10-K

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended June 30, 2013

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: 0-50347

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 No.)

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

Registrant’s telephone number, including area code: (423) 586-8421

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Name of each exchange on which registered
Common Stock, par value $0.01	The NASDAQ Stock Market LLC

Securities registered pursuant to Section 12(g) of the Act:None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 16b-2 of the Exchange Act). Yes o No x

The aggregate market value of the voting and non-voting common equity held by non-affiliates was $16,333,688 million, based upon the closing price ($2.70 per share) as quoted on the Nasdaq Global Market as of the last business day of the registrant’s most recently completed second fiscal quarter (December 30, 2012).

The number of shares outstanding of the registrant’s common stock as of September 13, 2013 was 6,597,739.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2013 Annual Meeting of Shareholders

are incorporated by reference in Part III of this Form 10-K.

INDEX

Part I

		Page
Item 1.	Business	1
Item 1A.	Risk Factors	14
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	19

  Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	19
Item 6.	Selected Financial Data	21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operation	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	40
Item 8.	Financial Statements and Supplementary Data	41
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	41
Item 9A.	Controls and Procedures	42
Item 9B.	Other Information	42

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	42
Item 11.	Executive Compensation	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	42
Item 13.	Certain Relationships and Related Transactions, and Director Independence	43
Item 14.	Principal Accountant Fees and Services	43

Part IV

Item 15. Exhibits and Financial Statement Schedules 44

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Note on Forward Looking Statements:

This report, as well as other written communications made from time to time by Jefferson Bancshares, Inc. (the “Company”) and subsidiaries and oral communications made from time to time by authorized officers of the Company, may contain statements relating to the future results of the Company (including certain projections, such as earnings projections, necessary tax provisions, and business trends) that are considered “forward looking statements” as defined in the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). Such forward-looking statements may be identified by the use of such words as “intend,” “believe,” “expect,” “should,” “planned,” “estimated,” and “potential.” For these statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the PSLRA. The Company’s ability to predict future results is inherently uncertain and the Company cautions you that a number of important factors could cause actual results to differ materially from those currently anticipated in any forward-looking statement. These factors include but are not limited to:

● The strength of the United States economy in general and the strength of the local economies in which the Company conducts its operations which may be less favorable than expected and may result in, among other things, a deterioration in the credit quality and value of the Company’s assets;

● The economic impact of past and any future terrorist attacks, acts of war or threats thereof and the response of the United States to any such threats and attacks;

● The effects of, and changes in, federal, state and local laws, regulations and policies affecting banking, securities, insurance and monetary and financial matters;

● The effects of changes in interest rates (including the effects of changes in the rate of prepayments of the Company’s assets) and the policies of the Board of Governors of the Federal Reserve System;

● The ability of the Company to compete with other financial institutions as effectively as the Company currently intends due to increases in competitive pressures in the financial services sector;

● The inability of the Company to obtain new customers and to retain existing customers;

● The timely development and acceptance of products and services, including products and services offered through alternative delivery channels such as the Internet;

● Technological changes implemented by the Company and by other parties, including third party vendors, which may be more difficult or more expensive than anticipated or which may have unforeseen consequences to the Company and its customers;  

● The ability of the Company to develop and maintain secure and reliable electronic systems;

● The ability of the Company to retain key executives and employees and the difficulty that the Company may experience in replacing key executives and employees in an effective manner;

● Consumer spending and saving habits which may change in a manner that affects the Company’s business adversely;

● Business combinations and the integration of acquired businesses which may be more difficult or expensive than expected;

● The costs, effects and outcomes of existing or future litigation;

● Changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board; and

● The ability of the Company to manage the risks associated with the foregoing as well as anticipated.

Additional factors that may affect our results are discussed in this annual report on Form 10-K under “Item 1A, Risk Factors.” These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

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PART I

ITEM 1. BUSINESS

General

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

In connection with the Company’s acquisition of State of Franklin Bancshares, Jefferson Federal Bank merged with and into State of Franklin Savings Bank, the wholly owned subsidiary of State of Franklin Bancshares. The resulting institution continues to operate as a Tennessee chartered savings bank under the name “Jefferson Federal Bank” (also referred to herein as 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 operates as a community-oriented financial institution offering traditional financial services to consumers and businesses in its market area. Jefferson Federal attracts deposits from the general public and uses those funds to originate loans, most of which it holds for investment.

Available Information

We maintain an Internet website at http://www.jeffersonfederal.com. We make available our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934, as amended, and other information related to us, free of charge, on this site as soon as reasonably practicable after we electronically file those documents with, or otherwise furnish them to, the Securities Exchange Commission. Our Internet website and the information contained therein or connected thereto are not intended to be incorporated into this annual report on Form 10-K. This annual report on Form 10-K has not been reviewed, or confirmed for accuracy or relevance, by the Securities and Exchange Commission, the Federal Deposit Insurance Corporation or any other governmental authority.

Market Area

We are headquartered in Morristown, Tennessee, which is situated approximately 40 miles northeast of Knoxville, Tennessee in the northeastern section of the state. We consider our primary market areas to consist of: (i) Hamblen County, Tennessee, and its contiguous counties; (ii) Knoxville, Tennessee, and its surrounding areas; and (iii) the greater Johnson City, Tennessee, Kingsport, Tennessee, and Virginia region (the “Tri-Cities region”).

We currently operate two full-service branch offices and two limited-service drive-through facilities in Hamblen County, Tennessee. The economy of Hamblen County, which has an estimated population of 62,000, is primarily oriented to manufacturing and agriculture. Morristown and Hamblen County also serve as a hub for retail shopping and medical services for a number of surrounding rural counties. The manufacturing sector is focused on three types of products: automotive and heavy equipment components; plastics, paper and corrugated products; and furniture. According to published statistics, the unemployment rate in Hamblen County was 10.0% as of June 2013, the most recent period for which data is available, which was above the national and state unemployment rates at that time.

We also currently operate two full-service branch offices in Knoxville, Tennessee. Knoxville’s population is approximately 183,000 and its economy is largely fueled by the location of the main campus of the University of Tennessee, the Oak Ridge National Laboratory, the National Transportation Research Center and the Tennessee Valley Authority. Additionally, Knoxville has many warehousing and distribution companies because of its central location in the eastern half of the United States. The unemployment rate for the Knoxville metropolitan statistical area was 7.5% as of June 2013, which was below the national and state unemployment rates at that time.

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We also currently operate six full-service branch offices in the Tri-Cities region, which is comprised of of Kingsport, Tennessee, Johnson City, Tennessee and Bristol, Tennessee and the surrounding areas. The population of the Tri-Cities region is approximately 500,000 and its economy is largely fueled by manufacturing and trade services. The unemployment rate for the Tri-Cities region combined statistical area was 8.4% as of June 2013, which was abovethe national unemployment rate and slightly below the state unemployment rate at that time.

Competition

We face significant competition for the attraction of deposits and origination of loans. Our most direct competition for deposits has historically come from the several financial institutions operating in our market area and, to a lesser extent, from other financial service companies, such as brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds and other corporate and government securities. At June 30, 2012, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held: (i) 22.58% of the deposits in Hamblen County, which is the largest market share out of nine financial institutions with offices in the county at that date; (ii) 0.27% of the deposits in the Knoxville, Tennessee, metropolitan statistical area, which is the 30th largest market share out of 44 financial institutions with offices in the metropolitan statistical area at that date; (iii) 4.77% of the deposits in the Johnson City, Tennessee metropolitan statistical area, which is the ninth largest market share out of 22 financial institutions located in the metropolitan statistical area at that date; and (iv) 1.06% of the deposits in the Kingsport, Tennessee-Bristol, Virginia metropolitan statistical area, which is the 20th largest market share out of 31 financial institutions located in the metropolitan statistical area at that date. Banks owned by SunTrust Banks, Inc., First Tennessee National Corporation and Regions Financial Corporation and other large regional bank holding companies also operate in our primary market areas. These institutions are significantly larger than us and, therefore, have significantly greater resources.

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

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

Lending Activities

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

One- to Four-Family Residential Loans. We originate mortgage loans to enable borrowers to purchase or refinance existing homes or to construct new one- to four-family homes. We offer fixed-rate mortgage loans with terms up to 30 years and adjustable-rate mortgage loans with terms up to 30 years. Borrower demand for adjustable-rate loans versus fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, the difference between the interest rates and loan fees offered for fixed-rate mortgage loans and the first year interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate mortgage loans and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment and the effect each has on our interest rate risk.

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

We originate all adjustable-rate loans at the fully indexed interest rate. The maximum amount by which the interest rate may be increased or decreased is generally 2% per year and the lifetime interest rate cap is generally 5% over the initial interest rate of the loan. Our adjustable-rate residential mortgage loans generally do not provide for a decrease in the rate paid below the initial contract rate. The inability of our residential real estate loans to adjust downward below the initial contract rate can contribute to increased income in periods of declining interest rates, and also assists us in our efforts to limit the risks to earnings and equity value resulting from changes in interest rates, subject to the risk that borrowers may refinance these loans during periods of declining interest rates.

While one- to four-family residential real estate loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full upon sale of the property pledged as security or upon refinancing the original loan. In addition, substantially all of the mortgage loans in our loan portfolio contain due-on-sale clauses providing that Jefferson Federal may declare the unpaid amount due and payable upon the sale of the property securing the loan. Jefferson Federal enforces these due-­on-sale clauses to the extent permitted by law. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans.

In addition to originating loans for our portfolio, we originate loans for the secondary mortgage market. Loans are sold without recourse and on a servicing-released basis.We generally do not make conventional loans with loan-to-value ratios exceeding 85% and generally make loans with a loan-to-value ratio in excess of 85% only when secured by first liens on owner-occupied, one- to four-family residences. Loans with loan-to-value ratios in excess of 90% generally require private mortgage insurance or additional collateral. We require all properties securing mortgage loans in excess of $250,000 to be appraised by a board-approved appraiser. We require title insurance on all mortgage loans in excess of $25,000. Borrowers must obtain hazard or flood insurance (for loans on property located in a flood zone) prior to closing the loan.

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

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

We originate both fixed- and adjustable-rate loans secured by commercial and multi-family real estate with terms up to 20 years. Fixed-rate loans have provisions that allow us to call the loan after five years. Adjustable-rate loans are generally based on prime and adjust monthly. Loan amounts generally do not exceed 85% of the lesser of the appraised value or the purchase price. When the borrower is a corporation, partnership or other entity, we generally require personal guarantees from significant equity holders. Currently, it is our philosophy to originate commercial real estate loans only to borrowers known to us and on properties in or near our market area.

At June 30, 2013, loans with principal balances of $500,000 or more secured by commercial real estate totaled $75.3 million, or 62.7% of commercial real estate loans, and loans with principal balances of $500,000 or more secured by multi-family properties totaled $10.8 million, or 80.0% of multi-family loans. At June 30, 2013, 14 commercial real estate loans totaling $3.8 million were nonaccrual loans.

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Construction Loans. We originate loans to finance the construction of one- to four-family homes and, to a lesser extent, multi-family and commercial real estate properties. At June 30, 2013, $2.0 million of our construction loans was for the construction of one- to four-family homes and $4.7 million was for the construction of commercial or multi-family real estate. Construction loans are generally made on a “pre-sold” basis; however, contractors who have sufficient financial strength and a proven track record are considered for loans for model and speculative purposes, with preference given to contractors with whom we have had successful relationships. We generally limit loans to contractors for speculative construction to a total of $350,000 per contractor. Construction loans generally provide for interest-only payments at fixed-rates of interest and have terms of six to 12 months. At the end of the construction period, the loan generally converts into a permanent loan. Construction loans to a borrower who will occupy the home, or to a builder who has pre-sold the home, will be considered for loan-to-value ratios of up to 85%. Construction loans for speculative purposes, models and commercial properties may be considered for loan-to-value ratios of up to 80%. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. We generally use in-house inspectors for construction disbursement purposes; however, we may rely on architect certifications and independent third party inspections for disbursements on larger commercial loans.

Land Loans. We originate loans secured by unimproved property, including lots for single family homes, raw land, commercial property and agricultural property. We originate both fixed- and adjustable-rate land loans with terms up to 20 years. Adjustable-rate loans are generally based on prime and adjust monthly. Loans secured by unimproved commercial property or for land development generally have five-year terms with a longer amortization schedule.

At June 30, 2013, our largest land loan had an outstanding balance of $3.6 million and was secured by vacant land. At June 30, 2013, loans with principal balances of $500,000 or more secured by unimproved property totaled $9.6 million, or 42.9% of land loans. At June 30, 2013, 14 land loans totaling $1.0 million were nonaccrual loans.

Commercial Business Loans. We extend commercial business loans on an unsecured and secured basis. Secured loans generally are collateralized by industrial/commercial machinery and equipment, livestock, farm machinery and, to a lesser extent, accounts receivable and inventory. We originate both fixed- and adjustable-rate commercial loans with terms up to 15 years. Fixed-rate loans have provisions that allow us to call the loan after five years. Adjustable-rate loans are generally based on prime and adjust monthly. Where the borrower is a corporation, partnership or other entity, we generally require personal guarantees from significant equity holders.

Consumer Loans. We offer a variety of consumer loans, including loans secured by automobiles and savings accounts. Other consumer loans include loans on recreational vehicles and boats, debt consolidation loans and personal unsecured debt.

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

Loan Underwriting Risks.

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

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Commercial and Multi-Family Real Estate Loans. Loans secured by commercial and multi-family real estate are generally larger and involve a greater degree of risk than one- to four-family residential mortgage loans. Of primary concern in commercial and multi-family real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties are often dependent on the successful operation or management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. In order to monitor cash flows on income properties, we require borrowers and loan guarantors, if any, to provide annual financial statements and rent rolls on multi-family loans. We also perform annual reviews on all lending relationships of $500,000 or more where the loan is secured by commercial or multi-family real estate.

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

Land Loans. Loans secured by undeveloped land or improved lots generally involve greater risks than residential mortgage lending because land loans are more difficult to evaluate. If the estimate of value proves to be inaccurate, in the event of default and foreclosure, we may be confronted with a property the value of which is insufficient to assure full repayment.

Commercial Loans. Commercial business lending generally involves greater risk than residential mortgage lending and involves risks that are different from those associated with commercial and multi-family real estate lending. Although the repayment of commercial and multi-family real estate loans depends primarily on the cash-flow of the property or related business, the underlying collateral generally provides a sufficient source of repayment. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable or other business assets, the liquidation of collateral if a borrower defaults is often an insufficient source of repayment because accounts receivable may be uncollectible and inventories and equipment may be obsolete or of limited use, among other things. Accordingly, the repayment of a commercial business loan depends primarily on the cash-flow, character and creditworthiness of the borrower (and any guarantors), while liquidation of collateral is secondary.

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

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

Loan Approval Procedures and Authority. Loan approval authority has been granted by the Board of Directors to certain officers on an individual and combined basis for consumer (including residential mortgages) and commercial purpose loans up to a maximum of $1.0 million per transaction. All loans with aggregate exposure of $2.0 million or more require the approval of our Loan Committee or Board of Directors.

The Loan Committee meets every two weeks to review all mortgage loans made within granted lending authority of $75,000 or more and all non-mortgage loans made within granted lending authority of $50,000 or more. The committee approves all requests which exceed granted lending authority or when the request carries aggregate exposure to us of $2.0 million or more. The minutes of the committee are reported to and reviewed by the Board of Directors.

Loans to One Borrower. The maximum amount that we may lend to one borrower and the borrower’s related entities is limited by regulation. At June 30, 2013, our regulatory limit on loans to one borrower was $11.3 million. At that date, our largest lending relationship was $5.7 million and consisted of multiple real estate and commercial business loans. These loans were performing according to their original repayment terms at June 30, 2013.

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

Investment Activities

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

At June 30, 2013, our investment portfolio consisted of U.S. agency securities, mortgage-backed securities, municipal securities and corporate securities.

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

Deposit Activities and Other Sources of Funds

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

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

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

The Federal Home Loan Bank functions as a central reserve bank providing credit for member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. Under its current credit policies, the Federal Home Loan Bank generally limits advances to 50% of a member’s assets. The availability of Federal Home Loan Bank advances to each borrower is based on the financial condition and the degree of security provided to collateralize borrowings.

Personnel

As of June 30, 2013, we had 135 full-time employees and eight part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Executive Officers

The executive officers of Jefferson Federal are elected annually by the Board of Directors and serve at the Board’s discretion. Ages presented are as of June 30, 2013. The executive officers of Jefferson Federal are:

Name	Age	Position
Anderson L. Smith	65	President and Chief Executive Officer
Douglas H. Rouse	60	Senior Vice President
Jane P. Hutton	54	Senior Vice President and Chief Financial Officer
Eric S. McDaniel	42	Senior Vice President and Chief Information Officer
Janet J. Ketner	60	Executive Vice President of Retail Banking
Anthony J. Carasso	54	President—Knoxville Region
Harvey L. Mitchell	65	President—Tri-Cities Division
John W. Beard, Jr.	60	Executive Vice President and Chief Credit Officer
Gary L. Keys	64	Executive Vice President and Manager, Special Assets

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Biographical Information

Anderson L. Smith has been President and Chief Executive Officer of Jefferson Bancshares since March 2003 and President and Chief Executive Officer of Jefferson Federal since January 2002. Prior to joining Jefferson Federal, Mr. Smith was President, Consumer Financial Services - East Tennessee Metro, First Tennessee Bank National Association. Director since 2002.

Jane P. Hutton has been Treasurer and Secretary of Jefferson Bancshares since March 2003 and Senior Vice President and Chief Financial Officer of Jefferson Federal since July 2009. From July 2002 to July 2009, Ms. Hutton served as Vice President and Chief Financial Officer of Jefferson Federal. Ms. Hutton was named Chief Financial Officer of Jefferson Bancshares on July 1, 2003. From June 1999 until July 2002, Ms. Hutton served as Assistant Financial Analyst.

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

Eric S. McDaniel has served as Senior Vice President and Chief Information Officer of Jefferson Federal since July 2009. In January 2013, he added the title of Chief Risk Officer. From July 2002 to July 2009, Mr. McDaniel served as Vice President and Senior Operations Officer of Jefferson Federal. From March 1996 to July 2002, Mr. McDaniel served as Jefferson Federal’s Director of Compliance and Internal Audit.

Janet J. Ketner has been Executive Vice President of Retail Banking since January 2006. Prior to joining Jefferson Federal, Ms. Ketner was Executive Vice President of First Tennessee Bank for Morristown, Dandridge and Greeneville, Tennessee.

Anthony J. Carassohas been the President of Jefferson Federal’s Knoxville Region since January 2005. In 1999, Mr. Carasso was Chief Executive Officer and President of Union Planters in Murfreesboro, Tennessee. Since then, he has been President of two other Union Planters Banks, one in Somerset, Kentucky as well as Harriman, Tennessee. During his tenure in Harriman, he had a dual role as an Area Sales Manager managing 22 branches in 11 communities.

Harvey L. Mitchell has been the President of Jefferson Federal’s Tri-Cities Division since May 2012. Mr. Mitchell served as Senior Vice President and Commercial Lending Officer of Jefferson Federal from October 2008 to May 2012. Prior to that time, Mr. Mitchell served as Senior Vice President and Commercial Lending Officer of State of Franklin Savings Bank from August 2007 until State of Franklin Savings Bank was acquired by Jefferson Bancshares in October 2008.

John W. Beard, Jr. has served as Executive Vice President and Chief Credit Officer of Jefferson Federal since May 2012. Mr. Beard served as the President and Chief Executive Officer of Citizens Bank, New Tazewell, Tennessee, from 2008 to May 2012. Prior to that time, Mr. Beard served as a Senior Credit Officer at First Tennessee Bank N.A. from 1992 to 2008.

Gary L. Keys has served as Executive Vice President and Manager, Special Assets of Jefferson Federal since May 2012. Mr. Keys served as Executive Vice President—Lending and Operations at Citizens Bank, New Tazewell, Tennessee, from 2008 to May 2012. Prior to that time, Mr. Keys served as Vice President and Kingsport City Executive and in various other positions at First Tennessee Bank N.A. from 1973 to 2008.

Subsidiaries

In addition to Jefferson Federal Bank, we currently have one subsidiary, State of Franklin Statutory Trust II. State of Franklin Statutory Trust II is a Delaware statutory trust. In December 2006, State of Franklin Bancshares issued subordinated debentures to State of Franklin Statutory Trust II, which purchased the debentures with the proceeds from the sale of trust preferred securities issued in a private placement. Our net consolidated principal obligation under the debentures and trust preferred securities is $10.0 million.

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Regulation and Supervision of the Company

General. The Company is a bank holding company subject to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) under the Bank Holding Company Act of 1956, as amended (the “BHCA”). As a result, the activities of the Company are subject to certain limitations, which are described below. In addition, as a bank holding company, the Company is required to file annual and quarterly reports with the Federal Reserve Board and to furnish such additional information as the Federal Reserve Board may require pursuant to the BHCA. The Company is also subject to regular examination by and the enforcement authority of the Federal Reserve Board.

Activities. With certain exceptions, the BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of a company that engages directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking. The activities of the Company are subject to these legal and regulatory limitations under the BHCA and the related Federal Reserve Board regulations. Notwithstanding the Federal Reserve Board’s prior approval of specific nonbanking activities, the Federal Reserve Board has the power to order a holding company or its subsidiaries to terminate any activity, or to terminate its ownership or control of any subsidiary, when it has reasonable cause to believe that the continuation of such activity or such ownership or control constitutes a serious risk to the financial safety, soundness or stability of any bank subsidiary of that holding company.

Acquisitions.Under the BHCA, a bank holding company must obtain the prior approval of the Federal Reserve Board before: (1) acquiring direct or indirect ownership or control of any voting shares of any bank or bank holding company if, after such acquisition, the bank holding company would directly or indirectly own or control more than 5% of such shares; (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Satisfactory financial condition, particularly with regard to capital adequacy, and satisfactory CRA ratings are generally prerequisites to obtaining federal regulatory approval to make acquisitions.

Under the BHCA, any company must obtain approval of the Federal Reserve Board prior to acquiring control of the Company or the Bank. For purposes of the BHCA, “control” is defined as ownership of more than 25% of any class of voting securities of the Company or the Bank, the ability to control the election of a majority of the directors, or the exercise of a controlling influence over management or policies of the Company or the Bank. In addition, the Change in Bank Control Act and the related regulations of the Federal Reserve Board require any person or persons acting in concert (except for companies required to make application under the BHCA), to file a written notice with the Federal Reserve Board before such person or persons may acquire control of the Company or the Bank. The Change in Bank Control Act defines “control” as the power, directly or indirectly, to vote 25% or more of any voting securities or to direct the management or policies of a bank holding company or an insured bank. There is a presumption of “control” where the acquiring person will own, control or hold with power to vote 10% or more of any class of voting security of a bank holding company or insured bank if, like the Company, the company involved has registered securities under Section 12 of the Securities Exchange Act of 1934.

Under Tennessee banking law, prior approval of the Tennessee Department of Financial Institutions is also required before any person may acquire control of a Tennessee bank or bank holding company. Tennessee law generally prohibits a bank holding company from acquiring control of an additional bank if, after such acquisition, the bank holding company would control more than 30% of the FDIC-insured deposits in the State of Tennessee.

Capital Requirements. The Federal Reserve Board has adopted guidelines regarding the consolidated capital adequacy of bank holding companies, which require bank holding companies to maintain specified minimum ratios of capital to total assets and to risk-weighted assets. See “Regulation and Supervision of the Bank—Capital Requirements.”

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In July 2013, the Federal Reserve Board approved revisions to its capital adequacy guidelines and prompt corrective action rules that implement the revised standards of the Basel Committee on Banking Supervision, commonly called Basel III, and address relevant provisions of the Dodd-Frank Act Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for us on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

Dividends. The Federal Reserve Board has the power to prohibit dividends by bank holding companies if their actions constitute unsafe or unsound practices. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. The Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized” or worse.” See “Regulation and Supervision of the Bank—Prompt Corrective Regulatory Action.”

Stock Repurchases.Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the Company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would violate any law, regulation, Federal Reserve Board order, directive or any condition imposed by, or written agreement with, the Federal Reserve Board. This requirement does not apply to bank holding companies that are “well-capitalized,” received one of the two highest examination ratings at their last examination and are not the subject of any unresolved supervisory issues.

Regulation and Supervision of the Bank

General. The Bank is subject to extensive regulation by the Tennessee Department of Financial Institutions (the “Department”) and, as an insured state bank that is not a member of the Federal Reserve System (a “nonmember bank”), by the FDIC. The lending activities and other investments of the Bank must comply with various federal regulatory requirements. The Department and FDIC periodically examine the Bank for compliance with these regulatory requirements and the Bank must regularly file reports with the Department and the FDIC describing its activities and financial condition. The Bank is also subject to certain reserve requirements promulgated by the Federal Reserve Board. This supervision and regulation is intended primarily for the protection of depositors.

The Dodd-Frank Act has created the Consumer Financial Protection Bureau (the “Bureau”) to implement federal consumer protection laws. The Bureau will assume responsibility for the existing federal consumer protection laws and regulations and has the authority to impose new requirements. The prudential regulators, however, will retain examination and enforcement authority over an institution’s compliance with such laws and regulations so long as the institution has less than $10 billion in assets.

Tennessee State Law.As a Tennessee-chartered savings bank, the Bank is subject to the applicable provisions of Tennessee law and the regulations of the Department adopted thereunder. The Bank derives its lending and investment powers from these laws, and is subject to periodic examination and reporting requirements by and of the Department. Certain powers granted under Tennessee law may be constrained by federal regulation. Banks nationwide are permitted to enter the Bank’s market area and compete for deposits and loan originations. The approval of the Department is required prior to any merger or consolidation, or the establishment or relocation of any branch office. Tennessee savings banks are also subject to the enforcement authority of the Department, which may suspend or remove directors or officers, issue cease and desist orders and appoint conservators or receivers in appropriate circumstances.

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Capital Requirements. Under FDIC regulations, nonmember banks are required to maintain a minimum leverage capital requirement consisting of a ratio of Tier 1 capital to total assets of 3% if the FDIC determines that the institution is not anticipating or experiencing significant growth and has well-diversified risk, including no undue interest rate risk exposure, excellent asset quality, high liquidity, good earnings and in general a strong banking organization, rated composite 1 under the Uniform Financial Institutions Rating System (the CAMELS rating system) established by the Federal Financial Institutions Examination Council. For all but the most highly rated institutions meeting the conditions set forth above, the minimum leverage capital ratio is not less than 4%. Tier 1 capital is the sum of common stockholders’ equity, noncumulative perpetual preferred stock (including any related surplus) and minority interests in consolidated subsidiaries, minus all intangible assets (other than certain mortgage servicing rights and purchased credit card relationships) minus identified losses, disallowed deferred tax assets and investments in financial subsidiaries and certain non-financial equity investments.

In addition to the leverage ratio (the ratio of Tier 1 capital to total assets), state-chartered nonmember banks must currently maintain a minimum ratio of qualifying total capital to risk-weighted assets of at least 8%, of which at least half must be Tier 1 capital. Qualifying total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items. Tier 2 capital items include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, certain cumulative preferred stock and subordinated debentures, certain other capital instruments and up to 45% of pre-tax net unrealized holding gains on equity securities. The includable amount of Tier 2 capital cannot exceed the institution’s Tier 1 capital. Qualifying total capital is further reduced by the amount of the bank’s investments in banking and finance subsidiaries that are not consolidated for regulatory capital purposes, reciprocal cross-holdings of capital securities issued by other banks, most intangible assets and certain other deductions. Under the FDIC risk-weighted system, all of a bank’s balance sheet assets and the credit equivalent amounts of certain off-balance sheet items are assigned to one of four broad risk weight categories from 0% to 100%, based on the risks inherent in the type of assets or item. The aggregate dollar amount of each category is multiplied by risk weight assigned to that category. The sum of these weighted values equals the Bank’s risk-weighted assets.

Dividend Limitations. The Bank 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 the Bank at the time of its conversion to stock form.

Earnings of the Bank appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then current tax rate by the Bank on the amount of earnings removed from the reserves for such distributions. The Bank intends to make full use of this favorable tax treatment and does not contemplate use of any earnings in a manner which would limit the Bank’s bad debt deduction or create federal tax liabilities.

Under FDIC regulations, the Bank is prohibited from making any capital distributions if, after making the distribution, the Bank would have: (i) a total risk-based capital ratio of less than 8%; (ii) a Tier 1 risk-based capital ratio of less than 4%; or (iii) a leverage ratio of less than 4%.

Investment Activities. Under federal law, all state-chartered FDIC-insured banks have generally been limited to activities as principal and equity investments of the type and in the amount authorized for national banks, notwithstanding state law, subject to certain exceptions. For example, the FDIC is authorized to permit institutions to engage in state authorized activities or investments that do not meet this standard (other than non-subsidiary equity investments) for institutions that meet all applicable capital requirements if it is determined that such activities or investments do not pose a significant risk to the Deposit Insurance Fund.

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Insurance of Deposit Accounts. The Bank’s deposits are insured up to applicable limits by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation. Under the Federal Deposit Insurance Corporation’s existing risk-based assessment system, insured institutions are assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain other factors, with less risky institutions paying lower assessments. An institution’s assessment rate depends upon the category to which it is assigned. Assessment rates range from seven to 77.5 basis points on the institution’s assessment base, which is calculated as total assets minus tangible equity.

Deposit insurance per account owner is currently $250,000. The Federal Deposit Insurance Corporation adopted an optional Temporary Liquidity Guarantee Program by which, for a fee, non-interest bearing transaction accounts would receive unlimited insurance coverage until December 31, 2010, which was later extended to December 31, 2012. The Bank opted to participate in the unlimited coverage for noninterest bearing transaction accounts.

The Federal Deposit Insurance Corporation has authority to increase insurance assessments. A significant increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future.

Prompt Corrective Regulatory Action. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept broker deposits. The FDIC is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution’s degree of undercapitalization. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. The FDIC could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Significantly and critically undercapitalized institutions are subject to additional mandatory and discretionary measures.

Safety and Soundness Guidelines. Each federal banking agency has established safety and soundness standards for institutions under its authority. These agencies, including the FDIC, have released interagency guidelines establishing such standards and adopted rules with respect to safety and soundness compliance plans. The guidelines require savings institutions to maintain internal controls and information systems and internal audit systems that are appropriate for the size, nature and scope of the institution’s business. The guidelines also establish certain basic standards for loan documentation, credit underwriting, interest rate risk exposure, and asset growth. The guidelines further provide that savings institutions should maintain safeguards to prevent the payment of compensation, fees and benefits that are excessive or that could lead to material financial loss, and should take into account factors such as comparable compensation practices at comparable institutions. If the agency determines that a savings institution is not in compliance with the safety and soundness guidelines, it may require the institution to submit an acceptable plan to achieve compliance with the guidelines. A savings institution must submit an acceptable compliance plan to the agency within 30 days of receipt of a request for such a plan. Failure to submit or implement a compliance plan may subject the institution to regulatory sanctions. Management believes that the Bank has met substantially all the standards adopted in the interagency guidelines.

Additionally, federal banking agencies have established standards relating to asset and earnings quality. The guidelines require a bank to maintain systems, commensurate with its size and the nature and scope of its operations, to identify problem assets and prevent deterioration in those assets as well as to evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital and reserves.

Federal Reserve System.The Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $55.2 million; a 10% reserve ratio is applied above $55.2 million. The first $10.7 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The amounts are adjusted annually. The Bank is in compliance with these requirements. At June 30, 2013, the Bank met applicable FRB reserve requirements.

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Federal Home Loan Bank System.The Bank is a member of the Federal Home Loan Bank System (“FHLBS”) which consists of 12 regional Federal Home Loan Banks governed and regulated by the Federal Housing Finance Board (“FHFB”) of the Federal Home Loan Bank Board. The Bank, as a member of the FHLB of Cincinnati, is required to purchase and hold shares of capital stock in the FHLB of Cincinnati. As of June 30, 2013, the Bank held stock in the FHLB of Cincinnati in the amount $4.7 million and was in compliance with the above requirement. The Federal Home Loan Banks are required to provide funds for certain purposes including contributing funds for affordable housing programs. These requirements, or financial stress caused by economic conditions, could reduce the amount of dividends that the Federal Home Loan Banks pay to their members and result in the Federal Home Loan Banks imposing a higher rate of interest on advances to their members.

Loans to Executive Officers, Directors and Principal Stockholders.Under federal law, loans to directors, executive officers and principal stockholders of a state non-member bank like the Bank must be made on substantially the same terms as those prevailing for comparable transactions with persons who are not executive officers, directors, principal stockholders or employees of the Bank unless the loan is made pursuant to a compensation or benefit plan that is widely available to employees and does not favor insiders. Loans to any executive officer, director and principal stockholder, together with all other outstanding loans to such person and affiliated interests, generally may not exceed 15% of the bank’s unimpaired capital and surplus, and aggregate loans to such persons may not exceed the institution’s unimpaired capital and unimpaired surplus. Loans to directors, executive officers and principal stockholders, and their respective affiliates, in excess of the greater of $25,000 or 5% of capital and surplus (and any loan or loans aggregating $500,000 or more) must be approved in advance by a majority of the board of directors of the bank with any “interested” director not participating in the voting. State nonmember banks are prohibited from paying the overdrafts of any of their executive officers or directors unless payment is made pursuant to a written, pre-authorized interest-bearing extension of credit plan that specifies a method of repayment or transfer of funds from another account at the bank. Loans to executive officers are further restricted as to type, amount and terms of credit. In addition, the BHCA prohibits extensions of credit to executive officers, directors and greater than 10% stockholders of a depository institution by any other institution which has a correspondent banking relationship with the institution, unless such extension of credit is on substantially the same terms as those prevailing at the time for comparable transactions with other persons and does not involve more than the normal risk of repayment or present other unfavorable features.

Transactions with Affiliates. A state non-member bank or its subsidiaries may not engage in “covered transactions” with any one affiliate in an amount greater than 10% of such bank’s capital stock and surplus, and for all such transactions with all affiliates a state non-member bank is limited to an amount equal to 20% of capital stock and surplus. All such transactions must also be on terms substantially the same, or at least as favorable, to the bank or subsidiary as those provided to a non-affiliate. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar types of transactions. Specified collateral requirements apply to covered transactions such as loans to and guarantees issued on behalf of an affiliate. An affiliate of a state non-member bank is any company or entity which controls or is under common control with the state non-member bank and, for purposes of the aggregate limit on transactions with affiliates, any subsidiary that would be deemed a financial subsidiary of a national bank. In a holding company context, the parent holding company of a state non-member bank and any companies which are controlled by such parent holding company are affiliates of the state non-member bank. Federal law further prohibits a depository institution from extending credit to or offering any other services, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or certain of its affiliates or not obtain services of a competitor of the institution, subject to certain limited exceptions.

Enforcement. The FDIC has extensive enforcement authority over insured non-member banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.

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The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” See “Prompt Corrective Regulatory Action.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

Community Reinvestment Act. Under the Community Reinvestment Act, as implemented by FDIC regulations, a state non-member bank has a continuing and affirmative obligation consistent with its safe and sound operation to help meet the credit needs of its entire community, including low and moderate-income neighborhoods. The Community Reinvestment Act neither establishes specific lending requirements or programs for financial institutions nor limits an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act requires the FDIC, in connection with its examination of an institution, to assess the institution’s record of meeting the credit needs of its community and to consider such record when it evaluates applications made by such institution. The Community Reinvestment Act requires public disclosure of an institution’s Community Reinvestment Act rating. The Bank’s latest Community Reinvestment Act rating received from the FDIC was “satisfactory.”

Financial Regulatory Legislation

The previously referenced Dodd-Frank Act contains a wide variety of provisions affecting the regulation of depository institutions. Those include, but are not limited to, restrictions related to mortgage originations, risk retention requirements as to securitized loans and the noted newly created consumer protection agency. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

ITEM 1A. RISK FACTORS

The current economic conditions pose significant challenges that could adversely affect our financial condition and results of operations.

Our success depends to a large degree on the general economic conditions in our market areas. Our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies. If economic conditions do not improve or continue to decline, we could experience any of the following consequences, each of which could further adversely affect our business: demand for our products and services could decline; problem assets and foreclosures may increase; and loan losses may increase.

We could experience further adverse consequences in the event of a prolonged economic downturn in our market due to our exposure to commercial loans across various lines of business. A prolonged economic downturn could adversely affect collateral values or cash flows of the borrowing businesses, and as a result our primary source of repayment could be insufficient to service the debt. Another adverse consequence in the event of a prolonged economic downturn in our market could be the loss of collateral value on commercial and real estate loans that are secured by real estate located in our market area. A further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished.

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Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation.

Our nonperforming assets expose us to increased risk of loss.

In recent years, our nonperforming assets have increased from historical levels primarily as a result of the recent economic recession. At June 30, 2013, we had total nonperforming assets of $19.2 million, or 3.8% of total assets. Our nonperforming assets adversely affect our net income in various ways. We do not accrue interest income on non-accrual loans and no interest income is recognized until the loan is performing. Loans are returned to accrual status when future payments are reasonably assured. We must reserve for probable losses, which are established through a current period charge to income in the provision for loan losses, and from time to time, write down the value of properties in our other real estate owned portfolio to reflect changing market values. Additionally, there are legal fees associated with the resolution of problem assets as well as carrying costs such as taxes, insurance and maintenance related to our other real estate owned.

Changes in interest rates could reduce our net interest income and earnings.

Our net interest income is the interest we earn on loans and investments less the interest we pay on our deposits and borrowings. Our net interest spread is the difference between the yield we earn on our assets and the interest rate we pay for deposits and our other sources of funding. Changes in interest rates—up or down—could adversely affect our net interest margin and, as a result, our net interest income. Although the yield we earn on our assets and our funding costs tend to move in the same direction in response to changes in interest rates, one can rise or fall faster than the other, causing our net interest margin to expand or contract. Our liabilities tend to be shorter in duration than our assets, so they may adjust faster in response to changes in interest rates. As a result, when interest rates rise, our funding costs may rise faster than the yield we earn on our assets, causing our net interest margin to contract until the yield catches up. This contraction could be more severe following a prolonged period of lower interest rates, as a larger proportion of our fixed rate residential loan portfolio will have been originated at those lower rates and borrowers may be more reluctant or unable to sell their homes in a higher interest rate environment. Changes in the slope of the “yield curve”—or the spread between short-term and long-term interest rates—could also reduce our net interest margin. Normally, the yield curve is upward sloping, meaning short-term rates are lower than long-term rates. Because our liabilities tend to be shorter in duration than our assets, when the yield curve flattens or even inverts, we could experience pressure on our net interest margin as our cost of funds increases relative to the yield we can earn on our assets.

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

We face intense competition both in making loans and attracting deposits. This competition has made it more difficult for us to make new loans and at times has forced us to offer higher deposit rates. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. At June 30, 2012, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held: (i) 22.58% of the deposits in Hamblen County, which is the largest market share out of nine financial institutions with offices in the county at that date; (ii) 0.27% of the deposits in the Knoxville, Tennessee, metropolitan statistical area, which is the 30th largest market share out of 44 financial institutions with offices in the metropolitan statistical area at that date; (iii) 4.77% of the deposits in the Johnson City, Tennessee metropolitan statistical area, which is the ninth largest market share out of 22 financial institutions located in the metropolitan statistical area at that date; and (iv) 1.06% of the deposits in the Kingsport, Tennessee-Bristol, Virginia metropolitan statistical area, which is the 20th largest market share out of 31 financial institutions located in the metropolitan statistical area at that date. Banks owned by SunTrust Banks, Inc., First Tennessee National Corporation and Regions Financial Corporation and other large regional bank holding companies also operate in our primary market areas. These institutions are significantly larger than us and, therefore, have significantly greater resources. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

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

At June 30, 2013, $191.0 million, or 58.4%, of our loan portfolio consisted of commercial real estate, commercial business and multi-family real estate loans. Commercial real estate and multi-family real estate loans generally expose a lender to greater risk of non-payment and loss than one- to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and the income stream of the borrowers. Commercial business loans expose us to additional risks because they typically are made on the basis of the borrower’s ability to make repayments from the cash flow of the borrower’s business and are secured by collateral that may depreciate over time. All three of these types of loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one- to four-family residential mortgage loans. Because such loans generally entail greater risk than one- to four-family residential mortgage loans, we may need to increase our allowance for loan losses in the future to account for the likely increase in probable incurred credit losses associated with the growth of such loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

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

If our borrowers do not repay their loans or if the collateral securing their loans is insufficient to provide for the full repayment, we may suffer credit losses. Credit losses are inherent in the lending business and could have a material adverse effect on our operating results. We make various assumptions and judgments about the collectibility of our loan portfolio and provide an allowance for loan losses based on a number of factors. If our assumptions and judgments are wrong, our allowance for loan losses may not be sufficient to cover our losses. In addition, when real estate values decline, the potential severity of loss on a real estate-secured loan can increase significantly, especially in the case of loans with high combined loan-to-value ratios. The recent decline in the national economy and the local economies of the areas in which the loans are concentrated could result in an increase in loan delinquencies, foreclosures or repossessions resulting in increased charge-off amounts and the need for additional loan loss allowances in future periods. If we determine that our allowance for loan losses is insufficient, we would be required to take additional provisions for loan losses, which would reduce net income during the period those provisions are taken. In addition, the Tennessee Department of Financial Institutions and the FDIC periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or to charge off particular loans.

We may be required to write down the value of our investment securities if we conclude that a decline in the value in any of our securities is other than temporary.

           We review our investment portfolio periodically to determine whether the fair value is below the current carrying value. If the fair value of any of our investment securities has declined below its carrying value, we are required to determine whether the decline is other than temporary. If we conclude that the decline is other than temporary, we are required to write down the value of that security through a charge to earnings.

The loss of our President and Chief Executive Officer could hurt our operations.

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

16

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

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

Recent regulatory reform may have a material impact on our operations.

On July 21, 2010, the President signed into law the Dodd-Frank Act. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008 and 2009. These include provisions strengthening holding company capital requirements, requiring retention of a portion of the risk of securitized loans and regulating debit card interchange fees. The Dodd-Frank Act also created the Consumer Financial Protection Bureau to administer consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. However, it is likely that the provisions of the Dodd-Frank Act will have an adverse impact on our operations, particularly through increased regulatory burden and compliance costs.

Additionally, in July 2013, the federal banking agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets, to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for us on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

Compliance with these rules, which are still being analyzed, will impose additional costs on banking entities and their holding companies.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general, which could significantly affect our ability to fund normal operations. In addition, our ability to acquire deposits or borrow could also be impaired by factors that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates. Furthermore, 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. Substantially all of Jefferson Bancshares’ revenues are obtained from subsidiary service fees and 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.

17

We are subject to certain risks in connection with our use of technology, including risks associated with systems failures, interruptions, or breaches of security.

Communications and information systems are essential to the conduct of our business, as we use such systems to manage our customer relationships, our general ledger, our deposits, and our loans. While we have established policies and procedures to prevent or limit the impact of systems failures, interruptions, and security breaches, there can be no assurance that such events will not occur or that they will be adequately addressed if they do. Although we rely on commonly used security and processing systems to provide the security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security. In addition, we outsource certain of our data processing to certain third-party providers. If our third-party providers encounter difficulties, or if we have difficulty in communicating with them, our ability to adequately process and account for customer transactions could be affected, and our business operations could be adversely impacted. Threats to information security also exist in the processing of customer information through various other vendors and their personnel. The occurrence of any systems failure, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional regulatory scrutiny, or could expose us to civil litigation and possible financial liability. Any of these occurrences could have a material adverse effect on our financial condition and results of operations.

The charter and bylaws of Jefferson Bancshares may prevent or make more difficult certain transactions, including a sale or merger of Jefferson Bancshares.

Provisions of the charter and bylaws of Jefferson Bancshares may make it more difficult for companies or persons to acquire control of Jefferson Bancshares. Consequently, our shareholders may not have the opportunity to participate in such a transaction and the trading price of our common stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. In addition, these provisions also make more difficult the removal of current directors or management, or the election of new directors. These provisions include:

· supermajority voting requirements for certain business combinations and changes to some provisions of the charter and bylaws;

· limitation on the right to vote shares;

· the election of directors to staggered terms of three years;

· provisions regarding the timing and content of shareholder proposals and nominations;

· provisions restricting the calling of special meetings of shareholders;

· the absence of cumulative voting by shareholders in the election of directors; and

· the removal of directors only for cause.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.
 

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ITEM 2. PROPERTIES

We conduct our business through our main office, nine full-service branch offices and two limited-service drive-through facilities located in Hamblen, Knox, Sullivan and Washington Counties, Tennessee. We own all of our offices, except for a drive-through facility located in Morristown, Tennessee, the lease on which expires in December 2013. As of June 30, 2013, the total net book value of our offices was $25.6 million. We believe that our facilities are adequate to meet our present and immediately foreseeable needs.

ITEM 3. 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.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market for Common Equity and Related Stockholder Matters

Jefferson Bancshares’ common stock is listed on the Nasdaq Global Market under the symbol “JFBI.” As of June 30, 2013, Jefferson Bancshares had approximately 613 holders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 6,601,091 shares issued and outstanding.

The following table sets forth high and low sales prices for each quarter during the fiscal years ended June 30, 2013 and June 30, 2012 for Jefferson Bancshares’ common stock, and corresponding quarterly dividends period per share.

	High		Low		Dividend Paid Per Share
Year Ended June 30, 2013
Fourth quarter	$	5.95	$	5.10	$	0.00
Third quarter		5.84		2.71		0.00
Second quarter		2.96		2.27		0.00
First quarter		2.63		1.92		0.00
Year Ended June 30, 2012
Fourth quarter	$	2.47	$	1.84	$	0.00
Third quarter		2.75		2.00		0.00
Second quarter		2.90		2.18		0.00
First quarter		3.37		2.50		0.00

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The Board of Directors of Jefferson Bancshares has the authority to declare dividends on the common stock, subject to statutory and regulatory requirements. Declarations of dividends by the Board of Directors, if any, will depend upon a number of factors, including investment opportunities available to Jefferson Bancshares or Jefferson Federal, capital requirements, regulatory limitations, Jefferson Bancshares’ and Jefferson Federal’s financial condition and results of operations, tax considerations and general economic conditions. No assurances can be given, however, that any dividends will be paid or, if commenced, will continue to be paid.

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

The following table provides certain information with regard to shares repurchased by the Company in the fourth quarter of fiscal 2013.

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 Programs		(d) Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs
April 1, 2013 through April 30, 2013		—	$	—		—		410,399	(1)
May 1, 2013 through May 31, 2013		3,494		5.51		3,494		406,905	(1)
June 1, 2013 through June 30, 2013		—		—		—		406,905	(1)
Total		3,494	$	5.51		3,494		406,905

(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 6. SELECTED FINANCIAL DATA

The selected financial information below is derived from the audited consolidated financial statements of the Company.

	At or For the Year Ended June 30,
	2013		2012			2011			2010			2009
Financial Condition Data:
Total assets	$	503,028	$	522,930		$	561,189		$	630,770		$	662,655
Loans receivable, net		321,299		322,499			378,587			434,378			498,107
Cash and cash equivalents, interest-bearing deposits		24,514		56,693			40,548			69,303			44,108
Investment securities		96,024		83,483			74,780			62,989			36,544
Borrowings		45,535		45,506			38,887			85,778			91,098
Deposits		399,642		423,882			454,262			479,183			482,167
Stockholders’ equity		53,025		52,629			55,919			56,523			79,505
Operating Data:
Interest income	$	19,501	$	22,432		$	26,334		$	30,043		$	28,175
Interest expense		3,130		4,570			8,030			11,593			11,619
Net interest income		16,371		17,862			18,304			18,450			16,556
Provision for loan losses		800		9,873			4,447			8,809			910
Net interest income after provision for loan losses		15,571		7,989			13,857			9,641			15,646
Noninterest income		2,113		2,180			3,233			4,034			3,185
Noninterest expense		15,546		16,693			17,411			39,657			14,683
Earnings before income taxes		2,138		(6,524	)		(321	)		(25,982	)		4,148
Total income taxes		544		(2,524	)		(351	)		(1,982	)		1,518
Net earnings	$	1,594	$	(4,000	)	$	30		$	(24,000	)	$	2,630
Per Share Data:
Earnings per share, basic	$	0.25	$	(0.64	)	$	0.00		$	(3.85	)	$	0.43
Earnings per share, diluted	$	0.25	$	(0.64	)	$	0.00		$	(3.85	)	$	0.43
Dividends per share	$	0.00	$	0.00		$	0.00		$	0.03		$	0.24

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	At or For the Year Ended June 30,
	2013			2012			2011			2010			2009
Performance Ratios:
Return on average assets		0.31	%		(0.74	%)		0.00	%		(3.65	)%		0.48	%
Return on average equity		2.97			(7.37	)		0.05			(29.65	)		3.40
Interest rate spread (1)		3.55			3.60			3.21			3.04			3.23
Net interest margin (2)		3.64			3.72			3.35			3.22			3.46
Noninterest expense to average assets (5)		3.06			3.10			2.86			2.72			2.67
Efficiency ratio (3) (5)		84.16			83.38			85.71			83.93			76.57
Average interest-earning assets to average interest-bearing liabilities		112.76			111.99			109.61			108.76			110.52
Dividend payout ratio (4)		0.00			0.00			0.00			N/M			55.81
Capital Ratios:
Tangible capital		9.21			8.23			8.50			7.29			7.85
Core capital		12.93			12.17			11.74			10.35			9.57
Risk-based capital		14.18			13.42			13.00			11.61			10.49
Average equity to average assets		10.55			10.07			9.35			12.33			14.09
Asset Quality Ratios:
Allowance for loan losses as a percent of total gross loans		1.73			1.78			2.11			2.17			0.94
Allowance for loan losses as a percent of nonperforming loans		44.23			31.53			99.19			51.38			78.30
Net charge-offs to average outstanding loans during the period		0.31			3.36			1.42			0.83			0.14
Nonperforming loans as a percent of total loans		3.91			5.65			2.13			4.22			1.20
Nonperforming assets as a percent of total assets		3.81			4.82			3.25			4.18			1.43

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

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

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

(4) Reflects dividends per share declared in the period divided by earnings per share for the period.

(5) For 2010, ratios exclude a goodwill impairment charge of $21.8 million.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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

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Overview.

Income

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

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

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

Expenses

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

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

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

Equipment and data processing expense includes fees paid to our third-party data processing service and expenses and depreciation charges related to office and banking equipment.

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

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

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

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: allowance for loan losses and deferred income taxes.

Allowance for Loan Losses. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Management reviews the level of the allowance on a monthly basis and establishes the provision for loan losses based on the composition of the loan portfolio, delinquency levels, loss experience, economic condition and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future additions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors. In addition, Tennessee Department of Financial Institutions and the FDIC, as an integral part of their examination processes, periodically review our allowance for loan losses. These agencies may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

23

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

Results of Operations for the Years Ended June 30, 2013 and 2012

Overview.

	2013			2012
	(Dollars in thousands, except per share data)
Net earnings	$	1,594		$	(4,000	)
Net earnings per share, basic	$	0.25		$	(0.64	)
Net earnings per share, diluted	$	0.25		$	(0.64	)
Return on average assets		0.31	%		(0.74	%)
Return on average equity		2.97	%		(7.37	%)

For the year ended June 30, 2013, the Company reported net income of $1.6 million, or $0.25 per diluted share, compared to a net loss of $4.0 million, or $0.64 per diluted share, for the year ended June 30, 2012. The improvement in net income was primarily due to a lower provision for loan losses totaling $800,000 for fiscal 2013 compared to $9.9 million for fiscal 2012. The decrease in the provision for loan losses was attributable to improvements in asset quality.

24

Net Interest Income.

The following table summarizes changes in interest income and expense for the years ended June 30, 2013 and 2012:

	Year Ended June 30,				% Change
	2013		2012		2013/2012
Interest income:
Loans	$	17,529	$	20,271		(13.5	%)
Investment securities		1,689		1,900		(11.1	%)
Interest-earning deposits		75		62		21.0	%
FHLB stock		208		199		4.5	%
Total interest income		19,501		22,432		(13.1	%)
Interest expense:
Deposits		1,535		2,965		(48.2	%)
Borrowings		1,270		1,278		(0.6	%)
Subordinated debentures		325		327		(0.6	%)
Total interest expense		3,130		4,570		(31.5	%)
Net interest income	$	16,371	$	17,862		(8.3	%)

Net interest income before loan loss provision decreased$1.5 million to $16.4 million for the year ended June 30, 2013. The interest rate spread and net interest margin for the year ended June 30, 2013 were 3.55% and 3.64%, respectively, compared to 3.60% and 3.72%, respectively, for the year ended June 30, 2012.

Total interest income decreased $2.9 million, or 13.1%, to $19.5 million for fiscal 2013 compared to $22.4 million for fiscal 2012 primarily due to a lower volume of interest-earning assets and lower market interest rates. The average volume of earning assets decreased $29.9 million to $451.3 million for fiscal 2013, while the average yield on interest-earning assets decreased 33 basis points to 4.33% compared to fiscal 2012.

Interest on loans decreased $2.7 million, or 13.5%, to $17.5 million for fiscal 2013 as a result of a lower average balance of loans and a lower average yield. The average balance of loans decreased $40.8 million, or 11.2%, to $322.3 million due to the combination of reduced loan demand, normal paydowns on existing loans, transfers to other real estate owned (“OREO”) and charge-offs. The average yield on loans was 5.44% for fiscal 2013 compared to 5.57% for fiscal 2012.

Interest on investment securities decreased to $1.7 million for fiscal 2013 compared to $1.9 million for fiscal 2012. The average balance of investment securities increased $9.4 million to $92.7 million for fiscal 2013 compared to $83.3 million for fiscal 2012 as excess liquidity has been deployed into the investment portfolio. The average yield on investments decreased to 1.89% for fiscal 2013 compared to 2.36% for fiscal 2012 due to lower market interest rates. Dividends on Federal Home Loan Bank (“FHLB”) stock were $208,000 for fiscal 2013, compared to $199,000 for fiscal 2012.

Total interest expense decreased $1.4 million to $3.1 million for the year ended June 30, 2013, compared to $4.6 million for the year ended June 30, 2012. The average volume of interest-bearing liabilities decreased $29.4 million to $400.2 million while the average rate paid on interest-bearing liabilities decreased 28 basis points to 0.78% for fiscal 2013. Interest expense on deposits decreased $1.4 million to $1.5 million for 2013 compared to $3.0 million for fiscal 2012 as a result of lower interest rates combined with a lower average balance of deposits. The average rate paid on deposits decreased 34 basis points to 0.43% for the year ended June 30, 2013. Interest expense on FHLB advances remained level at $1.3 million for fiscal 2013 compared to fiscal 2012. The average balance of FHLB advances decreased $206,000 to $37.7 million for fiscal 2013 while the average rate paid on FHLB advances remained unchanged at 3.36% compared to fiscal 2012.

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

	Year Ended June 30,
	2013							2012							2011
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Interest-earning assets:
Loans(1)	$	322,331	$	17,529		5.44	%	$	363,154	$	20,271		5.57	%	$	415,966	$	24,251		5.83	%
Investment securities		92,721		1,689		1.89			83,276		1,900		2.36			55,013		1,696		3.23
Daily interest deposits		31,466		75		0.24			29,996		62		0.21			72,804		180		0.25
Other earning assets		4,735		208		4.39			4,735		199		4.19			4,735		207		4.37
Total interest-earning assets		451,253		19,501		4.33			481,161		22,432		4.66			548,518		26,334		4.82
Noninterest-earning assets		57,262		—		—			57,864		—		—			59,553		—		—
Total assets	$	508,515		—				$	539,025		—				$	608,071		—
Interest-bearing liabilities:
Passbook accounts		91,745		207		0.23			97,167		485		0.50			86,581		651		0.75
NOW accounts		53,935		59		0.11			48,312		77		0.16			49,609		145		0.29
Money market accounts		51,708		119		0.23			53,797		311		0.58			56,113		521		0.93
Certificates of deposit		156,835		1,150		0.73			184,352		2,092		1.13			239,551		4,284		1.79
Total interest-bearing deposits		354,223		1,535		0.43			383,628		2,965		0.77			431,854		5,601		1.30
Borrowings		37,700		1,266		3.36			37,906		1,272		3.35			60,459		2,105		3.48
Repurchase agreements		985		4		0.41			912		6		0.66			1,053		6		0.57
Subordinated debentures		7,298		325		4.45			7,186		327		4.54			7,073		318		4.50
Total interest-bearing liabilities		400,206		3,130		0.78			429,632		4,570		1.06			500,439		8,030		1.60
Noninterest-bearing deposits		53,680		—					54,090		—		—			49,503		—		—
Other noninterest-bearing liabilities		959		—					1,014		—		—			1,284		—		—
Total liabilities		454,845							484,736							551,226
Stockholders’ equity		53,670							54,289							56,845
Total liabilities and stockholders’ equity	$	508,515						$	539,025						$	608,071
Net interest income			$	16,371						$	17,862						$	18,304
Interest rate spread						3.55	%						3.60	%						3.21	%
Net interest margin						3.64	%						3.72	%						3.35	%
Ratio of average interest-earning assets to average interest- bearing liabilities						112.76	%						111.99	%						109.61	%

­­­­­­­­­­­­­­­­­­

(1) Average loan balances include nonaccrual loans.

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

	2013 Compared to 2012									2012 Compared to 2011
	Increase (Decrease) Due to									Increase (Decrease) Due to
	Volume			Rate			Net			Volume			Rate			Net
	(In Thousands)
Interest income:
Loans receivable	$	(2,231	)	$	(511	)	$	(2,742	)	$	(2,981	)	$	(999	)	$	(3,980	)
Investment securities		250			(461	)		(211	)		950			(746	)		204
Daily interest-bearing deposits and other interest-earning assets		3			19			22			(92	)		(34	)		(126	)
Total interest-earning assets		(1,978	)		(953	)		(2,931	)		(2,123	)		(1,779	)		(3,902	)
Interest expense:
Deposits		(212	)		(1,218	)		(1,430	)		(571	)		(2,065	)		(2,636	)
Borrowings		(7	)		(1	)		(8	)		(760	)		(73	)		(833	)
Subordinated debentures		5			(7	)		(2	)		5			4			9
Total interest-bearing liabilities		(214	)		(1,226	)		(1,440	)		(1,326	)		(2,134	)		(3,460	)
Net change in interest income	$	(1,764	)	$	273		$	(1,491	)	$	(797	)	$	355		$	(442	)

Provision for Loan Losses.

The provision for loan losses for fiscal 2013 was $800,000 compared to a provision of $9.9 million for fiscal 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. Net charge-offs for the year ended June 30, 2013 amounted to $992,000 compared to $12.2 million for the year ended June 30, 2012. A significant portion of the loan charge-offs during fiscal 2013 and 2012 were against specific reserves and did not require replenishment of the allowance for loan losses.

An analysis of the changes in the allowance for loan losses is presented under “Allowance for Loan Losses and Asset Quality.”

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Noninterest Income. The following table shows the components of noninterest income and the percentage changes from 2013 to 2012.

	2013			2012			% Change 2013/2012
	(Dollars in Thousands)
Mortgage origination fees	$	445		$	306			45.4	%
Service charges and fees		1,036			1,106			(6.3	)
Gain on investment securities		12			50			(76.0	)
Impairment on investment securities		—			(29	)		(100.0	)
Loss on sale of fixed assets		1			(12	)		(108.3	)
Loss on foreclosed real estate		(266	)		(169	)		57.4
BOLI increase in cash value		239			236			1.3
Other		646			692			(6.6	)
Total noninterest income	$	2,113		$	2,180			(3.1	%)

For the year ended June 30, 2013, noninterest income decreased $67,000 to $2.1 million compared to $2.2 million for fiscal 2012. Mortgage origination fee income increased $139,000, or 45.4%, to $445,000 compared to the prior year due to higher demand for residential mortgage refinancing. Net losses on sale of foreclosed property totaled $266,000 for fiscal 2013 compared to $169,000 for fiscal 2012. Service charges and fees decreased $70,000, or 6.3%, to $1.0 million for fiscal 2013 compared to fiscal 2012.

Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes from 2013 to 2012.

	2013		2012		% Change 2013/2012
	(Dollars in Thousands)
Compensation and benefits	$	6,761	$	6,209		8.9	%
Occupancy		1,343		1,379		(2.6	)
Equipment and data processing		2,453		2,376		3.2
Deposit insurance premiums		968		811		19.4
Advertising		383		359		6.7
Professional services		463		442		(13.1	)
Valuation adjustment and expenses on OREO		732		2,374		(69.2	)
Amortization of intangible assets		386		441		(12.5	)
Other		2,057		2,302		(7.0	)
Total noninterest expense	$	15,546	$	16,693		(6.9	)

For the year ended June 30, 2013, noninterest expense decreased $1.1 million to $15.5 million compared to $16.7 million for fiscal 2012. Compensation and benefits expense increased $552,000, or 8.9%, to $6.8 million for fiscal 2013 compared to fiscal 2012 due to a higher number of full-time employees combined with increases in commissions, salaries, ESOP expense, and health insurance costs. Valuation adjustments and expenses on other real estate owned decreased $1.6 million to $732,000 for fiscal 2013 compared to $2.4 million for fiscal 2012.

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Income Taxes.

For the year ended June 30, 2013, income tax expense was $544,000 compared to a tax benefit of $2.5 million for the year ended June 30, 2012.

Balance Sheet Analysis

Loans. Net loans decreased slightly to $321.3 million at June 30, 2013 compared to $322.5 million at June 30, 2012. Loan principal repayments and payoffs slightly exceeded new loan volume during fiscal year 2013 compared to the year ended June 30, 2012. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. At June 30, 2013, real estate loans totaled $266.2 million, or 81.3% of our total loans, compared to $282.4 million, or 85.9% of total loans, at June 30, 2012. Real estate loans decreased $16.2 million, or 5.7%, in fiscal 2013.

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

	At June 30,
	2013						2012						2011						2010						2009
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Real estate loans:
Residential one- to four-family	$	87,233			26.7	%	$	97,182			29.6	%	$	110,046			28.4	%	$	136,430			30.7	%	$	144,659			28.7	%
Home equity lines of credit		16,259			5.0			18,395			5.6			20,029			5.2			19,768			4.4			22,467			4.5
Commercial		120,205			36.7			127,185			38.7			144,519			37.3			140,024			31.5			159,608			31.7
Multi-family		13,509			4.1			11,564			3.5			14,062			3.6			16,536			3.7			6,584			1.3
Construction		6,692			2.0			548			0.2			2,171			0.6			21,073			4.7			40,831			8.1
Land		22,296			6.8			27,487			8.4			30,053			7.8			37,135			8.4			46,987			9.3
Total real estate loans		266,194			81.3			282,361			85.9			320,880			82.9			370,966			83.5			421,136			83.7
Commercial business loans		57,288			17.5			42,107			12.8			60,497			15.6			66,699			15.0			73,467			14.6
Non-real estate loans:
Automobile loans		510			0.2			833			0.3			1,237			0.3			1,848			0.4			2,754			0.5
Mobile home loans		—			0.0			3			0.0			13			0.0			23			0.0			43			0.0
Loans secured by deposits		340			0.1			381			0.1			1,268			0.3			1,372			0.3			1,322			0.3
Other consumer loans		2,971			0.9			2,989			0.9			3,235			0.8			3,566			0.8			4,609			0.9
Total non-real estate loans		3,821			1.2			4,206			1.3			5,753			1.5			6,809			1.5			8,728			1.7
Total gross loans		327,303			100.00	%		328,674			100.0	%		387,130			100.0	%		444,474			100.0	%		503,331			100.00	%
Less:
Deferred loan fees, net		(344	)					(323	)					(362	)					(447	)					(502	)
Allowance for losses		(5,660	)					(5,852	)					(8,181	)					(9,649	)					(4,722	)
Total loans receivable, net	$	321,299					$	322,499					$	378,587					$	434,378					$	498,107

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The following table sets forth certain information at June 30, 2013 regarding the dollar amount of principal repayments becoming due during the periods indicated for loans. The table does not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

	Real Estate Loans		Commercial Business Loans		Consumer Loans		Total Loans
Amounts due in:	(In thousands)
One year or less	$	57,320	$	25,726	$	2,450	$	85,496
More than one to three years		42,694		11,036		841		54,571
More than three to five years		75,075		12,578		522		88,175
More than five to 15 years		37,519		4,986		8		42,513
More than 15 years		53,586		2,962		—		56,548
Total	$	266,194	$	57,288	$	3,821	$	327,303

The following table sets forth the dollar amount of all loans at June 30, 2013 that are due after June 30, 2014 and have either fixed interest rates or floating or adjustable interest rates.

	Fixed-Rates		Floating or Adjustable Rates		Total
	(In thousands)
Real estate loans:
One- to four-family	$	19,047	$	58,001	$	77,048
Home equity lines of credit		86		14,796		14,882
Commercial		55,225		37,631		92,856
Multi-family		7,897		512		8,409
Construction		2,832		2,205		5,037
Land		8,908		1,734		10,642
Commercial business loans		15,526		16,036		31,562
Consumer loans		1,352		19		1,371
Total	$	110,873	$	130,934	$	241,807

The following table shows activity in our loan portfolio, excluding loans held for sale, during the periods indicated.

	Year Ended June 30,
	2013			2012			2011
	(In thousands)
Total loans at beginning of period	$	328,674		$	387,130		$	444,474
Loans originated:
Real estate		48,757			21,219			25,706
Commercial business		24,279			6,386			14,051
Consumer		1,278			1,011			1,387
Total loans originated		74,314			28,616			41,144
Loan principal repayments		(75,685	)		(87,072	)		(98,488	)
Net loan activity		(1,371	)		(58,456	)		(57,344	)
Total gross loans at end of period	$	327,303		$	328,674		$	387,130

Investments. Our investment portfolio consists of U.S. agency securities, mortgage-backed securities, corporate securities, and municipal securities. Investment securities increased$12.5 million to $96.0 million at June 30, 2013 compared to $83.5 million at June 30, 2012 as the result of excess liquidity deployed into the investment portfolio. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $179,000, or $111,000 net of taxes. The increasein the investment portfolio reflects security purchases totaling $42.9 million, partially offset by sales, paydowns and calls of securities totaling approximately $27.8 million.

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	At June 30,
	2013				2012				2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Federal agency securities	$	21,985	$	21,653	$	24,033	$	24,296	$	43,721	$	43,949
Mortgage-backed securities		65,607		65,868		52,822		54,415		24,551		25,356
Municipal securities		8,004		8,005		4,245		4,563		5,150		5,237
Other securities		607		498		609		209		613		238
Total	$	96,203	$	96,024	$	81,709	$	83,483	$	74,035	$	74,780

The following table sets forth the maturities and weighted average yields of investment securities at June 30, 2013.

	More than One Year to Five Years					More than Five Years to Ten Years					More than Ten Years					Total
	Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield			Carrying Value		Weighted Average Yield
Federal agency securities	$	3,549		1.85	%	$	10,627		1.54	%	$	929		3.00	%	$	15,105		1.70	%
Mortgage-backed securities		—		0.00			9,475		1.24			56,386		1.91			65,861		1.82
Municipal securities		1,066		1.09			3,474		2.66			3,211		3.54			7,751		2.66
Other securities		—		0.00			—		0.00			499		0.00			499		0.00
Total	$	4,615		1.67	%	$	23,576		1.58	%	$	61,025		2.00	%	$	89,216		1.86	%

Deposits. Our primary source of funds is our deposit accounts. The deposit base is comprised of checking, savings, money market and time deposits. These deposits are provided primarily by individuals and businesses within our market area. We do not use brokered deposits as a source of funding. Total deposits decreased $24.2 million to $399.6 million at June 30, 2013 primarily due to the planned runoff of higher cost certificates of deposit. Certificates of deposit decreased $22.3 million, or 13.1%, to $148.1 million while transaction accounts decreased $1.9 million to $251.5 million at June 30, 2013. Management monitors the deposit mix and deposit pricing on a regular basis and has focused on growth in lower cost transaction accounts. Our deposit pricing strategy is to offer competitive rates, but not to offer the highest deposit rates in our markets.

	At June 30,
	2013		2012		2011
	(In thousands)
Noninterest-bearing accounts	$	54,765	$	52,436	$	54,340
NOW accounts		54,164		52,958		46,134
Passbook accounts		91,280		96,588		91,637
Money market deposit accounts		51,324		51,492		51,252
Certificates of deposit		148,109		170,408		210,899
Total	$	399,642	$	423,882	$	454,262

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The following table indicates the amount of jumbo certificates of deposit by time remaining until maturity as of June 30, 2013. Jumbo certificates of deposit require minimum deposits of $100,000.

	Certificates of Deposit
Maturity Period	(In thousands)
Three months or less	$	14,988
Over three through six months		9,024
Over six through twelve months		15,792
Over twelve months		17,394
Total	$	57,198

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

	At June 30,
	2013		2012		2011
	(In thousands)
0.01 – 1.00%	$	115,563	$	129,619	$	82,706
1.01 – 2.00%		31,306		36,538		108,257
2.01 – 3.00%		533		2,313		8,046
3.01 – 4.00%		35		64		4,963
4.01 – 5.00%		672		1,874		6,927
Total	$	148,109	$	170,408	$	210,899

The following table sets forth the amount and maturities of time deposits at June 30, 2013.

	At June 30, 2013
	Less Than One Year		1-2 Years		2-3 Years		3-4 Years		4 or More Years		Total		Percent of Total Certificate Accounts
	(In Thousands)
0.01 – 1.00%	$	91,537	$	11,320	$	11,323	$	1,250	$	133	$	115,563		78.0	%
1.01 – 2.00%		17,309		9,954		207		955		2,881		31,306		21.1
2.01 – 3.00%		471		62		—		—		—		533		0.4
3.01 – 4.00%		35		—		—		—		—		35		0.0
4.01 – 5.00%		672		—		—		—		—		672		0.5
Total	$	110,024	$	21,336	$	11,530	$	2,205	$	3,014	$	148,109		100.0	%

Borrowings. We have relied upon advances from the Federal Home Loan Bank (“FHLB”) of Cincinnati to supplement our supply of lendable funds and to meet deposit withdrawal requirements. FHLB advances decreased to $37.6 million at June 30, 2013 from $37.9 million at June 30, 2012. The following table presents certain information regarding our use of FHLB advances during the periods and at the dates indicated.

	Year Ended June 30,
	2013			2012			2011
	(Dollars in thousands)
Maximum amount of advances outstanding at any month end	$	37,856		$	37,936		$	85,104
Average advances outstanding	$	37,700		$	37,906		$	60,459
Weighted average interest rate during the period		3.36	%		3.36	%		3.48	%
Balance outstanding at end of period	$	37,626		$	37,863		$	37,942
Weighted average interest rate at end of period		3.36	%		3.36	%		3.36	%

Stockholders’ Equity. Stockholders’ equity was$53.0 million at June 30, 2013 compared to $52.6 million at June 30, 2012. The Bank’s total risk-based capital ratio was 14.18% at June 30, 2013, compared to 13.42% at June 30, 2012. During the year ended June 30, 2013, there were 30,897 shares of Company common stock purchased through the Company’s stock repurchase program at a cost of $156,000. At June 30, 2013, an additional 406,905 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 June 30, 2013, the adjustment to stockholders’ equity was a net unrealized lossof $111,000 compared to a net unrealized gain of $1.1 million at June 30, 2012.

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Allowance for Loan Losses and Asset Quality

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

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

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

The allowance for loan losses decreased $192,000 to $5.7 million at June 30, 2013. Primarily as a result of management’s evaluation of credit quality and current economic conditions, the provision for loan losses was $800,000 for fiscal 2013, compared to a provision of $9.9 million for fiscal 2012. Net charge-offs were $992,000 for fiscal 2013 compared to $12.2 million for fiscal 2012. Net charge-offs for the fiscal year ended June 30, 2013 were primarily attributable to real estate loans. At June 30, 2013, our allowance for loan losses represented 1.73% of total gross loans and 44.23% of nonperforming loans, compared to 1.78% of total gross loans and 31.53% of nonperforming loans at June 30, 2012. A significant portion of the loan charge-offs during fiscal 2013 were against specific reserves and did not require replenishment of the allowance for loan losses.

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

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

	Year Ended June 30,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Allowance at beginning of period	$	5,852		$	8,181		$	9,649		$	4,722		$	1,836
Provision for loan losses		800			9,873			4,447			8,809			910
Reserve for acquired bank		—			—			—			—			2,577
Recoveries:
Real estate loans		36			12			110			7			22
Commercial business loans		386			897			91			3			29
Consumer loans		17			25			18			51			63
Total recoveries		439			934			219			61			114
Charge offs:
Real estate loans		(950	)		(4,363	)		(3,853	)		(1,955	)		(220	)
Commercial business loans		(441	)		(8,673	)		(2,150	)		(1,869	)		(327	)
Consumer loans		(40	)		(100	)		(131	)		( 119	)		(168	)
Total charge-offs		(1,431	)		(13,136	)		(6,134	)		(3,943	)		(715	)
Net charge-offs		( 992	)		(12,202	)		(5,915	)		(3,882	)		(601	)
Allowance at end of period	$	5,660		$	5,852		$	8,181		$	9,649		$	4,722
Allowance to nonperforming loans		44.23	%		31.53	%		99.19	%		51.38	%		78.30	%
Allowance to total gross loans outstanding at the end of the period		1.73	%		1.78	%		2.11	%		2.17	%		0.94	%
Net charge-offs to average loans outstanding during the period		0.31	%		3.36	%		1.42	%		0.83	%		0.14	%

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

	At June 30,
	2013								2012
	Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans
Real estate	$	3,084		54.5	%		81.3	%	$	3,700		63.2	%		85.9	%
Commercial business		2,524		44.6			17.5			2,130		36.4			12.8
Consumer		52		0.9			1.2			22		0.4			1.3
Unallocated		—		—			—			—		—			—
Total allowance for loan losses	$	5,660		100.0	%		100.0	%	$	5,852		100.0	%		100.0	%

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	At June 30,
	2011								2010								2009
	Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans			Amount		% of Allowance to Total Allowance			% of Loans in Category to Total Loans
Real estate	$	6,941		84.8	%		80.8	%	$	7,857		81.4	%		83.5	%	$	3,819		80.9	%		83.7	%
Commercial business		1,197		14.6			17.7			1,675		17.4			15.0			755		16.0			14.6
Consumer		43		0.5			1.5			117		1.2			1.5			148		3.1			1.7
Unallocated		—		—			—			—		—			—			—		—			—
Total allowance for loan losses	$	8,181		100.0	%		100.0	%	$	9,649		100.0	%		100.0	%	$	4,722		100.0	%		100.0	%

Nonperforming and Classified Assets. When a loan becomes 90 days delinquent, the loan is placed on nonaccrual status at which time the accrual of interest ceases and the reserve for any uncollectible accrued interest is established and charged against operations. The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is returned to accrual status. Loans are returned to accrual status when future payments are reasonably assured. Payments received on non-accrual loans are applied to the remaining principal balance of the loans.

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

Nonperforming assets decreasedto $19.2 million, or 3.81% of total assets, at June 30, 2013, compared to $25.2 million, or 4.82% at June 30, 2012 as a result of a decrease in nonaccrual loans and foreclosed real estate. Nonaccrual loans totaled $12.8 million at June 30, 2013 compared to $18.6 million at June 30, 2012. The decreasein nonaccrual loans is primarily driven by the real estate segments of the portfolio. Nonaccrual loans with a current payment status were approximately 71% of the balance at June 30, 2013. Foreclosed real estate decreased $642,000 to $5.4 million at June 30, 2013. At June 30, 2013, foreclosed real estate consisted of $1.3 million of single family homes, $3.6 million of vacant land, and commercial real estate totaling $525,000.

Under current accounting guidelines, a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. We consider consumer installment loans to be homogeneous and, therefore, do not separately evaluate them for impairment. All other loans are evaluated for impairment on an individual basis. At June 30, 2013, impaired loans totaled $14.4 million.

Troubled debt restructuring (“TDR”) loans were $9.1 million at June 30, 2013. 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. Troubled debt restructurings are considered to be nonperforming, except for those that have established a sufficient performance history (generally at a minimum of six consecutive months of performance under the restructured terms) under the terms for the restructured loan. The majority of the Bank’s TDRs involve a modification in loan terms such as a temporary period of interest only or extension of the maturity date. The majority of loans in this category are in compliance with their modified loan terms as of June 30, 2013. The amount of accruing TDR loans totaled $1.6 million at June 30, 2013. Additional information on all of our troubled debt restructurings appears in the troubled debt restructurings table below.

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The following table provides information with respect to our nonperforming assets at the dates indicated.

	At June 30,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Nonaccrual loans:
Real estate	$	4,597		$	9,040		$	5,401		$	17,367		$	5,724
Commercial business		211			1,034			848			1,309			252
Consumer		439			33			41			103			55
Total nonaccrual loans		5,247			10,107			6,290			18,779			6,031
Nonaccrual restructured loans:
Real estate		7,312			8,140			1,531			—			—
Commercial business		237			315			427			—			—
Consumer		—			—			—			—			—
Total nonaccrual restructured loans		7,549			8,455			1,958			—			—
Total nonperforming loans		12,796			18,562			8,248			18,779			6,031
Nonaccrual investments		942			207			464			731			—
Real estate owned		5,433			6,075			9,498			6,865			3,328
Other nonperforming assets(1)		—			348			1			—			106
Total nonperforming assets	$	19,171		$	25,192		$	18,211		$	26,375		$	9,465
Accruing restructured loans	$	1,553		$	2,304		$	13,821		$	—		$	—
Accruing restructured loans and nonperforming loans	$	14,349		$	20,866		$	22,069		$	18,779		$	6,031
Total nonperforming loans to total loans		3.91	%		5.65	%		2.13	%		4.22	%		1.20	%
Total nonperforming loans to total assets		2.54	%		3.55	%		1.47	%		2.98	%		0.91	%
Total nonperforming assets to total assets		3.81	%		4.82	%		3.25	%		4.18	%		1.43	%

(1)   Consists primarily of repossessed automobiles and mobile homes.

Interest income that would have been recorded for the years ended June 30, 2013, and 2012 had nonaccruing loans and accruing restructured loans been current according to their original terms was $742,000 and $1.2 million, respectively. Interest related to nonaccrual loans or accruing restructured loans totaling $111,000 and $162,000 was included in interest income for the years ended June 30, 2013 and 2012, respectively. 

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

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

	At June 30,
	2013		2012		2011
	(In thousands)
Substandard assets	$	18,990	$	28,886	$	35,153
Doubtful assets		—		—		—
Loss assets		—		—		—
Total classified assets	$	18,990	$	28,886	$	35,153

At each of the dates in the above table, substandard assets consisted of nonperforming assets plus other loans that we believed exhibited weakness. These substandard but performing loans totaled $7.2 million, $11.8 million and $27.4 million at June 30, 2013, 2012 and 2011, respectively. At June 30, 2013, we also had $14.6 million of loans that we were monitoring because of concerns about the borrowers’ ability to continue to make payments in the future, none of which were nonperforming or classified as substandard.

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

	At June 30,
	2013				2012				2011
	30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due		30-59 Days Past Due		60-89 Days Past Due
	(In thousands)
Real estate loans	$	314	$	270	$	1,381	$	372	$	3,006	$	449
Commercial business loans		101		227		133		—		137		808
Consumer loans		10		—		17		—		24		—
Total	$	425	$	497	$	1,531	$	372	$	3,167	$	1,257

At June 30, 2013, 2012 and 2011, delinquent loans consisted primarily of loans secured by commercial and residential real estate.

Liquidity and Capital Resources

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

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term U.S. Government agency obligations. The Asset/Liability Committee (“ALCO”) is responsible for monitoring and implementing liquidity strategies and contingency plans that address the Company’s ongoing liquidity needs.

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Our most liquid assets are cash and cash equivalents and interest-bearing deposits. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2013, cash and cash equivalents totaled $8.8 million and interest-bearing deposits totaled $15.7 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $96.0 million at June 30, 2013. At June 30, 2013, approximately $11.0 million of the investment portfolio was pledged as collateral for municipal deposits and repurchase agreements. The Company’s external sources of liquidity include borrowing capacity with the Federal Home Loan Bank of Cincinnati, the Federal Reserve Bank of Atlanta, and other correspondent banks. At June 30, 2013, borrowing capacity with the FHLB totaled $37.7 million based on pledged collateral, of which $213,000 was unused. For the year ended June 30, 2013, FHLB advances decreased to $37.6 million as compared to $37.9 million at June 30, 2012. 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 June 30, 2013, the Company had approximately $18.9 million of unused borrowing capacity based on pledged collateral with the Federal Reserve Bank discount window. In addition, the Company also maintains unsecured 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.

At June 30, 2013, we had $27.7 million in unused lines of credit. Certificates of deposit due within one year of June 30, 2013 totaled $110.0 million. We believe, based on past experience, that a significant portion of those deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The following table presents certain of our contractual obligations as of June 30, 2013.

			Payments due by period
Contractual Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
	(In thousands)
Federal Home Loan Bank advances	$	37,626	$	26,997	$	5,048	$	5,110	$	471
Subordinated debentures		10,001		—		—		—		10,001
Capital lease obligations		—		—		—		—		—
Operating lease obligations		9		9		—		—		—
Purchase obligations		1,782		1,088		694		—		—
Total	$	49,418	$	28,094	$	5,742	$	5,110	$	10,472

Our primary investing activities are the origination of loans and the purchase of securities. In the year ended June 30, 2013, we originated $74.3 million of loans. In fiscal 2012, we originated $28.6 million of loans and in fiscal 2011 we originated $41.1 million of loans.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decreasein total deposits of $24.2 million in the year ended June 30, 2013, a net decrease in total deposits of $30.4 million for the year ended June 30, 2012 and a net decrease in total deposits of $24.9 million for the year ended June 30, 2011, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. Federal Home Loan Bank advance activity reflected a decreaseof $237,000 at June 30, 2013 and a decrease of $79,000 and $46.9 million at June 30, 2012 and 2011, respectively.

We are subject to various regulatory capital requirements administered by the federal prompt corrective action regulations, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2013, we exceeded all of our regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines. See “Regulation of the Bank—Capital Requirements.”

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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 its stock. Substantially all of Jefferson Bancshares’ revenues are obtained from subsidiary service fees and 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 and year ended June 30, 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.

Impact of New Accounting Pronouncements

The impact of new accounting pronouncements is discussed in Note 4 to the Company’s Audited Consolidated Financial Statements beginning on page F-1 and incorporated herein by reference.

Effect of Inflation and Changing Prices

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

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

40

Quantitative Aspects of Market Risk. We monitor the impact of changes in interest rates on our net interest income and present value of equity using rate shock analysis. The present value of equity is defined as the present value of assets minus the present value of liabilities. This analysis assesses the risk of loss in market risk sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, this analysis is not performed for decreases of more than 100 basis points. We measure interest rate risk by modeling the changes in net portfolio value over a variety of interest rate scenarios.

The following table presents the estimated impact on net interest income and equity due to immediate changes in interest rates at the specified levels at June 30, 2013:

		Change In:
Change in Interest Rates (In Basis Points)		Net Interest Income					Economic Value of Equity
		$ Change		% Change			Market Value		Change
400		$	17,718		7.6	%	$	60,575		(15.7	%)
300			17,069		3.6			62,018		(13.7	)
200			16,508		0.2			64,871		(9.7	)
100			16,260		(1.3	)		68,366		(4.9	)
No change			16,475		0.0			71,874		0.0
(100	)		15,969		(3.1	%)		75,056		4.4	%

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this Item are incorporated by reference to the Company’s Audited Consolidated Financial Statements found on pages F-1 through F-39hereto.

ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

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ITEM 9A. 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 June 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management’s report on internal control over financial reporting is incorporated by reference to page 47.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to the directors and officers of Jefferson Bancshares and information regarding compliance with Section 16(a) of the Exchange Act is incorporated herein by reference to Jefferson Bancshares’ Proxy Statement for the 2013 Annual Meeting of Shareholders (the “Proxy Statement”) and to Part I, Item 1, “Description of Business—Executive Officers of the Registrant.” The information regarding compliance with Section 16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers—Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.

Jefferson Bancshares has adopted a written code of ethics, which applies to our senior financial officers. We intend to disclose any changes or waivers from our Code of Ethics applicable to any senior financial officers on our website at http://www.jeffersonfederal.com or in a Current Report on Form 8-K. A copy of the Code of Ethics is available, without charge, upon written request to Jane P. Hutton, Corporate Secretary, Jefferson Bancshares, Inc., 120 Evans Avenue, Morristown, Tennessee 37814.

ITEM 11. EXECUTIVE COMPENSATION

The information contained under the sections captioned “Executive Compensation” and “Director Compensation” in the Proxy Statement is incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

(a) Security Ownership of Certain Beneficial Owners. The information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

(b) Security Ownership of Management. The information required by this item is incorporated herein by reference to the section captioned “Stock Ownership” in the Proxy Statement.

(c) Changes in Control. Management of Jefferson Bancshares knows of no arrangements, including any pledge by any person of securities of Jefferson Bancshares, the operation of which may at a subsequent date result in a change in control of the registrant.

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(d) Equity Compensation Plan Information.

The following table provides information as of June 30, 2013 for compensation plans under which equity securities may be issued. Jefferson Bancshares does not maintain any equity compensation plans that have not been approved by security holders.

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)		Weighted-average exercise price of outstanding options, warrants and rights (b)		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c)
Equity compensation plans approved by security holders		360,638	$	13.04		338,112
Equity compensation plans not approved by security holders		––				––
Total		360,638				338,112

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by this item relating to certain relationships and related transactions is incorporated herein by reference to the section captioned “Other Information Relating to Directors and Executive Officers—Transactions with Management” in the Proxy Statement. The information required by this item relating to director independence is incorporated herein by reference to the section captioned “Items to Be Voted Upon By Shareholders—Item I—Election of Directors” in the Proxy Statement.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this item is incorporated herein by reference to the section captioned “Items to Be Voted Upon By Shareholders—Item 2—Ratification of Independent Registered Public Accounting Firm” in the Proxy Statement.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(a)	(1)	The exhibits and financial statement schedules filed as a part of this report are as follows:
			●	Report of Independent Registered Public Accounting Firm.
			●	Consolidated Balance Sheets for the Years Ended June 30, 2013 and 2012.
			●	Consolidated Statements of Earnings for the Years Ended June 30, 2013 and 2012.
			●	Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended June 30, 2013 and 2012.
			●	Consolidated Statements of Cash Flows for the Years Ended June 30, 2013 and 2012.
			●	Notes to Consolidated Financial Statements.
	(2)	All schedules are omitted as the required information either is not applicable or is included in the financial statements or related notes.
	(3)	Exhibits

3.1	Charter of Jefferson Bancshares, Inc. (1)
3.2	Bylaws of Jefferson Bancshares, Inc. (2)
4.1	Specimen Stock Certificate of Jefferson Bancshares, Inc. (1)
4.2	No long-term debt instrument issued by Jefferson Bancshares, Inc. exceeds 10% of consolidated assets or is registered. In accordance with paragraph 4(iii) of Item 601(b) of Regulation S-K, Jefferson Bancshares, Inc. will furnish the Securities and Exchange Commission copies of long-term debt instruments and related agreements upon request.
10.1	Employment Agreement between Anderson L. Smith, Jefferson Bancshares, Inc. and Jefferson Federal Bank* (3)
10.2	Employment Agreement between John W. Beard, Jr., Jefferson Bancshares, Inc. and Jefferson Federal Bank* (4)
10.3	Employment Agreement between Gary L. Keys, Jefferson Bancshares, Inc. and Jefferson Federal Bank* (4)
10.4	Amendment to Employment Agreement between Anderson L. Smith, Jefferson Bancshares, Inc. and Jefferson Federal Bank* (5)
10.5	Amended and Restated Change in Control Severance Plan of Jefferson Federal Bank* (6)
10.6	1995 Jefferson Federal Savings and Loan Association Stock Option Plan* (1)
10.7	Jefferson Federal Bank Supplemental Executive Retirement Plan* (1)
10.8	Jefferson Bancshares, Inc. 2004 Stock-Based Incentive Plan* (7)
11.0	Statement re: computation of per share earnings (8)
21.0	List of Subsidiaries
23.0	Consent of Craine, Thompson & Jones, P.C.
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certifications
101.0	The following materials from the Company’s Annual Report on Form 10-K for the year ended June 30, 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**

44

*	Management contract or compensatory plan, contract or arrangement.
**	Furnished, not filed.
(1)	Incorporated herein by reference from the Exhibits to Registration Statement on Form S-1 and amendments thereto, initially filed on March 21, 2003, Registration No. 333-103961.
(2)	Incorporated herein by reference from the Exhibits to the Current Report on Form 8-K, filed on October 26, 2007.
(3)	Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-K, filed on September 29, 2003.
(4)	Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-K, filed on September 21, 2012.
(5)	Incorporated herein by reference from the Exhibits to the Annual Report on Form 10-K, filed on September 13, 2004.
(6)	Incorporated herein by reference from the Exhibits to the Quarterly Report on Form 10-Q, filed on May 15, 2013.
(7)	Incorporated herein by reference from Appendix A to the Company’s definitive proxy statement filed on December 1, 2003.
(8)	Incorporated herein by reference to Note 3 to the Company’s Audited Financial Statements beginning on page F-12.

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SIGNATURES

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	JEFFERSON BANCSHARES, INC.
Date: September 30, 2013	By:	/s/ Anderson L. Smith
		Anderson L. Smith
		President, Chief Executive Officer and Director

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/ Anderson L. Smith	President, Chief Executive	September 30, 2013
Anderson L. Smith	Officer and Director
	(principal executive officer)
/s/ Jane P. Hutton	Chief Financial Officer,	September 30, 2013
Jane P. Hutton	Treasurer and Secretary
	(principal financial and
	accounting officer)
/s/ H. Scott Reams	Director	September 30, 2013
H. Scott Reams
/s/ Dr. Jack E. Campbell	Director	September 30, 2013
Dr. Jack E. Campbell
/s/ Dr. Terry M. Brimer	Director	September 30, 2013
Dr. Terry M. Brimer
/s/ William T. Hale	Director	September 30, 2013
William T. Hale

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REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. The Company’s management conducted an evaluation of the effectiveness of internal control over financial reporting as of June 30, 2013 based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this evaluation, management concluded that internal control over financial reporting was effective as of June 30, 2013 based on the specified criteria. This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Annual Report on Form 10-K.

47

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

Jefferson Bancshares, Inc. and Subsidiaries

Morristown, Tennessee

We have audited the accompanying consolidated balance sheets of Jefferson Bancshares, Inc. and Subsidiaries as of June 30, 2013 and 2012, and the related consolidated statements of earnings, of comprehensive income, of changes in stockholders' equity and cash flows for each of the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.Accordingly, we express no such opinion.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferson Bancshares, Inc. and Subsidiaries as of June 30, 2013 and 2012, and the results of its operations and its cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.

/s/ Craine, Thompson, & Jones, P.C.

Morristown, Tennessee

September 13, 2013

F-1

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(Dollars in Thousands)

	June 30,
	2013			2012
Assets
Cash and cash equivalents	$	8,837		$	3,043
Interest-earning deposits		15,677			53,650
Investment securities classified as available for sale, net		96,024			83,483
Federal Home Loan Bank stock		4,735			4,735
Bank owned life insurance		7,100			6,861
Loans receivable, net of allowance for loan losses of $5,660 and $5,852		321,299			322,499
Loans held-for-sale		97			381
Premises and equipment, net		25,636			26,361
Foreclosed real estate, net		5,433			6,075
Accrued interest receivable:
Investments		349			383
Loans receivable		1,060			1,192
Deferred tax asset		10,911			10,676
Core deposit intangible		1,151			1,537
Other assets		4,719			2,054
Total Assets	$	503,028		$	522,930
Liabilities and Stockholders' Equity
Deposits
Noninterest-bearing	$	54,765		$	52,436
Interest-bearing		344,877			371,446
Repurchase agreements		551			398
Federal Home Loan Bank advances		37,626			37,863
Subordinated debentures		7,358			7,245
Other liabilities		4,826			913
Accrued income taxes		—			—
Total liabilities		450,003			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 6,601,091and 6,631,989 shares outstanding at June 30, 2013 and 2012, respectively		92			92
Additional paid-in capital		78,302			78,571
Unearned ESOP shares		(2,376	)		(2,809	)
Unearned compensation		(1,046	)		(1,046	)
Accumulated other comprehensive income		(111	)		1,095
Retained earnings		9,661			8,067
Treasury stock, at cost (2,581,280 and 2,550,383 shares)		(31,497	)		(31,341	)
Total stockholders' equity		53,025			52,629
Total Liabilities and Stockholders' Equity	$	503,028		$	522,930

The accompanying notes are an integral part of these consolidated financial statements.

F-2

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Dollars in Thousands Except Per Share Amounts)

	Year Ended June 30,
	2013			2012
Interest income:
Interest on loans receivable	$	17,529		$	20,271
Interest on investment securities		1,689			1,900
Other interest		283			261
Total interest income		19,501			22,432
Interest expense:
Deposits		1,535			2,965
Securities sold under repurchase agreements		4			6
Advances from FHLB		1,266			1,272
Subordinated debentures		325			327
Total interest expense		3,130			4,570
Net interest income		16,371			17,862
Provision for loan losses		800			9,873
Net interest income after provision for loan losses		15,571			7,989
Noninterest income:
Mortgage origination income		445			306
Service charges and fees		1,036			1,106
Gain (loss) on sale of fixed assets		1			(12	)
Gain on sale of investment securities, net		12			50
Impairment of investment securities		—			(29	)
Loss on sale of foreclosed real estate, net		(266	)		(169	)
BOLI increase in cash value		239			236
Other		646			692
Total noninterest income		2,113			2,180
Noninterest expense:
Compensation and benefits		6,761			6,209
Occupancy expense		1,343			1,379
Equipment and data processing expense		2,453			2,376
DIF deposit insurance premiums		968			811
Advertising		383			359
Professional services		463			442
Valuation adjustment and expenses on other real estate owned		732			2,374
Amortization of intangible assets		386			441
Other		2,057			2,302
Total noninterest expense		15,546			16,693
Earnings (loss) before income taxes		2,138			(6,524	)
Income taxes:
Current		30			—
Deferred		514			(2,524	)
Total income taxes		544			(2,524	)
Net earnings (loss)	$	1,594		$	(4,000	)
Net earnings (loss) per share, basic	$	0.25		$	(0.64	)
Net earnings (loss) per share, diluted	$	0.25		$	(0.64	)

The accompanying notes are an integral part of these consolidated financial statements.

F-3

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Earnings

(Dollars in Thousands Except Per Share Amounts)

Year Ended June 30,
2013	2012

Net earnings (loss)	$	1,594		$	(4,000	)
Other comprehensive income:
Unrealized holding gain (loss)		(1,944	)		1,310
Reclassification for realized gains included in net income, net of taxes		(6	)		(172	)
Income tax benefit (expense)		744			(502	)
Comprehensive income (loss)	$	388		$	(3,364	)

The accompanying notes are an integral part of these consolidated financial statements.

F-4

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(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, 2011	$	92	$	78,895		$	(3,241	)	$	(1,019	)	$	459		$	12,067		$	(31,334	)	$	55,919
Net loss		—		—			—			—			—			(4,000	)		—			(4,000	)
Other comprehensive income		—		—			—			—			636			—			—			636
Shares committed to be released by the ESOP		—		(324	)		432			—			—			—			—			108
Earned portion of grants		—		—			—			(27	)		—			—			—			(27	)
Purchase of common stock (2,534 shares)		—		—			—			—			—			—			(7	)		(7	)
Balance at June 30, 2012		92		78,571			(2,809	)		(1,046	)		1,095			8,067			(31,341	)		52,629
Net earnings		—		—			—			—			—			1,594			—			1,594
Other comprehensive income		—		—			—			—			(1,206	)		—			—			(1,206	)
Shares committed to be released by the ESOP		—		(274	)		433			—			—			—			—			159
Stock options expensed		—		5			—			—			—			—			—			5
Purchase of common stock (30,897 shares)		—		—			—			—			—			—			(156	)		(156	)
Balance at June 30, 2013	$	92	$	78,302		$	(2,376	)	$	(1,046	)	$	(111	)	$	9,661		$	(31,497	)	$	53,025

The accompanying notes are an integral part of these consolidated financial statements.

F-5

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in Thousands)

	Year Ended June 30,
	2013			2012
Cash flows from operating activities:
Net earnings (loss)	$	1,594		$	(4,000	)
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		158			109
Depreciation and amortization expense		1,797			1,854
Amortization of premiums (discounts), net on investment securities		648			572
Provision for loan losses		800			9,873
(Gain) loss on sale of fixed assets		(1	)		12
(Gain) on sale of investment securities and mortgage-backed securities, net		(12	)		(21	)
Amortization of deferred loan fees, net		(160	)		(169	)
Loss on sale of foreclosed real estate, net		266			169
Deferred tax expense (benefit)		514			(2,524	)
Originations of mortgage loans held for sale		(17,125	)		(13,759	)
Proceeds from sale of mortgage loans		17,409			13,378
Increase in cash value of life insurance		(239	)		(236	)
Earned portion of MRP		—			(27	)
Stock options expensed		5			—
Decrease (increase) in:
Accrued interest receivable		166			257
Other assets		(2,665	)		4,925
Increase (decrease) in other liabilities and accrued income taxes		3,913			(4,074	)
Net cash provided by (used for) operating activities		7,068			6,339
Cash flows used for investing activities:
Loan originations, net of principal collections		(1,581	)		45,910
Purchase of investment securities classified as held-to-maturity:
Investment securities classified as available for sale:
Purchased		(42,894	)		(58,320	)
Proceeds from sale		83			3,619
Proceeds from maturities, calls and prepayments		27,680			46,479
Purchase of premises and equipment		(319	)		(825	)
Proceeds from the sale of fixed assets		—			14
Proceeds from sale of (additions to) foreclosed real estate, net		2,205			3,845
Net cash provided by (used for) investing activities		(14,826	)		40,722

The accompanying notes are an integral part of these consolidated financial statements.

F-6

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(Dollars in Thousands)

(Continued)

Year Ended June 30,
2013	2012

Cash flows from financing activities:
Net increase (decrease) in deposits		(24,235	)		(30,337	)
Net increase (decrease) in repurchase agreements		153			(547	)
Repayment of FHLB advances		(183	)		(25	)
Purchase of treasury stock		(156	)		(7	)
Net cash provided by (used for) financing activities		(24,421	)		(30,916	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(32,179	)		16,145
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	$	24,514		$	56,693
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	1,550		$	3,067
Interest on borrowed funds	$	1,041		$	1,044
Interest on subordinated debentures	$	213		$	215
Income taxes	$	45		$	—
Real estate acquired in settlement of loans	$	3,893		$	2,936

The accompanying notes are an integral part of these consolidated financial statements.

F-7

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2013 and 2012

 (Dollars in Thousands)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Jefferson Bancshares, Inc. (the Company), is the holding company for Jefferson Federal Bank (the “Bank”).The Company’s common stock is listed on the NASDAQ Global Market under the symbol JFBI.

The Company provides a variety of financial services to individuals and small businesses through its offices in Tennessee.Its primary deposit products are transaction accounts and term certificate accounts and its lending products are commercial and residential mortgages and, to a lesser extent, consumer loans.

Principles of Consolidation - The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly owned subsidiaries Jefferson Federal Bank and State of Franklin Bank Statutory Trust II.All significant intercompany balances and transactions have been eliminated in consolidation.

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.

Significant Group Concentrations of Credit Risk - The Company originates residential real estate loans, commercial real estate loans and, to a lesser extent, consumer loans primarily to customers located in Upper East Tennessee.The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Significant Accounting Policies - The following comprise the significant accounting policies, which the Company follows in preparing and presenting its consolidated financial statements:

a. For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from depository institutions, interest-bearing deposits in other depository institutions and fed funds sold with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $15,677 and $53,650 at June 30, 2013 and 2012, respectively.

b. Investments in debt securities are classified as "held-to-maturity" or "available-for-sale" depending upon the intent of management with respect to the particular investments.Investments classified as "held-to-maturity" are carried at cost while those identified as "available-for-sale" are carried at fair value.All securities are adjusted for amortization of premiums and accretion of discounts over the term of the security using the interest method.Management has the positive intent and ability to carry those securities classified as "held-to-maturity" to maturity for long-term investment purposes and, accordingly, such securities are not adjusted for temporary declines in market value."Available-for-sale" securities are adjusted for changes in fair value through a direct entry to a separate component of stockholders' equity (i.e., other comprehensive income).Investments in equity securities are carried at the lower of cost or market.The cost of securities sold is determined by specific identification.

F-8

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

c. Loans receivable, net, which management has the intent and ability to hold until maturity or pay-off, are generally carried at unpaid principal balances less loans in process, net deferred loan fees, unearned discount on loans and allowances for losses. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized to interest income over the contractual life of the loan using the interest method.

d. The Company originates mortgage loans conforming to guidelines for sale in the secondary mortgage market. Because commitment letters are only given to the borrower after an underwriter agrees to purchase the loan according to the stated terms, the Company’s maximum time between funding the loan and completing the sale to the underwriter is generally three weeks.The loans are carried at the lower of aggregate cost or fair market value as determined by the amount committed to by the underwriter. The loans are sold without recourse and the mortgage servicing rights are sold as part of the loan package.

e. 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 write-down to fair value is charged to the allowance for loan and lease losses.Any subsequent write-down 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. Loan pools include residential mortgage loans, multi-family loans, construction and land development loans, non-residential real estate loans (owner occupied and non-owner occupied), commercial loans, consumer loans, HELOC and junior liens.Commercial business loans and loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans.In addition, loans secured by commercial real estate are more likely to be negatively impacted by adverse conditions in the real estate market or the economy.Management utilizes a loan grading system and assigns a loan grade of “Pass”, “Watch”, “Special Mention”, “Substandard”, “Doubtful” or “Loss” based on risk characteristics of loans.Lending staff reviews the loan grades of customers on a regular basis and makes changes as needed given that the creditworthiness of customers may change over time.

F-9

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Descriptions of loan grades are as follows:

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

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

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

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

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

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

Specific valuation allowances are established for impaired loans.The Company considers a loan to be impaired when, based on current information and events, it is probable that the company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis.A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition costs, or the net present value as determined by a discounted cash flow analysis.On a quarterly basis, management evaluates individual loans which have an outstanding principal balance of $250,000 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 2011-02in 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 $9.1 million and $10.8 million at June 30, 2013 and 2012, respectively.

F-10

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 placed on non-accrual or charged off is reversed against interest income.The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is returned to accrual status.Loans are returned to accrual status when future payments are reasonably assured.Payments received on non-accrual loans are applied to the remaining principal balance of the loans.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The evaluation of the allowance for loan and lease losses is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.The Company is subject to periodic examination by regulatory agencies, which may require the Company to record increases in the allowances based on the regulator’s evaluation of available information.There can be no assurance that the Company’s regulators will not require further increases to the allowances.

Tabular information related to loan grades, composition of loan portfolio and activity in the allowance for loan losses is included in Note 6.

f. Credit related financial instruments arising in the ordinary course of business consist primarily of commitments to extend credit.Such financial instruments are recorded when they are funded.

g. Premises and equipment are carried at cost, less accumulated depreciation. Expenditures for assets with a life greater than one year and costing more than $1,000 are generally capitalized.Depreciation of premises and equipment is computed using the straight-line and accelerated methods based on the estimated useful lives of the related assets. Estimated lives for buildings, leasehold improvements, equipment and furniture are thirty-nine, thirty- nine, five and seven years, respectively.Estimated lives for building improvements are evaluated on a case-by-case basis and depreciated over the estimated remaining life of the improvement.

h. Foreclosed real estate is initially recorded, and subsequently carried, at the lower of cost or fair value less estimated selling costs.Costs related to improvement of foreclosed real estate are capitalized.

i. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

j. GAAP requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period.

The Company utilizes the prospective application transition method. This method requires the Company to expense the unvested portion of options granted in fiscal 2013, which reduces net earnings by approximately $3, net of taxes for the fiscal year ending June 30, 2013 and by approximately $12 in the remaining requisite service period. GAAP provides for the use of alternative models to determine compensation cost related to stock option grants. The Company has determined the estimated fair value of stock options at grant date using the Black-Scholes option-pricing model based on market data as of June 30, 2012. The expected dividend yield of 0.0% and expected volatility of 65.52% were used to model the value. The risk free rate of return equaled 1.11%, 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.

F-11

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Core Deposit Intangible – The core deposit intangible (CDI) is an asset arising from the acquisition of State of Franklin Bank. The CDI was initially measured at fair value and then amortized using an accelerated method over ten years. The core deposit intangible asset is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Segment Reporting – The Company’s operations are solely in the financial services industry and include providing to its customers traditional banking and other financial services.The Company operates primarily in Tennessee.Management makes operating decisions and assesses performance based on an ongoing review of the Company’s financial results.Therefore, the Company has a single operating segment for financial reporting purposes.

NOTE 2 – RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain average balances on hand with the Federal Reserve Bank. At June 30, 2013 and 2012, these reserve balances amounted to $4,597 and $4,408, respectively.

NOTE 3 – EARNINGS PER SHARE

Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding.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 solely to outstanding stock options and are determined using the treasury stock method.Calculations related to earnings per share are provided in the following table.

	Year Ended		Year Ended
	June 30, 2013		June 30, 2012
Weighted average number of common shares used in computing basic earnings per common share		6,270,523		6,243,347
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		6,270,523		6,243,347

F-12

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2013-11 –In July 2013, the FASB issued Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss, a Similar Tax Loss, or a Tax Credit Carryforward Exists – a consensus of the FASM Emerging Issues Tax Force”. This update provides explicit guidance on the presentation in the financial statements. This standards update helps to bring consistency to a wide ranging diversity that currently exists in practice on the presentation of such unrecognized tax benefits.The amendments in this update become effective for public companies for fiscal years and interim periods within those years, beginning after December 31, 2013. Management does not believe this update will have a material, if any, impact on the Company’s consolidated financial statements.

ASU 2013-02 –In February 2013, the FASB issued Accounting Standards Update 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The Company adopted this update prospectively as of the quarter ended March 31, 2013. Accordingly, the Company’s financial statements now include consolidated statements of comprehensive income disclosing the required information.

ASU 2011-11 – In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This update requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of this update includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and lending arrangements. The Company is required to adopt this update retrospectively for annual periods beginning after January 1, 2013. Management does not anticipate that adoption will have a material impact on the Company’s consolidated financial position, results of operations or cash flows. ASU 2013-01 clarifies certain of the provisions of ASU 2011-11.

F-13

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 5 – INVESTMENT SECURITIES

Investment securities are summarized as follows:

	June 30, 2013
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency securities	$	21,985		$	88	$	(420	)	$	21,653
Mortgage-backed securities		65,607			1,096		(835	)		65,868
Municipal securities		8,004			172		(171	)		8,005
Other securities		607			—		(109	)		498
Total securities available-for-sale	$	96,203		$	1,356	$	(1,535	)	$	96,024
Weighted-average rate		1.83	%

	June 30, 2012
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency securities	$	24,033		$	263	$	—		$	24,296
Mortgage-backed securities		52,822			1,658		(65	)		54,415
Municipal securities		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	%

Investment securities with a carrying value of $11,017 and $13,021 were pledged to secure public funds, repurchase agreements and/or advances from the Federal Home Loan Bank at June 30, 2013 and 2012, respectively.

At June 30, 2013, the Company held no securities of any single issue (excluding the U.S. Government and federal agencies) with a book value that exceeded 10% of stockholders’ equity.

F-14

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 5 – INVESTMENT SECURITIES (CONTINUED)

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
June 30, 2013
Federal agency securities	$	9,555	$	(420	)	$	—	$	—		$	9,555	$	(420	)
Mortgage-backed securities		25,078		(832	)		443		(3	)		25,521		(835	)
Municipal securities		3,798		(171	)		—		—			3,798		(171	)
Other securities		—		—			498		(109	)		498		(109	)
	$	38,431	$	(1,423	)	$	941	$	(112	)	$	39,372	$	(1,535	)
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2012
Federal agency securities	$	—	$	—		$	—	$	—		$	—	$	—
Mortgage-backed securities		2,100		(9	)		569		(56	)		2,669		(65	)
Municipal securities		—		—			—		—			—		—
Other securities		—		—			207		(400	)		207		(400	)
	$	2,100	$	(9	)	$	776	$	(456	)	$	2,876	$	(465	)

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 foregoing unrealized losses in other comprehensive income. There were no other-than-temporary impairment charges for the year ending June 30, 2013. Unrealized losses on all securities as shown above are considered to be temporary in nature. The Company neither has the intent to sell nor is it forecasting the need or requirement to sell the securities before their anticipated recovery.

Federal Agency Securities – The unrealized losses of $420 for these ten 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 June 30, 2013.

GSE Residential Mortgage-Backed Securities – The unrealized losses of $832 for these thirty-three 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 June 30, 2013.

F-15

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 5 – INVESTMENT SECURITIES (CONTINUED)

Private-Label Residential Mortgage-Backed Securities - The unrealized loss of $3 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 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 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 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.

Municipal Securities – The unrealized losses of $171 for these eight 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 June 30, 2013.

Other Securities – The unrealized loss of $109 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 June 30, 2013.

Maturities of debt securities at June 30, 2013 are summarized as follows:

					Weighted
			Fair		Average
	Cost		Value		Yield
Within 1 year	$	6,763	$	6,808		1.26	%
Over 1 year through 5 years		4,579		4,615		1.67	%
After 5 years through 10 years		23,836		23,576		1.58	%
Over 10 years		61,025		61,025		2.00	%
	$	96,203	$	96,024		1.83	%

Proceeds from sale of debt securities and gross realized gains and losses on these sales are summarized as follows:

	Year ended June 30,
	2013		2012
Proceeds from sales	$	83	$	3,619
Gross realized gains		8		156
Gross realized losses		—		(135	)
Net gains (losses)	$	8	$	21

F-16

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 6 – LOANS RECEIVABLE, NET

Loans receivable, net are summarized as follows:

	June 30,
	2013			2012
Real estate loans:
Residential one-to four-family	$	87,233		$	97,182
Multi-family		13,509			11,564
Construction		6,692			548
Commercial		120,205			127,185
Land		22,296			27,487
Home equity line of credit		16,259			18,395
Total real estate loans		266,194			282,361
Commercial business loans		57,288			42,107
Consumer Loans:
Loans secured by deposit accounts		340			381
Other consumer loans		2,971			2,989
Loans secured by automobiles		510			833
Mobile home loans		—			3
Total non-real estate loans		3,821			4,206
Total gross loans		327,303			328,674
Less:
Deferred loan fees, net		(344	)		(323	)
Allowance for losses		(5,660	)		(5,852	)
Loans receivable, net	$	321,299		$	322,499
Weighted average rate		5.30	%		5.82	%

The following is a summary of information pertaining to impaired and non-accrual loans:

	June 30,
	2013		2012
Impaired loans without a valuation allowance	$	4,210	$	12,359
Impaired loans with a valution allowance		10,227		12,051
Total impaired loans	$	14,437	$	24,410
Valuation allowance for impaired loans	$	1,843	$	2,861
Total non-accrual loans	$	12,796	$	18,562
Average investment in impaired loans	$	19,915	$	30,415
Interest income recognized on impaired loans	$	344	$	825

F-17

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 6 – LOANS RECEIVABLE, NET (CONTINUED)

No additional funds are committed to be advanced in connection with impaired loans.

Commercial real estate loans are secured principally by office buildings, shopping centers, churches and other rental real estate.Construction loans are secured by commercial real estate and single-family dwellings.

The following is a table summarizing the activity in the allowance for loan losses for the year ending June 30, 2013:

	Resid. Mtg.			Multi-family			Const. and land dev.			Non-resid real estate			Owner occupied			Comm'l			HELOC/ Junior Liens			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	)		(23	)		(442	)		(109	)		(40	)		(1,431	)
Recoveries		—			—			23			—			13			386			2			15			439
Provision		614			(121	)		(171	)		(35	)		10			407			41			55			800
Balance at June 30, 2013	$	665		$	475		$	491		$	981		$	347		$	2,481		$	168		$	52		$	5,660
	`
Ending balance, Individually Evaluated	$	—		$	423		$	200		$	467		$	—		$	753		$	—		$	—		$	1,843
Ending balance, Collectively Evaluated	$	665		$	52		$	291		$	514		$	347		$	1,728		$	168		$	52		$	3,817
Loans:
Balance at June 30, 2013	$	86,539		$	13,509		$	30,679		$	50,128		$	68,327		$	57,171		$	17,085		$	3,865		$	327,303
Ending balance, Individually Evaluated	$	40		$	4,923		$	510		$	1,834		$	—		$	2,504		$	416		$	—		$	10,227
Ending balance, Collectively Evaluated	$	86,499		$	8,586		$	30,169		$	48,294		$	68,327		$	54,667		$	16,669		$	3,865		$	317,076

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

	30-59 days past due		60-89 days past due		90 or more days past due and still accruing		Nonaccrual		Total past due		Total Current		Total loans receivable
Residential Mortgage	$	256	$	44	$	—	$	1,918	$	2,218	$	84,321	$	86,539
Multi-family		—		—		—		4,927		4,927		8,582		13,509
Construction/land development						—		1,011		1,011		29,668		30,679
Non-residential real estate		58		103		—		3,120		3,281		46,847		50,128
Owner occupied				123		—		868		991		67,336		68,327
Commercial		101		227		—		448		776		56,395		57,171
Heloc and junior lien						—		65		65		17,020		17,085
Consumer		10		—		—		439		449		3,416		3,865
Total	$	425	$	497	$	—	$	12,796	$	13,718	$	313,585	$	327,303

F-18

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 6 – LOANS RECEIVABLE, NET (CONTINUED)

The following table summarizes the credit risk profile by internally assigned grade at June 30, 2013:

	Resid Mtg.		Multi-family		Const. and land dev.		Non-residential real estate		Owner occupied		Commercial		HELOC/ Junior Liens		Consumer		Total
Grade:
Pass	$	80,268	$	7,872	$	27,382	$	40,291	$	65,527	$	52,740	$	16,150	$	3,447	$	293,677
Watch		2,800		621		1,726		5,802		1,643		1,563		71		410		14,636
Special mention		—		—		—		—		—		—		—		—		—
Substandard		3,471		5,016		1,571		4,035		1,157		2,868		864		8		18,990
Doubtful		—		—		—		—				—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total:	$	86,539	$	13,509	$	30,679	$	50,128	$	68,327	$	57,171	$	17,085	$	3,865	$	327,303

The following table summarizes the composition of impaired loans, the associated specific reserves and interest income recognized on impaired loans as of June 30, 2013:

	Recorded investment		Unpaid principal balance		Specific allowance			Interest income recognized
With an allowance recorded:
Residential Mortgage	$	40	$	40	$	—		$	1
Multi-family		4,500		4,923		(423	)		—
Construction and land development		310		510		(200	)		11
Non-residential real estate		1,367		1,834		(467	)		—
Owner occupied		—		—		—			—
Commercial		1,751		2,504		(753	)		185
Heloc and junior lien		416		416		—			15
Consumer		—		—		—			—
Total	$	8,384	$	10,227	$	(1,843	)	$	212
With no related allowance:
Residential Mortgage	$	890	$	890	$	—		$	61
Multi-family		—		—		—			—
Construction and land development		300		300		—			4
Non-residential real estate		1,744		1,744		—			61
Owner occupied		653		653		—			—
Commercial		—		—		—			—
Heloc and junior lien		193		193					6
Consumer		430		430		—			—
Total	$	4,210	$	4,210	$	—		$	132
Total:
Residential Mortgage	$	930	$	930	$	—		$	62
Multi-family		4,500		4,923		(423	)		—
Construction and land development		610		810		(200	)		15
Non-residential real estate		3,111		3,578		(467	)		61
Owner occupied		653		653		—			—
Commercial		1,751		2,504		(753	)		185
Heloc and junior lien		609		609		—			21
Consumer		430		430		—			—
Total	$	12,594	$	14,437	$	(1,843	)	$	344

F-19

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 6 – LOANS RECEIVABLE, NET (CONTINUED)

The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of June 30, 2013:

	June 30, 2013
	Accrual Status		Non-Accrual Status		Number of Loans		Total TDR's
Residential Mortgage	$	664	$	—		2	$	664
Multi-family		621		4,923		2		5,544
Construction and land development		146		—		1		146
Non-residential real estate		122		2,010		3		2,132
Owner occupied		—		379		2		379
Commercial		—		237		2		237
HELOC and Junior Lien		—		—		—		—
Total	$	1,553	$	7,549		12	$	9,102

The following tables include the recorded investment and number of modifications for modified loans.The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.During the years ended June 30, 2013 and 2012, there were no defaults of loans modified within the respective years.

	For the year ended June 30, 2013						For the year ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
Multi-family		—	$	—	$	—		2	$	7,775	$	5,284
Non-residential real estate		1		191		191		1		3,025		2,000
Total		1	$	191	$	191		3	$	10,800	$	7,284

Following is a summary of loans to directors, executive officers and associates of such persons:

Balance at June 30, 2012	$	839
Additions		25
Reclassifications		—
Repayments		(2	)
Balance at June 30, 2013	$	862

These loans were made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

F-20

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 7 – PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:

	June 30,
	2013		2012
Land	$	6,772	$	6,772
Office building		22,117		21,982
Furniture and equipment		5,889		5,704
		34,778		34,458
Less:accumulated depreciation and amortization		9,142		8,097
	$	25,636	$	26,361

Depreciation expense for the years ended June 30, 2013 and 2012 was $1,045 and $1,055, respectively.

Pursuant to the terms of non-cancelable lease agreements in effect at June 30, 2013, pertaining to real property, future minimum payments are as follows:

For the Year Ended
2014	$	9
2015		—
	$	9

Lease expense for June 30, 2013 and 2012 was $19 and $49, respectively.

The Company has also entered into a service contract for data processing services.Future minimum payments under this agreement are as follows:

For the Year Ended
2014	$	1,088
2015		682
2016		12
	$	1,782

Data processing service expense for June 30, 2013 and 2012 was $1,127 and $1,075, respectively.

F-21

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 8 - DEPOSITS

Deposits are summarized as follows:

	June 30,
	2013			2012
Non-interest bearing accounts	$	54,765		$	52,436
NOW accounts, 0.10% and 0.12%, respectively		54,164			52,958
Savings accounts, 0.23% and 0.23%, respectively		91,280			96,588
Money market accounts, 0.23% and 0.23%, respectively		51,324			51,492
Total transaction accounts		251,533			253,474
Certificates:
0.00 - 1.00%	$	115,563		$	129,619
1.01 - 2.00%		31,306			36,538
2.01 - 3.00%		533			2,313
3.01 - 4.00%		35			64
4.01 - 5.00%		672			1,874
Total Certificates, 0.66% and 0.91%, respectively		148,109			170,408
Total Deposits	$	399,642		$	423,882
Weighted-average rate - deposits		0.34	%		0.46	%

The aggregate amount of time deposits in denominations of $100 or more was $57,198 and $67,502, respectively, at June 30, 2013 and 2012.

The Deposit Insurance Fund, as administrated by the Federal Deposit Insurance Corporation, insures deposits up to applicable limits.Deposit amounts in excess of $250,000 are generally not federally insured.

The total amount of overdrafts reclassified as loans was $77 and $75, respectively, at June 30, 2013 and 2012.

At June 30, 2013, the scheduled maturities of time deposits are as follows:

CD Maturities:
2014	$	110,024
2015		21,336
2016		11,530
2017		2,205
2018		3,014
Total	$	148,109

F-22

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 8 – DEPOSITS (CONTINUED)

Following is a summary of interest on deposits:

	June 30,
	2013		2012
NOW	$	59	$	77
Savings		207		485
MMA		119		311
Certificates		1,150		2,092
		1,535		2,965
Less : penalties		—		—
Total	$	1,535	$	2,965

NOTE 9 - FHLB ADVANCES

At June 30, 2013, the Company’s fixed-rate FHLB advances had interest rates that ranged from 2.00% to 3.55% with a weighted average rate of 3.36% and 3.36% at June 30, 2013 and 2012, respectively. Pursuant to collateral agreements with the FHLB, advances are secured by a Blanket Mortgage Collateral Agreement.The Agreement pledges the entire one-to-four family residential mortgage portfolio and allows a maximum advance of $37,686 and an additional borrowing capacity of $213 at June 30, 2013.Outstanding advances were $37,626 and $37,863 at June 30, 2013 and 2012, respectively.Advances are payable at the maturity dates and prepayment penalties are required if paid before maturity.

A total of $10.0 million of FHLB advances are putable advances that give the FHLB the option to require repayment on specific dates.Under the terms of the putable advances, the company could be required to repay all of the principal and accrued interest before the maturity date.

A total of $10.0 million of FHLB advances are convertible advances with interest rates that may be reset on certain dates at the option of the FHLB in accordance with the terms of the note.The Company has the option of repaying the outstanding advance or converting the interest rate from a fixed rate to a floating LIBOR rate at the time the advance is called by the FHLB.

F-23

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 9 - FHLB ADVANCES (CONTINUED)

Maturities and weighted average rates of fixed rate FHLB advances at June 30, 2013 and 2012 are as follows:

	Amount				Weighted Avg Rate
	2013		2012		2013			2012
Fixed Rate Advances Maturing:
Less than 1 year	$	26,997	$	—		3.41	%		0.00	%
1 to 2 years		5,048		26,993		3.22	%		3.41	%
2 to 3 years		—		5,082		0.00	%		3.20	%
3 to 4 years		—		—		0.00	%		0.00	%
4 to 5 years		5,110		—		3.33	%		0.00	%
5 to 10 years		—		5,134		0.00	%		3.31	%
After 10 years		471		654		2.65	%		2.66	%
Total FHLB Advances	$	37,626	$	37,863		3.36	%		3.36	%

NOTE 10 – INCOME TAXES

In computing federal income tax, savings institutions treated as small banks for tax years beginning before 1996 were allowed a statutory bad debt deduction based on specified experience formulas or 8% of otherwise taxable income, subject to limitations based on aggregate loans and savings balances.For tax years after 1996, financial institutions meeting the definition of a small bank can use either the “experience method” or the “specific charge-off method” in computing their bad debt deduction.The Company qualifies as a small bank and is using the experience method.As of June 30, 2013, the end of the most recent tax year, the Company’s tax bad debt reserves were approximately $1,312. If these tax bad debt reserves are used for other than loan losses, the amount used will be subject to federal income taxes at the then prevailing corporate rates.

Income taxes are summarized as follows:

	Year Ending June 30,
	2013		2012
Current taxes:
Federal income	$	30	$	—
State excise		—		—
		30		—
Deferred taxes
Federal income		456		(2,229	)
State excise		58		(295	)
		514		(2,524	)
	$	544	$	(2,524	)

F-24

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 10 – INCOME TAXES (CONTINUED)

The provision for income taxes differs from the federal statutory corporate rate as follows:

	Percentage of Earnings
	Before Income Taxes
	Years Ending June 30,
	2013	2012
Tax at statutory rate	34.0%	(34.0%)
Increase (decrease) in taxes:
State income taxes, net of federal tax benefit	2.7	(4.3)
Increase in BOLI cash value	(3.8)	(1.4)
Additional ESOP compensation	(4.6)	(2.0)
Other, net	(2.9)	3.0
Effective tax rate	25.4%	(38.7%)

The provisions of GAAP related to income taxes require the Company to establish a deferred tax liability for the tax effect of the tax bad debt reserves over the base year amounts.There were no excess reserves at June 30, 2013 and 2012.The Company’s base year tax bad debt reserve is $1,312.The estimated deferred tax liability on the base year amount is approximately $502, which has not been recorded in the accompanying consolidated financial statements. The deferred tax valuation allowance is related to a capital loss carryforward that can only be used to offset capital gains.

The Company acquired a tax net operating loss (NOL) carryforward from its acquisition of State of Franklin. A deferred tax benefit was recorded for the portion deemed usable over its statutory remaining life (initially 20 years). The expiration date of the remaining NOL carryforward of $10,560 is June 30, 2029.

 A deferred tax benefit of $1,022 has been recorded for the 2011 NOL of $2,668. The NOL’s remaining life is eighteen years and management believes it will be utilized in full prior to expiration.

For 2012, a deferred tax benefit of $2,904 was recorded for the NOL of $7,585. The NOL’s remaining life is nineteen years and management believes it will be utilized in full prior to expiration.

F-25

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 10 – INCOME TAXES (CONTINUED)

The components of the net deferred tax asset are summarized as follows:

	June 30.
	2013			2012
Deferred tax liabilities:
FHLB stock dividends	$	(959	)	$	(959	)
Depreciation		(12	)		(27	)
FHLB advance restructuring penalty		(72	)		(181	)
Allowance for "available-for-sale" securities		—			(679	)
		(1,043	)		(1,846	)
Deferred tax assets:
Fair value adjustment from acquisition,net		708			533
Subsequent writedowns on foreclosed property		434			831
Nonaccrual interest on securities		58			48
NOL carryforward		7,596			8,023
Deferred loan fees, net		132			124
Deferred compensation		62			55
Capital loss on Silverton Bank Stock		141			141
Allowance for losses on loans		2,895			2,908
Allowance for "available-for-sale" securities		69			—
Gross deferred tax asets		12,095			12,663
Valuation allowance		(141	)		(141	)
Deferred tax asset		11,954			12,522
Net deferred tax asset	$	10,911		$	10,676

NOTE 11 – EMPLOYEE BENEFIT PLANS

401 (K) RETIREMENT PLAN.The Company has a defined contribution pension plan covering all employees having attained the age of 20 and one-half and completing six months of service.Normal retirement date is the participant’s sixty-fifth birthday.

Before the Company established the Employee Stock Ownership Plan (effective July 1, 2003), the 401(k) plan was funded by annual employer contributions of 10% of the total plan compensation of all participants in the plan.The amount contributed by the employer was divided among the participants in the same proportion that each participant’s compensation bore to the aggregate compensation of all participants.Employer contributions vest to employees over a seven-year period.Employees are permitted to make contributions of up to 50% of their compensation subject to certain limits based on federal tax laws.

F-26

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 11 – EMPLOYEE BENEFIT PLANS (CONTINUED)

EMPLOYEE STOCK OWNERSHIP PLAN.The Bank maintains an Employee Stock Ownership Plan (ESOP).On July 1, 2003, the ESOP purchased 670,089 shares of Jefferson Bancshares, Inc. from proceeds provided by the Company in the form of a loan.Thus, the ESOP is considered a leveraged plan.Employees are eligible for participation in the plan upon attaining 20 and one-half years of age and completing six consecutive calendar months during which they have performed at least 500 hours of service.Each plan year, the Bank may, in its discretion, make a contribution to the plan; however, at a minimum, the Bank has agreed to make as a contribution the amount necessary to service the debt incurred to acquire the stock.

Shares are scheduled for release as the loan is repaid.The present amortization schedule calls for 43,207 shares to be released each December 31.Dividends on unallocated shares are used to repay the loan while dividends paid on allocated shares become part of the plan’s assets.Accounting for the ESOP consists of recognizing compensation expense for the fair market value of the shares as of the date of release.Allocated shares are included in earnings per share calculations while unallocated shares are not included.

ESOP compensation expense was $158 and $109 for the years ended June 30, 2013 and 2012. The original number of shares committed was 670,089 and 43,207 were released during the years ended June 30, 2013 and 2012, respectively. The 259,239 remaining unearned shares had an approximate fair market value of $1,465 at June 30, 2013.

The Bank has also established a SERP to provide for supplemental retirement benefits with respect to the ESOP. The plan provides certain executives with benefits that cannot be provided under the ESOP as a result of the limitations imposed by the Internal Revenue Code, but that would have been provided under the ESOP but for such limitations. The Plan was amended in 2007 to change the first allocation period to December 31, 2007. Compensation expense under the SERP was $1 and $(2) for the years ended June 30, 2013 and 2012, respectively.

STOCK COMPENSATION PLANS. The Company maintains stock-based benefit plans under which certain employees and directors are eligible to receive restricted stock grants or options.Under the 2005 Stock-Based Benefit Plan, the maximum number of shares that may be granted as restricted stock is 279,500, and a maximum of 698,750 shares may be issued through the exercise of non-statutory 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 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. Compensation expense for grants vesting in 2013 and 2012 was $0 and $(27), respectively.

F-27

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 11 – EMPLOYEE BENEFIT PLANS (CONTINUED)

A summary of the status of the Company’s stock option plan is presented below:

	2013				2012
			Weighted-					Weighted-
			average					average
	Shares		exercise price		Shares			exercise price
Outstanding at beginning of period		340,638	$	13.69		525,287		$	12.69
Granted during the 12 month period		20,000	$	1.97		—		$	—
Options exercised		—				—
Options forfeited		—				(184,649	)	$	10.85
Outstanding at end of year		360,638	$	13.04		340,638		$	13.69
Options exercisable at end of year		340,638	$	13.69		340,638		$	13.69

Information pertaining to options outstanding at June 30, 2013 is as follows:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted
			Remaining		Average				Weighted
	Number		Contractual		Exercise		Number		Average
Range of Exercise Prices	Outstanding		Life		Price		Exercisable		Exercise Price
1.01 - 2.00		20,000		9.08	$	1.97		—	$	—
13.01 - 14.00		340,638		0.58	$	13.69		340,638	$	13.69

NOTE 12 – MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements.Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and core and tangible capital (as defined) to tangible assets (as defined). Management believes as of June 30, 2013 and 2012, that the Bank met all capital adequacy requirements to which it was subject.

F-28

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 12 – MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

As of June 30, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.There are no conditions or events since the notification that management believes have changed the Bank's category. The Company and Bank’s actual capital amounts and ratios as of June 30, 2013 and 2012 are also presented in the table.

												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
	(Dollars in thousands)
At June 30, 2013
Total Risk-Based Capital
(To Risk Weighted Assets)
Consolidated	$	53,507		15.25	%	$	28,078	≥		8.0	%	NA
Jefferson Federal Bank		49,773		14.18	%		28,075	≥		8.0	%		35,093	≥		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)
Consolidated		49,104		13.99	%		14,039	≥		4.0	%	NA
Jefferson Federal Bank		45,361		12.93	%		14,037	≥		4.0	%		21,056	≥		6.0	%
Tier 1 Capital
(To Average Assets)
Consolidated		49,104		9.97	%		19,697	≥		4.0	%	NA
Jefferson Federal Bank		45,361		9.21	%		19,695	≥		4.0	%		24,619	≥		5.0	%
At June 30, 2012
Total Risk-Based Capital
(To Risk Weighted Assets)
Consolidated	$	50,937		14.63	%	$	27,857	≥		8.0	%	NA
Jefferson Federal Bank		46,815		13.42	%		27,900	≥		8.0	%		34,875	≥		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)
Consolidated		46,566		13.37	%		13,929	≥		4.0	%	NA
Jefferson Federal Bank		42,437		12.17	%		13,950	≥		4.0	%		20,925	≥		6.0	%
Tier 1 Capital
(To Average Assets)
Consolidated		46,566		9.03	%		20,637	≥		4.0	%	NA
Jefferson Federal Bank		42,437		8.23	%		20,634	≥		4.0	%		25,792	≥		5.0	%

F-29

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 12 – MINIMUM REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

The following table provides reconciliation between GAAP capital and the various categories of regulatory capital:

	Bank
	June 30,
	2013			2012
GAAP Capital	$	57,053		$	56,290
Adjustments:
Deferred Taxes		(10,652	)		(11,221	)
Unrealized gains		111			(1,095	)
Disallowed intangibles		(1,151	)		(1,537	)
Core, Tangible and Tier 1 Capital		45,361			42,437
Adjustments:
Allowance for losses		4,412			4,378
Total Capital	$	49,773		$	46,815

NOTE 13 – RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company.The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis.

At June 30, 2013, the Bank’s retained earnings available for the payment of dividends was $0. Accordingly, $56,189 of the Company’s equity in the net assets of the Bank was restricted at June 30, 2013.Funds available for loans or advances by the Bank to the Company amounted to $5,705.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

NOTE 14 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business.These financial instruments generally include commitments to originate mortgage loans.Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on 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.

F-30

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Commitments to originate mortgage loans are legally binding agreements to lend to the Company's customers and generally expire in ninety days or less.There were no commitments at June 30, 2013 to originate adjustable-rate mortgage loans or to originate fixed-rate mortgage loans with a term of twenty years or less. The Company has $320 in unfunded letters of credit and $27,663 in unfunded lines of credit at June 30, 2013. The Company also has $15,330 in commitments to fund residential construction, commercial real estate construction and land development loans at June 30, 2013.

The Company has entered into employment agreements with its President and CEO Anderson L. Smith and two other officers. Agreement stipulations are terms, duties, compensation and performance bonuses and provide remedies for all parties upon certain events occurring.Mr. Smith’s agreement provides for deferred compensation upon attaining the age of 65.

Upon completion of the Bank’s conversion from mutual to stock form, a “liquidation account” was established in an amount equal to the total equity of the Bank as of the latest practicable date prior to the conversion.The liquidation account was established to provide limited priority claim to the assets of the Bank to “eligible account holders”, as defined in the Plan of Conversion, who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such event, each eligible account holder and supplemental eligible account holder would receive a liquidation distribution, prior to any payment to the holder of the Bank’s common stock. This distribution would be based upon each eligible account holder’s and supplemental eligible account holder’s proportionate share of the then total remaining qualifying deposits.At the time of the conversion, the liquidation account, which is an off-balance sheet memorandum account, amounted to $29.5 million.

NOTE 16 – RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company obtains products and services from directors or affiliates thereof.In the opinion of management, such transactions are made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

F-31

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 17 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Financial information pertaining only to Jefferson Bancshares, Inc. is as follows:

Balance Sheet	June 30, 2013
Assets
Cash and due from banks	$	928
Investment in common stock of Jefferson Federal Bank		57,052
Investment in common stock of State of Franklin Statutory Trust II		1
Loan receivable from ESOP		3,082
Other assets		95
Total assets	$	61,158
Liabilities and Stockholders' Equity
Accrued expenses	$	361
Other liabilities		413
Subordinated debentures		7,359
Stockholders' equity		53,025
Total liabilities and stockholders' equity	$	61,158

	Year Ended
Statement of Income	June 30, 2013
Dividends from Jefferson Federal Bank	$	—
Interest income		132
Other income		—
Total income		132
Interest expense		325
Other operating expenses		150
Income before income taxes and equity in undistributed
net income of Jefferson Federal Bank		(343	)
Income tax		(131	)
		(212	)
Equity in undistributed earnings (loss) of subsidiaries		1,806
Net Income	$	1,594

F-32

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 17 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (CONTINUED)

	Year Ended
Statement of Cash Flows	June 30, 2013
Cash flows from operating activities:
Net income	$	1,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries		(1,806	)
Deferred tax expense		(131	)
Amortization/accretion of intangibles		112
Increase in other assets		10
Increase in other liabilities		199
Net cash provided by operations		(22	)
Cash flows from investing activities:
Return of principal on loan to ESOP		447
Net cash used for investing activities		447
Cash flows from financing activities:
Purchase of treasury stock		(156	)
Net cash provided by financing activities		(156	)
Net increase in cash and cash equivalents		269
Cash and cash equivalents at beginning of year		659
Cash and cash equivalents at end of year	$	928

F-33

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 18 – QUARTERLY FINANCIAL INFORMATION

The following table summarizes selected information regarding the Company’s results of operations for the periods indicated (in thousands except per share data):

	Three Months Ended
	September 30,		December 31,		March 31,		June 30,
	2012		2012		2013		2013
Interest income	$	4,969	$	4,931	$	4,781	$	4,820
Interest expense		846		789		751		744
Net interest income		4,123		4,142		4,030		4,076
Provision for loan losses		300		300		200		—
Net interest income after provision for loan losses		3,823		3,842		3,830		4,076
Noninterest income		456		581		582		494
Noninterest expense		3,906		3,961		3,873		3,806
Earnings before income taxes		373		462		539		764
Income taxes		78		114		153		199
Net earnings	$	295	$	348	$	386	$	565
Earnings per share, basic	$	0.05	$	0.05	$	0.06	$	0.09
Earnings per share, diluted	$	0.05	$	0.05	$	0.06	$	0.09

	Three Months Ended
	September 30,			December 31,			March 31,		June 30,
	2011			2011			2012		2012
Interest income	$	6,120		$	5,775		$	5,302	$	5,235
Interest expense		1,355			1,203			1,073		939
Net interest income		4,765			4,572			4,229		4,296
Provision for loan losses		2,986			5,687			600		600
Net interest income after provision for loan losses		1,779			(1,115	)		3,629		3,696
Noninterest income		603			578			508		491
Noninterest expense		4,020			5,095			3,772		3,806
Earnings before income taxes		(1,638	)		(5,632	)		365		381
Income taxes		(680	)		(1,965	)		31		90
Net earnings	$	(958	)	$	(3,667	)	$	334	$	291
Earnings per share, basic	$	(0.15	)	$	(0.59	)	$	0.05	$	0.05
Earnings per share, diluted	$	(0.15	)	$	(0.59	)	$	0.05	$	0.05

F-34

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 19 – SUBORDINATED DEBT

As part of the State of Franklin acquisition, the Company acquired the 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 $10,310 of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin. The Trust (a) sold $10,000 of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310 of common securities to State of Franklin.The sole assets of the Trust are the $10,310 of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity 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 20, 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.

NOTE 20 – FAIR VALUE DISCLOSURES

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the 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. Generally accepted accounting principles in the United States of America (“GAAP”) establishes a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of input may be used to measure fair value as follows:

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.

F-35

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 20 – FAIR VALUE DISCLOSURES (CONTINUED)

Following is a description of valuation methodologies used for assets and liabilities 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 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 mortgage-backed securities issued by government-sponsored entities and other debt securities.

Impaired Loans and Other Real Estate Owned

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 in accordance with U.S. GAAP. The fair value of impaired loans is estimated 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 June 30, 2013, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with GAAP, 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, the Company records the impaired loan as nonrecurring Level 2.

The fair value of collateral dependent impaired loans and other real estate owned is generally based on recent real estate appraisals and other available observable market information.These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.The Company generally uses independent external appraisers in this process who routinely make adjustments to adjust for differences between the comparable sales and income data available.Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below are tables that present information about certain assets and liabilities measured at fair value:

	June 30, 2013
							Total Carrying
							Amount in		Assets/Liabilities
	Fair Value Measurement Using						Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	$	—	$	95,082	$	942	$	96,024	$	96,024

F-36

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 20 – FAIR VALUE DISCLOSURES (CONTINUED)

	June 30, 2012
							Total Carrying
							Amount in		Assets/Liabilities
	Fair Value Measurement Using						Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	$	—	$	82,738	$	745	$	83,483	$	83,483

The following table below presents, for the year ending June 30, 2013, the changes in Level 3 assets that are measured at fair value on a recurring basis:

					Other					Transfers
	Balance at				Comprehensive					In or Out		Balance at
	June 30, 2012		Net Income		Income		Paydowns			of Level 3		June 30, 2013
Securities available for sale	$	745	$	—	$	345	$	(148	)	$	—	$	942

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 at June 30, 2013 and 2012 are included in the table below.

	June 30, 2013									June 30, 2012
							Total Gains									Total Gains
Description	Level 1		Level 2		Level 3		(Losses)			Level 1		Level 2		Level 3		(Losses)
Impaired Loans	$	—	$	—	$	12,594	$	(927	)	$	—	$	—	$	21,549	$	(1,509	)
Other real estate owned		—		—		5,433		(60	)		—		—		6,075		(481	)

Individual loans with a carrying amount of $14,437 were written down to their fair value of $12,594 resulting in an impairment charge of $1,843 of which $927 was charged to earnings for the period ended June 30, 2013. For the period ending June 30, 2012, individual loans with a carrying amount of $24,410 were written down to their fair value of $21,549 resulting in an impairment charge of $2,861 of which $1,509 was charged to earnings.Loans applicable to write downs of impaired loans are estimated using the present value of expected cash flows or the appraised value of the underlying collateral discounted as necessary due to management’s estimates of changes in economic conditions.

Other real estate owned is being carried at appraised value less anticipated selling expenses resulting in a charge to earnings of $60 and $481 for the years ended June 30, 2013 and 2012, respectively.

F-37

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 20 – FAIR VALUE DISCLOSURES (CONTINUED)

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

	June 30, 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	$	24,514		$	24,514		$	56,693		$	56,693
Available-for-sale securities		96,024			96,024			83,483			83,483
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Bank owned life insurance		7,100			7,100			6,861			6,861
Loans receivable		321,299			329,268			322,499			330,664
Accrued interest receivable		1,409			1,409			1,575			1,575
Loans held-for-sale		97			97			381			381
Financial liabilities:
Deposits		(399,642	)		(391,442	)		(423,882	)		(424,523	)
Borrowed funds		(38,177	)		(39,505	)		(38,261	)		(40,064	)
Subordinated debentures		(7,358	)		(4,950	)		(7,245	)		(4,200	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			15,330			—			8,452
Unused letters of credit		—			320			—			4,454
Unused lines of credit		—			27,663			—			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 38 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.

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.

F-38

JEFFERSON BANCSHARES, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

(Dollars in Thousands)

NOTE 21 – CORE DEPOSIT INTANGIBLE (CDI)

CDI is composed of the following:

	June 30,
	2013			2012
Beginning balance of core deposit intangible	$	1,537		$	1,978
Less: amortization		(386	)		(441	)
Core deposit intangibles, net	$	1,151		$	1,537

CDI is amortized using an accelerated method over 10 years.

Future amortization of CDI is as follows:

Year Ending June 30,
2014	$	330
2015		275
2016		219
2017		163
2018		108
thereafter		56

Amortization expense related to CDI is $386 and $441 for the years ending June 30, 2013 and 2012, respectively.

F-39 

EX-21.1

Jefferson Bancshares, Inc. 10-K

EXHIBIT 21.0

List of Subsidiaries

Registrant: Jefferson Bancshares, Inc.

Subsidiaries	Percentage Ownership	Jurisdiction or State of Incorporation
Jefferson Federal Bank	100%	United States
State of Franklin Statutory Trust II	100%	Delaware

EX-23.0

Jefferson Bancshares, Inc. 10-K

EXHIBIT 23.0

Independent Auditor’s Consent

We consent to the incorporation by reference of our report dated September 13, 2013, on the consolidated balance sheets of Jefferson Bancshares, Inc. as of June 30, 2013 and June 30, 2012, and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the years then ended, which report is included in the Annual Report on Form 10-K for the year ended June 30, 2013 of Jefferson Bancshares, Inc., in the Registration Statements on Form S-8 (Nos. 333-106807, 333-106808 and 333-112051) filed by Jefferson Bancshares, Inc. with the United States Securities and Exchange Commission.

/s/ Craine, Thompson & Jones, P.C.

Morristown, Tennessee

September 26, 2013

EX-31.1

Jefferson Bancshares, Inc. 10-K

EXHIBIT 31.1

CERTIFICATION

I, Anderson L. Smith, certify that:

1. I have reviewed this Annual Report on Form 10-K of Jefferson Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 30, 2013	/s/ Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer
	(principal executive officer)

EX-31.2

Jefferson Bancshares, Inc. 10-K

EXHIBIT 31.2

CERTIFICATION

I, Jane P. Hutton, certify that:

1. I have reviewed this Annual Report on Form 10-K of Jefferson Bancshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: September 30, 2013	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary
	(principal financial and accounting officer)

EX-32.0

Jefferson Bancshares, Inc. 10-K

EXHIBIT 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Jefferson Bancshares, Inc. (the “Company”) on Form 10-K for the fiscal year ended June 30, 2013 as filed with the Securities and Exchange Commission (the “Report”), the undersigned certify, pursuant to 18 U.S.C. §1350, as added by Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/a/ Anderson L. Smith

Anderson L. Smith

President and Chief Executive Officer

(principal executive officer)

	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary
	(principal financial and accounting officer)
Date: September 30, 2013

XML

FAIR VALUE DISCLOSURES (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Fair Value Disclosures Details Narrative
Impaired loans, original face value	$ 14,437	$ 24,410
Impairment charge recognized	1,843	2,861
Anticipated selling expenses of foreclosed real estate	$ 60	$ 481

XML

EMPLOYEE BENEFIT PLANS (Details) (USD $)	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Number of Shares
Options outstanding, beginning	340,638	525,287
Options granted	20,000
Options forfeited		(184,649)
Options outstanding, ending	360,638	340,638
Options exercisable, ending	340,638	340,638
Weighted Average Exercise Price
Options outstanding, beginning	$ 13.69	$ 12.69
Options granted	$ 1.97
Options exercised
Options forfeited		$ 10.85
Options outstanding, ending	$ 13.04	$ 13.69
Options exercisable, ending	$ 13.69	$ 13.69
Weighted Average Remaining Contractual Life
[us-gaap:ShareBasedCompensationArrangementByShareBasedPaymentAwardOptionsOutstandingNumber]	360,638	340,638
Stock Option Plan | Exercise Price Range 1.01 - 2.00
Number of Shares
Options outstanding, ending	20,000
Weighted Average Exercise Price
Options outstanding, ending	$ 1.97
Options exercisable, ending
Weighted Average Remaining Contractual Life
Weighted Average Remaining Contractual Life of options outstanding	9 years 0 months 29 days
[us-gaap:ShareBasedCompensationArrangementByShareBasedPaymentAwardOptionsOutstandingNumber]	20,000
Stock Option Plan | Exercise Price Range 13.01-14.00
Number of Shares
Options outstanding, ending	340,638
Options exercisable, ending	340,638
Weighted Average Exercise Price
Options outstanding, ending	$ 13.69
Options exercisable, ending	$ 13.69
Weighted Average Remaining Contractual Life
Weighted Average Remaining Contractual Life of options outstanding	0 years 6 months 21 days
[us-gaap:ShareBasedCompensationArrangementByShareBasedPaymentAwardOptionsOutstandingNumber]	340,638

XML

MINIMUM REGULATORY CAPITAL REQUIREMENTS (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Reconciliation between GAAP capital and various categories of regulatory capital:
GAAP Capital	$ 57,053	$ 56,290
Adjustments:
Deferred Taxes	(10,652)	(11,221)
Unrealized gains	111	(1,095)
Disallowed intangibles	(1,151)	(1,537)
Core, Tangible and Tier 1 Capital	45,361	42,437
Adjustments:
Allowance for losses	4,412	4,378
Total Capital	$ 49,773	$ 46,815

XML

CORE DEPOSIT INTANGIBLE (CDI) (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Core Deposit Intangible Cdi Details
Core deposit intangible, beginning balance	$ 1,537	$ 1,978
Less: amortization	386	441
Core deposit intangible, ending balance	$ 1,151	$ 1,537

XML

FHLB ADVANCES

12 Months Ended

Jun. 30, 2013

Fhlb Advances

FHLB ADVANCES

NOTE 9 - FHLB ADVANCES

At June 30, 2013, the Company’s fixed-rate FHLB advances had interest rates that ranged from 2.00% to 3.55% with a weighted average rate of 3.36% and 3.36% at June 30, 2013 and 2012, respectively. Pursuant to collateral agreements with the FHLB, advances are secured by a Blanket Mortgage Collateral Agreement.The Agreement pledges the entire one-to-four family residential mortgage portfolio and allows a maximum advance of $37,686 and an additional borrowing capacity of $213 at June 30, 2013.Outstanding advances were $37,626 and $37,863 at June 30, 2013 and 2012, respectively.Advances are payable at the maturity dates and prepayment penalties are required if paid before maturity.

A total of $10.0 million of FHLB advances are putable advances that give the FHLB the option to require repayment on specific dates.Under the terms of the putable advances, the company could be required to repay all of the principal and accrued interest before the maturity date.

A total of $10.0 million of FHLB advances are convertible advances with interest rates that may be reset on certain dates at the option of the FHLB in accordance with the terms of the note.The Company has the option of repaying the outstanding advance or converting the interest rate from a fixed rate to a floating LIBOR rate at the time the advance is called by the FHLB.

Maturities and weighted average rates of fixed rate FHLB advances at June 30, 2013 and 2012 are as follows:

	Amount				Weighted Avg Rate
	2013		2012		2013			2012
Fixed Rate Advances Maturing:
Less than 1 year	$	26,997	$	—		3.41	%		0.00	%
1 to 2 years		5,048		26,993		3.22	%		3.41	%
2 to 3 years		—		5,082		0.00	%		3.20	%
3 to 4 years		—		—		0.00	%		0.00	%
4 to 5 years		5,110		—		3.33	%		0.00	%
5 to 10 years		—		5,134		0.00	%		3.31	%
After 10 years		471		654		2.65	%		2.66	%
Total FHLB Advances	$	37,626	$	37,863		3.36	%		3.36	%

XML

LOANS RECEIVABLE, NET (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Impaired and Non-Accrual Loans
Impaired loans without a valuation allowance	$ 4,210	$ 12,359
Impaired loans with a valuation allowance	10,227	12,051
Total impaired loans	14,437	24,410
Valuation allowance for impaired loans	1,843	2,861
Total non-accrual loans	12,796	18,562
Average investment in impaired loans	19,915	30,415
Interest income recognized on impaired loans	$ 344	$ 825

XML

Consolidated Statements of Earnings (USD $) In Thousands, except Per Share data, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Interest income:
Interest on loans receivable	$ 17,529	$ 20,271
Interest on investment securities	1,689	1,900
Other interest	283	261
Total interest income	19,501	22,432
Interest expense:
Deposits	1,535	2,965
Securities sold under repurchase agreements	4	6
Advances from FHLB	1,266	1,272
Subordinated debentures	325	327
Total interest expense	3,130	4,570
Net interest income	16,371	17,862
Provision for loan losses	800	9,873
Net interest income after provision for loan losses	15,571	7,989
Noninterest income:
Mortgage origination income	445	306
Service charges and fees	1,036	1,106
Gain (loss) on sale of fixed assets	1	(12)
Gain on sale of investment securities, net	12	50
Impairment of investment securities		(29)
Loss on sale of foreclosed real estate	(266)	(169)
BOLI increase in cash value	239	236
Other	646	692
Total noninterest income	2,113	2,180
Noninterest expense:
Compensation and benefits	6,761	6,209
Occupancy expense	1,343	1,379
Equipment and data processing expense	2,453	2,376
DIF deposit insurance premiums	968	811
Advertising	383	359
Professional services	463	442
Valuation adjustment and expenses on other real estate owned	732	2,374
Amortization of intangible assets	386	441
Other	2,057	2,302
Total noninterest expense	15,546	16,693
Earnings (loss) before income taxes	2,138	(6,524)
Income taxes:
Current	30
Deferred	514	(2,524)
Total income taxes	544	(2,524)
Net earnings (loss)	$ 1,594	$ (4,000)
Net earnings (loss) per share, basic	$ 0.25	$ (0.64)
Net earnings (loss) per share, diluted	$ 0.25	$ (0.64)

XML

RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

12 Months Ended

Jun. 30, 2013

Restrictions On Cash And Amounts Due From Banks

RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

NOTE 2 – RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

The Bank is required to maintain average balances on hand with the Federal Reserve Bank. At June 30, 2013 and 2012, these reserve balances amounted to $4,597 and $4,408, respectively.

XML

RELATED PARTY TRANSACTIONS

12 Months Ended

Jun. 30, 2013

Related Party Transactions [Abstract]

RELATED PARTY TRANSACTIONS

NOTE 16 – RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Company obtains products and services from directors or affiliates thereof.In the opinion of management, such transactions are made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

XML

DEPOSITS (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Maturities of Time Deposits
2014	$ 110,024
2015	21,336
2016	11,530
2017	2,205
2018	3,014
Total	$ 148,109

XML

LOANS RECEIVABLE, NET (Details 4) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Credit risk profile by internally assigned grade:
Gross Loans	$ 327,303	$ 328,674
Pass
Credit risk profile by internally assigned grade:
Gross Loans	293,677
Watch
Credit risk profile by internally assigned grade:
Gross Loans	14,636
Substandard
Credit risk profile by internally assigned grade:
Gross Loans	18,990
Residential Mortgage
Credit risk profile by internally assigned grade:
Gross Loans	86,539
Residential Mortgage | Pass
Credit risk profile by internally assigned grade:
Gross Loans	80,268
Residential Mortgage | Watch
Credit risk profile by internally assigned grade:
Gross Loans	2,800
Residential Mortgage | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	3,471
Multi-family Real Estate Loans
Credit risk profile by internally assigned grade:
Gross Loans	13,509
Multi-family Real Estate Loans | Pass
Credit risk profile by internally assigned grade:
Gross Loans	7,872
Multi-family Real Estate Loans | Watch
Credit risk profile by internally assigned grade:
Gross Loans	621
Multi-family Real Estate Loans | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	5,016
Construction and Land Development Loans
Credit risk profile by internally assigned grade:
Gross Loans	30,679
Construction and Land Development Loans | Pass
Credit risk profile by internally assigned grade:
Gross Loans	27,382
Construction and Land Development Loans | Watch
Credit risk profile by internally assigned grade:
Gross Loans	1,726
Construction and Land Development Loans | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	1,571
Nonresidential Real Estate Loans
Credit risk profile by internally assigned grade:
Gross Loans	50,128
Nonresidential Real Estate Loans | Pass
Credit risk profile by internally assigned grade:
Gross Loans	40,291
Nonresidential Real Estate Loans | Watch
Credit risk profile by internally assigned grade:
Gross Loans	5,802
Nonresidential Real Estate Loans | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	4,035
Owner Occupied Loans
Credit risk profile by internally assigned grade:
Gross Loans	68,327
Owner Occupied Loans | Pass
Credit risk profile by internally assigned grade:
Gross Loans	65,527
Owner Occupied Loans | Watch
Credit risk profile by internally assigned grade:
Gross Loans	1,643
Owner Occupied Loans | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	1,157
Commercial Loans
Credit risk profile by internally assigned grade:
Gross Loans	57,171
Commercial Loans | Pass
Credit risk profile by internally assigned grade:
Gross Loans	52,740
Commercial Loans | Watch
Credit risk profile by internally assigned grade:
Gross Loans	1,563
Commercial Loans | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	2,868
HELOC and Junior Liens
Credit risk profile by internally assigned grade:
Gross Loans	17,085
HELOC and Junior Liens | Pass
Credit risk profile by internally assigned grade:
Gross Loans	16,150
HELOC and Junior Liens | Watch
Credit risk profile by internally assigned grade:
Gross Loans	71
HELOC and Junior Liens | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	864
Consumer Loans
Credit risk profile by internally assigned grade:
Gross Loans	3,865
Consumer Loans | Pass
Credit risk profile by internally assigned grade:
Gross Loans	3,447
Consumer Loans | Watch
Credit risk profile by internally assigned grade:
Gross Loans	410
Consumer Loans | Substandard
Credit risk profile by internally assigned grade:
Gross Loans	$ 8

XML

INCOME TAXES

12 Months Ended

Jun. 30, 2013

Income Taxes

INCOME TAXES

NOTE 10 – INCOME TAXES

In computing federal income tax, savings institutions treated as small banks for tax years beginning before 1996 were allowed a statutory bad debt deduction based on specified experience formulas or 8% of otherwise taxable income, subject to limitations based on aggregate loans and savings balances.For tax years after 1996, financial institutions meeting the definition of a small bank can use either the “experience method” or the “specific charge-off method” in computing their bad debt deduction.The Company qualifies as a small bank and is using the experience method.As of June 30, 2013, the end of the most recent tax year, the Company’s tax bad debt reserves were approximately $1,312. If these tax bad debt reserves are used for other than loan losses, the amount used will be subject to federal income taxes at the then prevailing corporate rates.

Income taxes are summarized as follows:

	Year Ending June 30,
	2013		2012
Current taxes:
Federal income	$	30	$	—
State excise		—		—
		30		—
Deferred taxes
Federal income		456		(2,229	)
State excise		58		(295	)
		514		(2,524	)
	$	544	$	(2,524	)

The provision for income taxes differs from the federal statutory corporate rate as follows:

	Percentage of Earnings
	Before Income Taxes
	Years Ending June 30,
	2013	2012
Tax at statutory rate	34.0%	(34.0%)
Increase (decrease) in taxes:
State income taxes, net of federal tax benefit	2.7	(4.3)
Increase in BOLI cash value	(3.8)	(1.4)
Additional ESOP compensation	(4.6)	(2.0)
Other, net	(2.9)	3.0
Effective tax rate	25.4%	(38.7%)

The provisions of GAAP related to income taxes require the Company to establish a deferred tax liability for the tax effect of the tax bad debt reserves over the base year amounts.There were no excess reserves at June 30, 2013 and 2012.The Company’s base year tax bad debt reserve is $1,312.The estimated deferred tax liability on the base year amount is approximately $502, which has not been recorded in the accompanying consolidated financial statements. The deferred tax valuation allowance is related to a capital loss carryforward that can only be used to offset capital gains.

The Company acquired a tax net operating loss (NOL) carryforward from its acquisition of State of Franklin. A deferred tax benefit was recorded for the portion deemed usable over its statutory remaining life (initially 20 years). The expiration date of the remaining NOL carryforward of $10,560 is June 30, 2029.

 A deferred tax benefit of $1,022 has been recorded for the 2011 NOL of $2,668. The NOL’s remaining life is eighteen years and management believes it will be utilized in full prior to expiration.

For 2012, a deferred tax benefit of $2,904 was recorded for the NOL of $7,585. The NOL’s remaining life is nineteen years and management believes it will be utilized in full prior to expiration.

The components of the net deferred tax asset are summarized as follows:

	June 30.
	2013			2012
Deferred tax liabilities:
FHLB stock dividends	$	(959	)	$	(959	)
Depreciation		(12	)		(27	)
FHLB advance restructuring penalty		(72	)		(181	)
Allowance for "available-for-sale" securities		—			(679	)
		(1,043	)		(1,846	)
Deferred tax assets:
Fair value adjustment from acquisition,net		708			533
Subsequent writedowns on foreclosed property		434			831
Nonaccrual interest on securities		58			48
NOL carryforward		7,596			8,023
Deferred loan fees, net		132			124
Deferred compensation		62			55
Capital loss on Silverton Bank Stock		141			141
Allowance for losses on loans		2,895			2,908
Allowance for "available-for-sale" securities		69			—
Gross deferred tax asets		12,095			12,663
Valuation allowance		(141	)		(141	)
Deferred tax asset		11,954			12,522
Net deferred tax asset	$	10,911		$	10,676

XML

FAIR VALUE DISCLOSURES (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Securities available for sale fair value	$ 96,024	$ 83,483
Carrying Amount
Securities available for sale fair value	96,024	83,483
Fair Value
Securities available for sale fair value	96,024	83,483
Fair Value measured on a Recurring Basis | Level 2
Securities available for sale fair value	95,082	82,738
Fair Value measured on a Recurring Basis | Level 3
Securities available for sale fair value	942	745
Fair Value measured on a Recurring Basis | Carrying Amount
Securities available for sale fair value	96,024	83,483
Fair Value measured on a Recurring Basis | Fair Value
Securities available for sale fair value	$ 96,024	$ 83,483

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INVESTMENT SECURITIES (Details) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Available For Sale Securities
Amortized Cost	$ 96,203	$ 81,709
Unrealized Gains	1,356	2,239
Unrealized losses on securities	(1,535)	(465)
Securities available for sale fair value	96,024	83,483
Weighted-average rate	1.83%	2.20%
Federal agency
Available For Sale Securities
Amortized Cost	21,985	24,033
Unrealized Gains	88	263
Unrealized losses on securities	(420)
Securities available for sale fair value	21,653	24,296
Mortgage-backed
Available For Sale Securities
Amortized Cost	65,607	52,822
Unrealized Gains	1,096	1,658
Unrealized losses on securities	(835)	(65)
Securities available for sale fair value	65,868	54,415
Municipal Securities
Available For Sale Securities
Amortized Cost	8,004	4,245
Unrealized Gains	172	318
Unrealized losses on securities	(171)
Securities available for sale fair value	8,005	4,563
Other Securities
Available For Sale Securities
Amortized Cost	607	609
Unrealized losses on securities	(109)	(400)
Securities available for sale fair value	$ 498	$ 209

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COMMITMENTS AND CONTINGENCIES (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Off-balance sheet liquidation account	$ 29,500
Unused letters of credit
Unfunded commitments	320
Line of Credit
Unfunded commitments	27,663
Commitment to Fund Loans
Unfunded commitments	$ 15,330

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LOANS RECEIVABLE, NET (Details 5) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
With an allowance recorded:
Recorded Investment	$ 8,384
Unpaid Principal Balance	10,227	12,051
Specific Allowance	(1,843)	(2,861)
Interest Income Recognized	212
With no related allowance:
Recorded Investment	4,210
Unpaid Principal Balance	4,210	12,359
Interest Income Recognized	132
Total Impaired Loans:
Recorded Investment	12,594
Unpaid Principal Balance	14,437	24,410
Interest Income	344	825
Residential Mortgage
With an allowance recorded:
Recorded Investment	40
Unpaid Principal Balance	40
Interest Income Recognized	1
With no related allowance:
Recorded Investment	890
Unpaid Principal Balance	890
Interest Income Recognized	61
Total Impaired Loans:
Recorded Investment	930
Unpaid Principal Balance	930
Interest Income	62
Multi-family Real Estate Loans
With an allowance recorded:
Recorded Investment	4,500
Unpaid Principal Balance	4,923
Specific Allowance	(423)
Total Impaired Loans:
Recorded Investment	4,500
Unpaid Principal Balance	4,923
Construction and Land Development Loans
With an allowance recorded:
Recorded Investment	310
Unpaid Principal Balance	510
Specific Allowance	(200)
Interest Income Recognized	11
With no related allowance:
Recorded Investment	300
Unpaid Principal Balance	300
Interest Income Recognized	4
Total Impaired Loans:
Recorded Investment	610
Unpaid Principal Balance	810
Interest Income	15
Nonresidential Real Estate Loans
With an allowance recorded:
Recorded Investment	1,367
Unpaid Principal Balance	1,834
Specific Allowance	(467)
With no related allowance:
Recorded Investment	1,744
Unpaid Principal Balance	1,744
Interest Income Recognized	61
Total Impaired Loans:
Recorded Investment	3,111
Unpaid Principal Balance	3,578
Interest Income	61
Owner Occupied Loans
With no related allowance:
Recorded Investment	653
Unpaid Principal Balance	653
Total Impaired Loans:
Recorded Investment	653
Unpaid Principal Balance	653
Commercial Loans
With an allowance recorded:
Recorded Investment	1,751
Unpaid Principal Balance	2,504
Specific Allowance	(753)
Interest Income Recognized	185
Total Impaired Loans:
Recorded Investment	1,751
Unpaid Principal Balance	2,504
Interest Income	185
HELOC and Junior Liens
With an allowance recorded:
Recorded Investment	416
Unpaid Principal Balance	416
Interest Income Recognized	15
With no related allowance:
Recorded Investment	193
Unpaid Principal Balance	193
Interest Income Recognized	6
Total Impaired Loans:
Recorded Investment	609
Unpaid Principal Balance	609
Interest Income	21
Consumer Loans
With no related allowance:
Recorded Investment	430
Unpaid Principal Balance	430
Total Impaired Loans:
Recorded Investment	430
Unpaid Principal Balance	$ 430

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EMPLOYEE BENEFIT PLANS (Tables)

12 Months Ended

Jun. 30, 2013

Employee Benefit Plans Tables

Schedule of the Company's stock option plans

A summary of the status of the Company’s stock option plan is presented below:

	2013				2012
			Weighted-					Weighted-
			average					average
	Shares		exercise price		Shares			exercise price
Outstanding at beginning of period		340,638	$	13.69		525,287		$	12.69
Granted during the 12 month period		20,000	$	1.97		—		$	—
Options exercised		—				—
Options forfeited		—				(184,649	)	$	10.85
Outstanding at end of year		360,638	$	13.04		340,638		$	13.69
Options exercisable at end of year		340,638	$	13.69		340,638		$	13.69

Information pertaining to options outstanding at June 30, 2013 is as follows:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted
			Remaining		Average				Weighted
	Number		Contractual		Exercise		Number		Average
Range of Exercise Prices	Outstanding		Life		Price		Exercisable		Exercise Price
1.01 - 2.00		20,000		9.08	$	1.97		—	$	—
13.01 - 14.00		340,638		0.58	$	13.69		340,638	$	13.69

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SUBORDINATED DEBT

12 Months Ended

Jun. 30, 2013

Subordinated Debt

SUBORDINATED DEBT

NOTE 19 – SUBORDINATED DEBT

As part of the State of Franklin acquisition, the Company acquired the 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 $10,310 of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin. The Trust (a) sold $10,000 of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310 of common securities to State of Franklin.The sole assets of the Trust are the $10,310 of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity 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 20, 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.

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QUARTERLY FINANCIAL INFORMATION

12 Months Ended

Jun. 30, 2013

Quarterly Financial Information

QUARTERLY FINANCIAL INFORMATION

NOTE 18 – QUARTERLY FINANCIAL INFORMATION

The following table summarizes selected information regarding the Company’s results of operations for the periods indicated (in thousands except per share data):

	Three Months Ended
	September 30,		December 31,		March 31,		June 30,
	2012		2012		2013		2013
Interest income	$	4,969	$	4,931	$	4,781	$	4,820
Interest expense		846		789		751		744
Net interest income		4,123		4,142		4,030		4,076
Provision for loan losses		300		300		200		—
Net interest income after provision for loan losses		3,823		3,842		3,830		4,076
Noninterest income		456		581		582		494
Noninterest expense		3,906		3,961		3,873		3,806
Earnings before income taxes		373		462		539		764
Income taxes		78		114		153		199
Net earnings	$	295	$	348	$	386	$	565
Earnings per share, basic	$	0.05	$	0.05	$	0.06	$	0.09
Earnings per share, diluted	$	0.05	$	0.05	$	0.06	$	0.09

	Three Months Ended
	September 30,			December 31,			March 31,		June 30,
	2011			2011			2012		2012
Interest income	$	6,120		$	5,775		$	5,302	$	5,235
Interest expense		1,355			1,203			1,073		939
Net interest income		4,765			4,572			4,229		4,296
Provision for loan losses		2,986			5,687			600		600
Net interest income after provision for loan losses		1,779			(1,115	)		3,629		3,696
Noninterest income		603			578			508		491
Noninterest expense		4,020			5,095			3,772		3,806
Earnings before income taxes		(1,638	)		(5,632	)		365		381
Income taxes		(680	)		(1,965	)		31		90
Net earnings	$	(958	)	$	(3,667	)	$	334	$	291
Earnings per share, basic	$	(0.15	)	$	(0.59	)	$	0.05	$	0.05
Earnings per share, diluted	$	(0.15	)	$	(0.59	)	$	0.05	$	0.05

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EARNINGS PER SHARE (Details)	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Earnings Per Common Share
Weighted average number of common shares used in computing basic earnings per common share	6,270,523	6,243,347
Weighted average number of common shares and dilutive potential common shares used in computing earnings per common share assuming dilution	6,270,523	6,243,347

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PREMISES AND EQUIPMENT, NET (Tables)

12 Months Ended

Jun. 30, 2013

Premises And Equipment Net Tables

Schedule of premises and equipment

Premises and equipment, net are summarized as follows:

	June 30,
	2013		2012
Land	$	6,772	$	6,772
Office building		22,117		21,982
Furniture and equipment		5,889		5,704
		34,778		34,458
Less:accumulated depreciation and amortization		9,142		8,097
	$	25,636	$	26,361

Schedule of future minimum payments of non-cancelable lease agreements

Pursuant to the terms of non-cancelable lease agreements in effect at June 30, 2013, pertaining to real property, future minimum payments are as follows:

For the Year Ended
2014	$	9
2015		—
	$	9

Schedule of future minimum payments for service contracts

The Company has also entered into a service contract for data processing services.Future minimum payments under this agreement are as follows:

For the Year Ended
2014	$	1,088
2015		682
2016		12
	$	1,782

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CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Tables)

12 Months Ended

Jun. 30, 2013

Condensed Financial Statements Of Parent Company Tables

Schedule of Condensed Balance Sheet

Balance Sheet	June 30, 2013
Assets
Cash and due from banks	$	928
Investment in common stock of Jefferson Federal Bank		57,052
Investment in common stock of State of Franklin Statutory Trust II		1
Loan receivable from ESOP		3,082
Other assets		95
Total assets	$	61,158
Liabilities and Stockholders' Equity
Accrued expenses	$	361
Other liabilities		413
Subordinated debentures		7,359
Stockholders' equity		53,025
Total liabilities and stockholders' equity	$	61,158

Schedule of Condensed Income Statement

	Year Ended
Statement of Income	June 30, 2013
Dividends from Jefferson Federal Bank	$	—
Interest income		132
Other income		—
Total income		132
Interest expense		325
Other operating expenses		150
Income before income taxes and equity in undistributed
net income of Jefferson Federal Bank		(343	)
Income tax		(131	)
		(212	)
Equity in undistributed earnings (loss) of subsidiaries		1,806
Net Income	$	1,594

Schedule of Condensed Cash Flow Statement

	Year Ended
Statement of Cash Flows	June 30, 2013
Cash flows from operating activities:
Net income	$	1,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries		(1,806	)
Deferred tax expense		(131	)
Amortization/accretion of intangibles		112
Increase in other assets		10
Increase in other liabilities		199
Net cash provided by operations		(22	)
Cash flows from investing activities:
Return of principal on loan to ESOP		447
Net cash used for investing activities		447
Cash flows from financing activities:
Purchase of treasury stock		(156	)
Net cash provided by financing activities		(156	)
Net increase in cash and cash equivalents		269
Cash and cash equivalents at beginning of year		659
Cash and cash equivalents at end of year	$	928

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INVESTMENT SECURITIES (Details 1) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Available For Sale Securities
Less than 12 Months, Fair Value	$ 38,431	$ 2,100
Less than 12 Months, Unrealized Losses	(1,423)	(9)
12 Months or Longer, Fair Value	941	776
12 Months or Longer, Unrealized Losses	(112)	(456)
Total, Fair Value	39,372	2,876
Total, Unrealized Losses	(1,535)	(465)
Federal agency
Available For Sale Securities
Less than 12 Months, Fair Value	9,555
Less than 12 Months, Unrealized Losses	(420)
Total, Fair Value	9,555
Total, Unrealized Losses	(420)
Mortgage-backed
Available For Sale Securities
Less than 12 Months, Fair Value	25,078	2,100
Less than 12 Months, Unrealized Losses	(832)	(9)
12 Months or Longer, Fair Value	443	569
12 Months or Longer, Unrealized Losses	(3)	(56)
Total, Fair Value	25,521	2,669
Total, Unrealized Losses	(835)	(65)
Municipal Securities
Available For Sale Securities
Less than 12 Months, Fair Value	3,798
Less than 12 Months, Unrealized Losses	(171)
Total, Fair Value	3,798
Total, Unrealized Losses	(171)
Other Securities
Available For Sale Securities
12 Months or Longer, Fair Value	498	207
12 Months or Longer, Unrealized Losses	(109)	(400)
Total, Fair Value	498	207
Total, Unrealized Losses	$ (109)	$ (400)

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EARNINGS PER SHARE (Tables)

12 Months Ended

Jun. 30, 2013

Earnings Per Share Tables

Schedule of number of weighted-average shares of common stock used for earning per common share calculation

	Year Ended		Year Ended
	June 30, 2013		June 30, 2012
Weighted average number of common shares used in computing basic earnings per common share		6,270,523		6,243,347
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		6,270,523		6,243,347

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PREMISES AND EQUIPMENT, NET (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Future minimum payments for service contract, for the year ended
2014	$ 1,088
2015	682
2016	12
[OtherCommitment]	$ 1,782

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INCOME TAXES (Details) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2013	Jun. 30, 2012
Current taxes:
Federal income									$ 30
[CurrentIncomeTaxExpenseBenefit]									30
Deferred taxes
Federal income									456	(2,229)
State excise									58	(295)
[DeferredIncomeTaxExpenseBenefit]									514	(2,524)
Total income taxes	$ 199	$ 153	$ 114	$ 78	$ 90	$ 31	$ (1,965)	$ (680)	$ 544	$ (2,524)

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PREMISES AND EQUIPMENT, NET (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Future Minimum Lease Payments, for the year ended
2014	$ 9
[OperatingLeasesFutureMinimumPaymentsDue]	$ 9

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CORE DEPOSIT INTANGIBLE (CDI) (Tables)

12 Months Ended

Jun. 30, 2013

Core Deposit Intangible Cdi Tables

Schedule of core deposit intangible

CDI is composed of the following:

	June 30,
	2013			2012
Beginning balance of core deposit intangible	$	1,537		$	1,978
Less: amortization		(386	)		(441	)
Core deposit intangibles, net	$	1,151		$	1,537

Schedule of future amortization of core deposit intangible

Future amortization of CDI is as follows:

Year Ending June 30,
2014	$	330
2015		275
2016		219
2017		163
2018		108
thereafter		56

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FHLB ADVANCES (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Fhlb Advances Details Narrative
FHLB fixed rate advances, interest rate, lower range	2.00%
FHLB fixed rate advances, interest rate, upper range	3.55%
Weighted average interest rate of FHLB Advances	3.36%	3.36%
Maximum advance	$ 37,686
Additional borrowing capacity	213
Outstanding Advances from FHLB	37,626	37,863
FHLB advances putable	10,000
FHLB advances convertible	$ 10,000

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CORE DEPOSIT INTANGIBLE (CDI) (Details 1) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Future amortization expense for the year ending June 30,
2014	$ 330
2015	275
2016	219
2017	163
2018	108
Thereafter	$ 56

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CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

12 Months Ended

Jun. 30, 2013

Condensed Financial Statements Of Parent Company

CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

NOTE 17 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

Financial information pertaining only to Jefferson Bancshares, Inc. is as follows:

Balance Sheet	June 30, 2013
Assets
Cash and due from banks	$	928
Investment in common stock of Jefferson Federal Bank		57,052
Investment in common stock of State of Franklin Statutory Trust II		1
Loan receivable from ESOP		3,082
Other assets		95
Total assets	$	61,158
Liabilities and Stockholders' Equity
Accrued expenses	$	361
Other liabilities		413
Subordinated debentures		7,359
Stockholders' equity		53,025
Total liabilities and stockholders' equity	$	61,158

	Year Ended
Statement of Income	June 30, 2013
Dividends from Jefferson Federal Bank	$	—
Interest income		132
Other income		—
Total income		132
Interest expense		325
Other operating expenses		150
Income before income taxes and equity in undistributed
net income of Jefferson Federal Bank		(343	)
Income tax		(131	)
		(212	)
Equity in undistributed earnings (loss) of subsidiaries		1,806
Net Income	$	1,594

	Year Ended
Statement of Cash Flows	June 30, 2013
Cash flows from operating activities:
Net income	$	1,594
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries		(1,806	)
Deferred tax expense		(131	)
Amortization/accretion of intangibles		112
Increase in other assets		10
Increase in other liabilities		199
Net cash provided by operations		(22	)
Cash flows from investing activities:
Return of principal on loan to ESOP		447
Net cash used for investing activities		447
Cash flows from financing activities:
Purchase of treasury stock		(156	)
Net cash provided by financing activities		(156	)
Net increase in cash and cash equivalents		269
Cash and cash equivalents at beginning of year		659
Cash and cash equivalents at end of year	$	928

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Consolidated Statements of Changes in Stockholders' Equity (USD $) In Thousands	Common Stock	Additional Paid-In Capital	Unallocated Common Stock in ESOP	Unearned Compensation	Accumulated Other Comprehensive Income	Retained Earnings	Treasury Stock	Total
Balance, beginning at Jun. 30, 2011	$ 92	$ 78,895	$ (3,241)	$ (1,019)	$ 459	$ 12,067	$ (31,334)	$ 55,919
Net earnings (loss)						(4,000)		(4,000)
Other comprehensive income					636			636
Shares committed to be released by the ESOP		(324)	432					108
Earned portion of grants				(27)				(27)
Purchase of common stock							(7)	(7)
Balance, ending at Jun. 30, 2012	92	78,571	(2,809)	(1,046)	1,095	8,067	(31,341)	52,629
Net earnings (loss)						1,594		1,594
Other comprehensive income					(1,206)			(1,206)
Shares committed to be released by the ESOP		(274)	433					159
Stock options expensed		5						5
Purchase of common stock							(156)	(156)
Balance, ending at Jun. 30, 2013	$ 92	$ 78,302	$ (2,376)	$ (1,046)	$ (111)	$ 9,661	$ (31,497)	$ 53,025

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Consolidated Statements of Cash Flows (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net earnings (loss)	$ 1,594	$ (4,000)
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares	158	109
Depreciation and amortization expense	1,797	1,854
Amortization of premiums (discounts), net on investment securities	648	572
Provision for loan losses	800	9,873
(Gain) loss on sale of fixed assets	(1)	12
(Gain) on sale of investment securities and mortgage-backed securities, net	(12)	(21)
Amortization of deferred loan fees, net	(160)	(169)
Loss on sale of foreclosed real estate, net	266	169
Deferred tax expense (benefit)	514	(2,524)
Originations of mortgage loans held for sale	(17,125)	(13,759)
Proceeds from sale of mortgage loans	17,409	13,378
Increase in cash value of life insurance	(239)	(236)
Earned portion of MRP		(27)
Stock options expensed	5
Decrease (increase) in:
Accrued interest receivable	166	257
Other assets	(2,665)	4,925
Increase (decrease) in other liabilities and accrued income taxes	3,913	(4,074)
Net cash provided by (used for) operating activities	7,068	6,339
Cash flows used for investing activities:
Loan originations, net of principal collections	(1,581)	45,910
Investment securities classified as available-for-sale:
Purchase of securities	(42,894)	(58,320)
Proceeds from sale	83	3,619
Proceeds from maturities, calls and prepayments	27,680	46,479
Purchase of premises and equipment	(319)	(825)
Proceeds from sale of fixed assets		14
Proceeds from sale of (additions to) foreclosed real estate, net	2,205	3,845
Net cash provided by (used for) investing activities	(14,826)	40,722
Cash flows from financing activities:
Net increase (decrease) in deposits	(24,235)	(30,337)
Net increase (decrease) in repurchase agreements	153	(547)
Repayment of FHLB advances	(183)	(25)
Purchase of treasury stock	(156)	(7)
Net cash provided by (used for) financing activities	(24,421)	(30,916)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits	(32,179)	16,145
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	24,514	56,693
Cash paid during period for:
Interest on deposits	1,550	3,067
Interest on borrowed funds	1,041	1,044
Interest on subordinated debentures	213	215
Income taxes	45
Real estate acquired in settlement of loans	$ 3,893	$ 2,936

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EARNINGS PER SHARE

12 Months Ended

Jun. 30, 2013

Earnings Per Share [Abstract]

EARNINGS PER SHARE

NOTE 3 – EARNINGS PER SHARE

Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding.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 solely to outstanding stock options and are determined using the treasury stock method.Calculations related to earnings per share are provided in the following table.

	Year Ended		Year Ended
	June 30, 2013		June 30, 2012
Weighted average number of common shares used in computing basic earnings per common share		6,270,523		6,243,347
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		6,270,523		6,243,347

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INCOME TAXES (Details 1)	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Income Tax reconciliation
Tax at statutory rate	34.00%	(34.00%)
Increase (decrease) in taxes:
State income taxes, net of federal tax benefit	2.70%	(4.30%)
Increase in BOLI cash value	(3.80%)	(1.40%)
Additional ESOP compensation	(4.60%)	(2.00%)
Other, net	(2.90%)	3.00%
Effective tax rate	25.40%	(38.70%)

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Jun. 30, 2013

Nature Of Business And Summary Of Significant Accounting Policies

NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 1 – NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Jefferson Bancshares, Inc. (the Company), is the holding company for Jefferson Federal Bank (the “Bank”).The Company’s common stock is listed on the NASDAQ Global Market under the symbol JFBI.

The Company provides a variety of financial services to individuals and small businesses through its offices in Tennessee.Its primary deposit products are transaction accounts and term certificate accounts and its lending products are commercial and residential mortgages and, to a lesser extent, consumer loans.

Principles of Consolidation - The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly owned subsidiaries Jefferson Federal Bank and State of Franklin Bank Statutory Trust II.All significant intercompany balances and transactions have been eliminated in consolidation.

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.

Significant Group Concentrations of Credit Risk - The Company originates residential real estate loans, commercial real estate loans and, to a lesser extent, consumer loans primarily to customers located in Upper East Tennessee.The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Significant Accounting Policies - The following comprise the significant accounting policies, which the Company follows in preparing and presenting its consolidated financial statements:

a. For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from depository institutions, interest-bearing deposits in other depository institutions and fed funds sold with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $15,677 and $53,650 at June 30, 2013 and 2012, respectively.  

b. Investments in debt securities are classified as "held-to-maturity" or "available-for-sale" depending upon the intent of management with respect to the particular investments.Investments classified as "held-to-maturity" are carried at cost while those identified as "available-for-sale" are carried at fair value.All securities are adjusted for amortization of premiums and accretion of discounts over the term of the security using the interest method.Management has the positive intent and ability to carry those securities classified as "held-to-maturity" to maturity for long-term investment purposes and, accordingly, such securities are not adjusted for temporary declines in market value."Available-for-sale" securities are adjusted for changes in fair value through a direct entry to a separate component of stockholders' equity (i.e., other comprehensive income).Investments in equity securities are carried at the lower of cost or market.The cost of securities sold is determined by specific identification.  

c. Loans receivable, net, which management has the intent and ability to hold until maturity or pay-off, are generally carried at unpaid principal balances less loans in process, net deferred loan fees, unearned discount on loans and allowances for losses. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized to interest income over the contractual life of the loan using the interest method.  

d. The Company originates mortgage loans conforming to guidelines for sale in the secondary mortgage market. Because commitment letters are only given to the borrower after an underwriter agrees to purchase the loan according to the stated terms, the Company’s maximum time between funding the loan and completing the sale to the underwriter is generally three weeks.The loans are carried at the lower of aggregate cost or fair market value as determined by the amount committed to by the underwriter. The loans are sold without recourse and the mortgage servicing rights are sold as part of the loan package.  

e. 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 write-down to fair value is charged to the allowance for loan and lease losses.Any subsequent write-down 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. Loan pools include residential mortgage loans, multi-family loans, construction and land development loans, non-residential real estate loans (owner occupied and non-owner occupied), commercial loans, consumer loans, HELOC and junior liens.Commercial business loans and loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans.In addition, loans secured by commercial real estate are more likely to be negatively impacted by adverse conditions in the real estate market or the economy.Management utilizes a loan grading system and assigns a loan grade of “Pass”, “Watch”, “Special Mention”, “Substandard”, “Doubtful” or “Loss” based on risk characteristics of loans.Lending staff reviews the loan grades of customers on a regular basis and makes changes as needed given that the creditworthiness of customers may change over time.

Descriptions of loan grades are as follows:

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

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

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

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

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

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

Specific valuation allowances are established for impaired loans.The Company considers a loan to be impaired when, based on current information and events, it is probable that the company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis.A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition costs, or the net present value as determined by a discounted cash flow analysis.On a quarterly basis, management evaluates individual loans which have an outstanding principal balance of $250,000 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 2011-02in 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 $9.1 million and $10.8 million at June 30, 2013 and 2012, respectively.

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 placed on non-accrual or charged off is reversed against interest income.The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is returned to accrual status.Loans are returned to accrual status when future payments are reasonably assured.Payments received on non-accrual loans are applied to the remaining principal balance of the loans.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The evaluation of the allowance for loan and lease losses is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.The Company is subject to periodic examination by regulatory agencies, which may require the Company to record increases in the allowances based on the regulator’s evaluation of available information.There can be no assurance that the Company’s regulators will not require further increases to the allowances.

Tabular information related to loan grades, composition of loan portfolio and activity in the allowance for loan losses is included in Note 6.

f. Credit related financial instruments arising in the ordinary course of business consist primarily of commitments to extend credit.Such financial instruments are recorded when they are funded.  

g. Premises and equipment are carried at cost, less accumulated depreciation. Expenditures for assets with a life greater than one year and costing more than $1,000 are generally capitalized.Depreciation of premises and equipment is computed using the straight-line and accelerated methods based on the estimated useful lives of the related assets. Estimated lives for buildings, leasehold improvements, equipment and furniture are thirty-nine, thirty- nine, five and seven years, respectively.Estimated lives for building improvements are evaluated on a case-by-case basis and depreciated over the estimated remaining life of the improvement.  

h. Foreclosed real estate is initially recorded, and subsequently carried, at the lower of cost or fair value less estimated selling costs.Costs related to improvement of foreclosed real estate are capitalized.  

i. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.  

j. GAAP requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period.

The Company utilizes the prospective application transition method. This method requires the Company to expense the unvested portion of options granted in fiscal 2013, which reduces net earnings by approximately $3, net of taxes for the fiscal year ending June 30, 2013 and by approximately $12 in the remaining requisite service period. GAAP provides for the use of alternative models to determine compensation cost related to stock option grants. The Company has determined the estimated fair value of stock options at grant date using the Black-Scholes option-pricing model based on market data as of June 30, 2012. The expected dividend yield of 0.0% and expected volatility of 65.52% were used to model the value. The risk free rate of return equaled 1.11%, 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.

Core Deposit Intangible – The core deposit intangible (CDI) is an asset arising from the acquisition of State of Franklin Bank. The CDI was initially measured at fair value and then amortized using an accelerated method over ten years. The core deposit intangible asset is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Segment Reporting – The Company’s operations are solely in the financial services industry and include providing to its customers traditional banking and other financial services.The Company operates primarily in Tennessee.Management makes operating decisions and assesses performance based on an ongoing review of the Company’s financial results.Therefore, the Company has a single operating segment for financial reporting purposes.

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QUARTERLY FINANCIAL INFORMATION (Tables)

12 Months Ended

Jun. 30, 2013

Quarterly Financial Information Tables

Schedule of quarterly financial information

The following table summarizes selected information regarding the Company’s results of operations for the periods indicated (in thousands except per share data):

	Three Months Ended
	September 30,		December 31,		March 31,		June 30,
	2012		2012		2013		2013
Interest income	$	4,969	$	4,931	$	4,781	$	4,820
Interest expense		846		789		751		744
Net interest income		4,123		4,142		4,030		4,076
Provision for loan losses		300		300		200		—
Net interest income after provision for loan losses		3,823		3,842		3,830		4,076
Noninterest income		456		581		582		494
Noninterest expense		3,906		3,961		3,873		3,806
Earnings before income taxes		373		462		539		764
Income taxes		78		114		153		199
Net earnings	$	295	$	348	$	386	$	565
Earnings per share, basic	$	0.05	$	0.05	$	0.06	$	0.09
Earnings per share, diluted	$	0.05	$	0.05	$	0.06	$	0.09

	Three Months Ended
	September 30,			December 31,			March 31,		June 30,
	2011			2011			2012		2012
Interest income	$	6,120		$	5,775		$	5,302	$	5,235
Interest expense		1,355			1,203			1,073		939
Net interest income		4,765			4,572			4,229		4,296
Provision for loan losses		2,986			5,687			600		600
Net interest income after provision for loan losses		1,779			(1,115	)		3,629		3,696
Noninterest income		603			578			508		491
Noninterest expense		4,020			5,095			3,772		3,806
Earnings before income taxes		(1,638	)		(5,632	)		365		381
Income taxes		(680	)		(1,965	)		31		90
Net earnings	$	(958	)	$	(3,667	)	$	334	$	291
Earnings per share, basic	$	(0.15	)	$	(0.59	)	$	0.05	$	0.05
Earnings per share, diluted	$	(0.15	)	$	(0.59	)	$	0.05	$	0.05

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FAIR VALUE DISCLOSURES

12 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

FAIR VALUE DISCLOSURES

NOTE 20 – FAIR VALUE DISCLOSURES

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the 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. Generally accepted accounting principles in the United States of America (“GAAP”) establishes a hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Three levels of input may be used to measure fair value as follows:

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.

Following is a description of valuation methodologies used for assets and liabilities 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 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 mortgage-backed securities issued by government-sponsored entities and other debt securities.

Impaired Loans and Other Real Estate Owned

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 in accordance with U.S. GAAP. The fair value of impaired loans is estimated 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 June 30, 2013, substantially all of the total impaired loans were evaluated based on either the fair value of the collateral or its liquidation value. In accordance with GAAP, 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, the Company records the impaired loan as nonrecurring Level 2.

The fair value of collateral dependent impaired loans and other real estate owned is generally based on recent real estate appraisals and other available observable market information.These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach.The Company generally uses independent external appraisers in this process who routinely make adjustments to adjust for differences between the comparable sales and income data available.Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Below are tables that present information about certain assets and liabilities measured at fair value:

	June 30, 2013
							Total Carrying
							Amount in		Assets/Liabilities
	Fair Value Measurement Using						Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	$	—	$	95,082	$	942	$	96,024	$	96,024

	June 30, 2012
							Total Carrying
							Amount in		Assets/Liabilities
	Fair Value Measurement Using						Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	$	—	$	82,738	$	745	$	83,483	$	83,483

The following table below presents, for the year ending June 30, 2013, the changes in Level 3 assets that are measured at fair value on a recurring basis:

					Other					Transfers
	Balance at				Comprehensive					In or Out		Balance at
	June 30, 2012		Net Income		Income		Paydowns			of Level 3		June 30, 2013
Securities available for sale	$	745	$	—	$	345	$	(148	)	$	—	$	942

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 at June 30, 2013 and 2012 are included in the table below.

	June 30, 2013									June 30, 2012
							Total Gains									Total Gains
Description	Level 1		Level 2		Level 3		(Losses)			Level 1		Level 2		Level 3		(Losses)
Impaired Loans	$	—	$	—	$	12,594	$	(927	)	$	—	$	—	$	21,549	$	(1,509	)
Other real estate owned		—		—		5,433		(60	)		—		—		6,075		(481	)

Individual loans with a carrying amount of $14,437 were written down to their fair value of $12,594 resulting in an impairment charge of $1,843 of which $927 was charged to earnings for the period ended June 30, 2013. For the period ending June 30, 2012, individual loans with a carrying amount of $24,410 were written down to their fair value of $21,549 resulting in an impairment charge of $2,861 of which $1,509 was charged to earnings.Loans applicable to write downs of impaired loans are estimated using the present value of expected cash flows or the appraised value of the underlying collateral discounted as necessary due to management’s estimates of changes in economic conditions.

Other real estate owned is being carried at appraised value less anticipated selling expenses resulting in a charge to earnings of $60 and $481 for the years ended June 30, 2013 and 2012, respectively.

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

	June 30, 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	$	24,514		$	24,514		$	56,693		$	56,693
Available-for-sale securities		96,024			96,024			83,483			83,483
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Bank owned life insurance		7,100			7,100			6,861			6,861
Loans receivable		321,299			329,268			322,499			330,664
Accrued interest receivable		1,409			1,409			1,575			1,575
Loans held-for-sale		97			97			381			381
Financial liabilities:
Deposits		(399,642	)		(391,442	)		(423,882	)		(424,523	)
Borrowed funds		(38,177	)		(39,505	)		(38,261	)		(40,064	)
Subordinated debentures		(7,358	)		(4,950	)		(7,245	)		(4,200	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			15,330			—			8,452
Unused letters of credit		—			320			—			4,454
Unused lines of credit		—			27,663			—			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 38 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.

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.

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INVESTMENT SECURITIES (Tables)

12 Months Ended

Jun. 30, 2013

Investment Securities Tables

Schedule of investment securities

Investment securities are summarized as follows:

	June 30, 2013
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency securities	$	21,985		$	88	$	(420	)	$	21,653
Mortgage-backed securities		65,607			1,096		(835	)		65,868
Municipal securities		8,004			172		(171	)		8,005
Other securities		607			—		(109	)		498
Total securities available-for-sale	$	96,203		$	1,356	$	(1,535	)	$	96,024
Weighted-average rate		1.83	%

	June 30, 2012
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency securities	$	24,033		$	263	$	—		$	24,296
Mortgage-backed securities		52,822			1,658		(65	)		54,415
Municipal securities		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	%

Schedule of securities with unrealized losses not recognized in income

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
June 30, 2013
Federal agency securities	$	9,555	$	(420	)	$	—	$	—		$	9,555	$	(420	)
Mortgage-backed securities		25,078		(832	)		443		(3	)		25,521		(835	)
Municipal securities		3,798		(171	)		—		—			3,798		(171	)
Other securities		—		—			498		(109	)		498		(109	)
	$	38,431	$	(1,423	)	$	941	$	(112	)	$	39,372	$	(1,535	)
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2012
Federal agency securities	$	—	$	—		$	—	$	—		$	—	$	—
Mortgage-backed securities		2,100		(9	)		569		(56	)		2,669		(65	)
Municipal securities		—		—			—		—			—		—
Other securities		—		—			207		(400	)		207		(400	)
	$	2,100	$	(9	)	$	776	$	(456	)	$	2,876	$	(465	)

Schedule of maturities of debt securities

Maturities of debt securities at June 30, 2013 are summarized as follows:

					Weighted
			Fair		Average
	Cost		Value		Yield
Within 1 year	$	6,763	$	6,808		1.26	%
Over 1 year through 5 years		4,579		4,615		1.67	%
After 5 years through 10 years		23,836		23,576		1.58	%
Over 10 years		61,025		61,025		2.00	%
	$	96,203	$	96,024		1.83	%

Schedule of proceeds from sale of debt securities and gross realized gains and losses

Proceeds from sale of debt securities and gross realized gains and losses on these sales are summarized as follows:

	Year ended June 30,
	2013		2012
Proceeds from sales	$	83	$	3,619
Gross realized gains		8		156
Gross realized losses		—		(135	)
Net gains (losses)	$	8	$	21

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INCOME TAXES (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2011
Income Taxes Details Narrative
Bad debt deduction, percent of taxable income	8.00%
Tax bad debt reserves	$ 1,312
Deferred tax liability on base year tax bad debt reserve	502
Net operating loss (NOL) carryforward	10,560	7,585	2,668
Statutory remaining life (years)	20 years
Expiration Date of NOL carryforward	Jun. 30, 2029
Deferred tax benefit		$ 2,904	$ 1,022

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INCOME TAXES (Tables)

12 Months Ended

Jun. 30, 2013

Income Taxes Tables

Schedule of income tax summary

Income taxes are summarized as follows:

	Year Ending June 30,
	2013		2012
Current taxes:
Federal income	$	30	$	—
State excise		—		—
		30		—
Deferred taxes
Federal income		456		(2,229	)
State excise		58		(295	)
		514		(2,524	)
	$	544	$	(2,524	)

Schedule of effective income tax rate reconciliation

The provision for income taxes differs from the federal statutory corporate rate as follows:

	Percentage of Earnings
	Before Income Taxes
	Years Ending June 30,
	2013	2012
Tax at statutory rate	34.0%	(34.0%)
Increase (decrease) in taxes:
State income taxes, net of federal tax benefit	2.7	(4.3)
Increase in BOLI cash value	(3.8)	(1.4)
Additional ESOP compensation	(4.6)	(2.0)
Other, net	(2.9)	3.0
Effective tax rate	25.4%	(38.7%)

Schedule of components of net deferred tax assets

The components of the net deferred tax asset are summarized as follows:

	June 30.
	2013			2012
Deferred tax liabilities:
FHLB stock dividends	$	(959	)	$	(959	)
Depreciation		(12	)		(27	)
FHLB advance restructuring penalty		(72	)		(181	)
Allowance for "available-for-sale" securities		—			(679	)
		(1,043	)		(1,846	)
Deferred tax assets:
Fair value adjustment from acquisition,net		708			533
Subsequent writedowns on foreclosed property		434			831
Nonaccrual interest on securities		58			48
NOL carryforward		7,596			8,023
Deferred loan fees, net		132			124
Deferred compensation		62			55
Capital loss on Silverton Bank Stock		141			141
Allowance for losses on loans		2,895			2,908
Allowance for "available-for-sale" securities		69			—
Gross deferred tax asets		12,095			12,663
Valuation allowance		(141	)		(141	)
Deferred tax asset		11,954			12,522
Net deferred tax asset	$	10,911		$	10,676

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FHLB ADVANCES (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Amount
Less than 1 year	$ 26,997
1 to 2 years	5,048	26,993
2 to 3 years		5,082
4 to 5 years	5,110
5 to 10 years		5,134
After 10 years	471	654
Total FHLB Advances	$ 37,626	$ 37,863
Weighted Average Rate
Less than 1 year	3.41%	0.00%
1 to 2 years	3.22%	3.41%
2 to 3 years	0.00%	3.20%
3 to 4 years	0.00%	0.00%
4 to 5 years	3.33%	0.00%
5 to 10 years	0.00%	3.31%
After 10 years	2.65%	2.66%
Total FHLB Advances	3.36%	3.36%

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LOANS RECEIVABLE, NET (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Loans Receivable Payment Age Analysis
30-59 days past due	$ 425
60-89 days past due	497
Nonaccrual	12,796	18,562
Total past due	13,718
Total Current	313,585
Total loans receivable	327,303	328,674
Residential Mortgage
Loans Receivable Payment Age Analysis
30-59 days past due	256
60-89 days past due	44
Nonaccrual	1,918
Total past due	2,218
Total Current	84,321
Total loans receivable	86,539
Multi-family Real Estate Loans
Loans Receivable Payment Age Analysis
Nonaccrual	4,927
Total past due	4,927
Total Current	8,582
Total loans receivable	13,509
Construction and Land Development Loans
Loans Receivable Payment Age Analysis
Nonaccrual	1,011
Total past due	1,011
Total Current	29,668
Total loans receivable	30,679
Nonresidential Real Estate Loans
Loans Receivable Payment Age Analysis
30-59 days past due	58
60-89 days past due	103
Nonaccrual	3,120
Total past due	3,281
Total Current	46,847
Total loans receivable	50,128
Owner Occupied Loans
Loans Receivable Payment Age Analysis
60-89 days past due	123
Nonaccrual	868
Total past due	991
Total Current	67,336
Total loans receivable	68,327
Commercial Loans
Loans Receivable Payment Age Analysis
30-59 days past due	101
60-89 days past due	227
Nonaccrual	448
Total past due	776
Total Current	56,395
Total loans receivable	57,171
HELOC and Junior Liens
Loans Receivable Payment Age Analysis
Nonaccrual	65
Total past due	65
Total Current	17,020
Total loans receivable	17,085
Consumer Loans
Loans Receivable Payment Age Analysis
30-59 days past due	10
Nonaccrual	439
Total past due	449
Total Current	3,416
Total loans receivable	$ 3,865

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INVESTMENT SECURITIES (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Available For Sale Debt securities, Amortized Cost
Within 1 year	$ 6,763
Over 1 year through 5 years	4,579
After 5 years through 10 years	23,836
Over 10 years	61,025
Total	96,203
Available For Sale Debt securities, Fair Value
Within 1 year	6,808
Over 1 year through 5 years	4,615
After 5 years through 10 years	23,576
Over 10 years	61,025
Total	$ 96,024
Available For Sale Debt securities, Weighted Average Yield
Within 1 year (as a percent)	1.26%
Over 1 year through 5 years (as a percent)	1.67%
After 5 years through 10 years (as a percent)	1.58%
Over 10 years (as a percent)	2.00%
Weighted-average yield (as a percent)	1.83%	2.20%

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RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Restrictions On Cash And Amounts Due From Banks Details Narrative
Reserves held with Federal Reserve Bank	$ 4,597	$ 4,408

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Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Statement of Financial Position [Abstract]
Allowance for loan losses	$ 5,660	$ 5,852
Preferred stock, par value	$ 0.01	$ 0.01
Preferred stock, shares authorized	10,000,000	10,000,000
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	30,000,000	30,000,000
Common stock, shares issued	9,182,372	9,182,372
Common stock, shares outstanding	6,601,091	6,631,989
Treasury stock, shares	2,581,280	2,550,383

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LOANS RECEIVABLE, NET

12 Months Ended

Jun. 30, 2013

Loans Receivable, Net [Abstract]

LOANS RECEIVABLE, NET

NOTE 6 – LOANS RECEIVABLE, NET

Loans receivable, net are summarized as follows:

	June 30,
	2013			2012
Real estate loans:
Residential one-to four-family	$	87,233		$	97,182
Multi-family		13,509			11,564
Construction		6,692			548
Commercial		120,205			127,185
Land		22,296			27,487
Home equity line of credit		16,259			18,395
Total real estate loans		266,194			282,361
Commercial business loans		57,288			42,107
Consumer Loans:
Loans secured by deposit accounts		340			381
Other consumer loans		2,971			2,989
Loans secured by automobiles		510			833
Mobile home loans		—			3
Total non-real estate loans		3,821			4,206
Total gross loans		327,303			328,674
Less:
Deferred loan fees, net		(344	)		(323	)
Allowance for losses		(5,660	)		(5,852	)
Loans receivable, net	$	321,299		$	322,499
Weighted average rate		5.30	%		5.82	%

The following is a summary of information pertaining to impaired and non-accrual loans:

	June 30,
	2013		2012
Impaired loans without a valuation allowance	$	4,210	$	12,359
Impaired loans with a valution allowance		10,227		12,051
Total impaired loans	$	14,437	$	24,410
Valuation allowance for impaired loans	$	1,843	$	2,861
Total non-accrual loans	$	12,796	$	18,562
Average investment in impaired loans	$	19,915	$	30,415
Interest income recognized on impaired loans	$	344	$	825

No additional funds are committed to be advanced in connection with impaired loans.

Commercial real estate loans are secured principally by office buildings, shopping centers, churches and other rental real estate.Construction loans are secured by commercial real estate and single-family dwellings.

The following is a table summarizing the activity in the allowance for loan losses for the year ending June 30, 2013:

	Resid. Mtg.			Multi-family			Const. and land dev.			Non-resid real estate			Owner occupied			Comm'l			HELOC/ Junior Liens			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	)		(23	)		(442	)		(109	)		(40	)		(1,431	)
Recoveries		—			—			23			—			13			386			2			15			439
Provision		614			(121	)		(171	)		(35	)		10			407			41			55			800
Balance at June 30, 2013	$	665		$	475		$	491		$	981		$	347		$	2,481		$	168		$	52		$	5,660
	`
Ending balance, Individually Evaluated	$	—		$	423		$	200		$	467		$	—		$	753		$	—		$	—		$	1,843
Ending balance, Collectively Evaluated	$	665		$	52		$	291		$	514		$	347		$	1,728		$	168		$	52		$	3,817
Loans:
Balance at June 30, 2013	$	86,539		$	13,509		$	30,679		$	50,128		$	68,327		$	57,171		$	17,085		$	3,865		$	327,303
Ending balance, Individually Evaluated	$	40		$	4,923		$	510		$	1,834		$	—		$	2,504		$	416		$	—		$	10,227
Ending balance, Collectively Evaluated	$	86,499		$	8,586		$	30,169		$	48,294		$	68,327		$	54,667		$	16,669		$	3,865		$	317,076

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

	30-59 days past due		60-89 days past due		90 or more days past due and still accruing		Nonaccrual		Total past due		Total Current		Total loans receivable
Residential Mortgage	$	256	$	44	$	—	$	1,918	$	2,218	$	84,321	$	86,539
Multi-family		—		—		—		4,927		4,927		8,582		13,509
Construction/land development						—		1,011		1,011		29,668		30,679
Non-residential real estate		58		103		—		3,120		3,281		46,847		50,128
Owner occupied				123		—		868		991		67,336		68,327
Commercial		101		227		—		448		776		56,395		57,171
Heloc and junior lien						—		65		65		17,020		17,085
Consumer		10		—		—		439		449		3,416		3,865
Total	$	425	$	497	$	—	$	12,796	$	13,718	$	313,585	$	327,303

The following table summarizes the credit risk profile by internally assigned grade at June 30, 2013:

	Resid Mtg.		Multi-family		Const. and land dev.		Non-residential real estate		Owner occupied		Commercial		HELOC/ Junior Liens		Consumer		Total
Grade:
Pass	$	80,268	$	7,872	$	27,382	$	40,291	$	65,527	$	52,740	$	16,150	$	3,447	$	293,677
Watch		2,800		621		1,726		5,802		1,643		1,563		71		410		14,636
Special mention		—		—		—		—		—		—		—		—		—
Substandard		3,471		5,016		1,571		4,035		1,157		2,868		864		8		18,990
Doubtful		—		—		—		—				—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total:	$	86,539	$	13,509	$	30,679	$	50,128	$	68,327	$	57,171	$	17,085	$	3,865	$	327,303

The following table summarizes the composition of impaired loans, the associated specific reserves and interest income recognized on impaired loans as of June 30, 2013:

	Recorded investment		Unpaid principal balance		Specific allowance			Interest income recognized
With an allowance recorded:
Residential Mortgage	$	40	$	40	$	—		$	1
Multi-family		4,500		4,923		(423	)		—
Construction and land development		310		510		(200	)		11
Non-residential real estate		1,367		1,834		(467	)		—
Owner occupied		—		—		—			—
Commercial		1,751		2,504		(753	)		185
Heloc and junior lien		416		416		—			15
Consumer		—		—		—			—
Total	$	8,384	$	10,227	$	(1,843	)	$	212
With no related allowance:
Residential Mortgage	$	890	$	890	$	—		$	61
Multi-family		—		—		—			—
Construction and land development		300		300		—			4
Non-residential real estate		1,744		1,744		—			61
Owner occupied		653		653		—			—
Commercial		—		—		—			—
Heloc and junior lien		193		193					6
Consumer		430		430		—			—
Total	$	4,210	$	4,210	$	—		$	132
Total:
Residential Mortgage	$	930	$	930	$	—		$	62
Multi-family		4,500		4,923		(423	)		—
Construction and land development		610		810		(200	)		15
Non-residential real estate		3,111		3,578		(467	)		61
Owner occupied		653		653		—			—
Commercial		1,751		2,504		(753	)		185
Heloc and junior lien		609		609		—			21
Consumer		430		430		—			—
Total	$	12,594	$	14,437	$	(1,843	)	$	344

The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of June 30, 2013:

	June 30, 2013
	Accrual Status		Non-Accrual Status		Number of Loans		Total TDR's
Residential Mortgage	$	664	$	—		2	$	664
Multi-family		621		4,923		2		5,544
Construction and land development		146		—		1		146
Non-residential real estate		122		2,010		3		2,132
Owner occupied		—		379		2		379
Commercial		—		237		2		237
HELOC and Junior Lien		—		—		—		—
Total	$	1,553	$	7,549		12	$	9,102

The following tables include the recorded investment and number of modifications for modified loans.The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.During the years ended June 30, 2013 and 2012, there were no defaults of loans modified within the respective years.

	For the year ended June 30, 2013						For the year ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
Multi-family		—	$	—	$	—		2	$	7,775	$	5,284
Non-residential real estate		1		191		191		1		3,025		2,000
Total		1	$	191	$	191		3	$	10,800	$	7,284

Following is a summary of loans to directors, executive officers and associates of such persons:

Balance at June 30, 2012	$	839
Additions		25
Reclassifications		—
Repayments		(2	)
Balance at June 30, 2013	$	862

These loans were made on substantially the same terms as those prevailing at the time for comparable transactions with unaffiliated persons.

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Consolidated Statements of Comprehensive Income (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Statement of Comprehensive Income [Abstract]
Net earnings (loss)	$ 1,594	$ (4,000)
Other comprehensive income:
Unrealized holding gain (loss)	(1,944)	1,310
Reclassification for realized gains included in net income, net of taxes	(6)	(172)
Income tax benefit (expense)	744	(502)
Comprehensive income (loss)	$ 388	$ (3,364)

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LOANS RECEIVABLE, NET (Details 6) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013 Loans	Jun. 30, 2012
Loans classified as TDRs:
Accrual Status	$ 1,553
Non-accrual status	7,549
Number of Loans	12
Total TDRs	9,102	10,800
Residential Mortgage
Loans classified as TDRs:
Accrual Status	664
Number of Loans	2
Total TDRs	664
Multi-family Real Estate Loans
Loans classified as TDRs:
Accrual Status	621
Non-accrual status	4,923
Number of Loans	2
Total TDRs	5,544
Construction and Land Development Loans
Loans classified as TDRs:
Accrual Status	146
Number of Loans	1
Total TDRs	146
Nonresidential Real Estate Loans
Loans classified as TDRs:
Accrual Status	122
Non-accrual status	2,010
Number of Loans	3
Total TDRs	2,132
Owner Occupied Loans
Loans classified as TDRs:
Non-accrual status	379
Number of Loans	2
Total TDRs	379
Commercial Loans
Loans classified as TDRs:
Non-accrual status	237
Number of Loans	2
Total TDRs	$ 237

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Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Assets
Cash and cash equivalents	$ 8,837	$ 3,043
Interest-earning deposits	15,677	53,650
Investment securities classified as available for sale, net	96,024	83,483
Federal Home Loan Bank stock	4,735	4,735
Bank owned life insurance	7,100	6,861
Loans receivable, net of allowance for loan losses of $5,660 and $5,852	321,299	322,499
Loans held-for-sale	97	381
Premises and equipment, net	25,636	26,361
Foreclosed real estate, net	5,433	6,075
Accrued interest receivable:
Investments	349	383
Loans receivable	1,060	1,192
Deferred tax asset	10,911	10,676
Core deposit intangible	1,151	1,537
Other assets	4,719	2,054
Total Assets	503,028	522,930
Deposits
Noninterest-bearing	54,765	52,436
Interest-bearing	344,877	371,446
Repurchase agreements	551	398
Federal Home Loan Bank advances	37,626	37,863
Subordinated debentures	7,358	7,245
Other liabilities	4,826	913
Accrued income taxes
Total liabilities	450,003	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 6,601,091 and 6,631,989 shares outstanding at June 30, 2013 and 2012, respectively	92	92
Additional paid-in capital	78,302	78,571
Unearned ESOP shares	(2,376)	(2,809)
Unearned compensation	(1,046)	(1,046)
Accumulated other comprehensive income	(111)	1,095
Retained earnings	9,661	8,067
Treasury stock, at cost (2,581,280 and 2,550,383 shares)	(31,497)	(31,341)
Total stockholders' equity	53,025	52,629
Total liabilities and stockholders' equity	$ 503,028	$ 522,930

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INVESTMENT SECURITIES (Details 3) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Available For Sale Securities
Proceeds from sales	$ 83	$ 3,619
Gross realized gains	8	156
Gross realized losses		(135)
Net gains (losses)	$ 8	$ 21

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RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013
Restrictions On Dividends Loans And Advances Details Narrative
Retained earnings available for payment of dividends	$ 0
Company's equity in net assets of the bank restricted	56,189
Funds available for loans or advances by teh Bank ot the Company	$ 5,705

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EMPLOYEE BENEFIT PLANS (Details Narrative) (USD $)	12 Months Ended				12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2002 H	Jul. 01, 2003	Jun. 30, 2006 Restricted Stock Units	Jun. 30, 2013 Restricted Stock Units	Jun. 30, 2013 Stock Option Plan
401(K) Plan
Plan opening contribution made on behalf of employees, based upon total plan compensation of all participants			10.00%
Maximum contribution by employee, based on overall compensation	50.00%
Employee Stock Ownership Plan
Age eligible to participate in ESOP			20 years 5 months
Completion of time to be eligible to participate in ESOP			6 months
Completion of hours to be eligible to participate in ESOP			500
Number of shares in ESOP plan				670,089
Number of shares committed and released	670,089	43,207
Allocated ESOP compensation expense	$ 158,000	$ 109,000
Unearned shares	259,239
Fair value of shares in ESOP	1,465,000
Compensation expense under SERP	1,000	(2,000)
Stock Compensation Plans
Maximum number of shares authorized						279,500	698,750
Restricted stock grants awarded					45,000
Fair value of restricted stock grants awarded					597,000
Co\mpensation expense for grants vesting	$ 0	$ (27,000)

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CORE DEPOSIT INTANGIBLE (CDI)

12 Months Ended

Jun. 30, 2013

Core Deposit Intangible Cdi

CORE DEPOSIT INTANGIBLE (CDI)

NOTE 21 – CORE DEPOSIT INTANGIBLE (CDI)

CDI is composed of the following:

	June 30,
	2013			2012
Beginning balance of core deposit intangible	$	1,537		$	1,978
Less: amortization		(386	)		(441	)
Core deposit intangibles, net	$	1,151		$	1,537

CDI is amortized using an accelerated method over 10 years.

Future amortization of CDI is as follows:

Year Ending June 30,
2014	$	330
2015		275
2016		219
2017		163
2018		108
thereafter		56

Amortization expense related to CDI is $386 and $441 for the years ending June 30, 2013 and 2012, respectively.

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COMMITMENTS AND CONTINGENCIES

12 Months Ended

Jun. 30, 2013

Commitments And Contingencies

COMMITMENTS AND CONTINGENCIES

NOTE 15 – COMMITMENTS AND CONTINGENCIES

Commitments to originate mortgage loans are legally binding agreements to lend to the Company's customers and generally expire in ninety days or less.There were no commitments at June 30, 2013 to originate adjustable-rate mortgage loans or to originate fixed-rate mortgage loans with a term of twenty years or less. The Company has $320 in unfunded letters of credit and $27,663 in unfunded lines of credit at June 30, 2013. The Company also has $15,330 in commitments to fund residential construction, commercial real estate construction and land development loans at June 30, 2013.

The Company has entered into employment agreements with its President and CEO Anderson L. Smith and two other officers. Agreement stipulations are terms, duties, compensation and performance bonuses and provide remedies for all parties upon certain events occurring.Mr. Smith’s agreement provides for deferred compensation upon attaining the age of 65.

Upon completion of the Bank’s conversion from mutual to stock form, a “liquidation account” was established in an amount equal to the total equity of the Bank as of the latest practicable date prior to the conversion.The liquidation account was established to provide limited priority claim to the assets of the Bank to “eligible account holders”, as defined in the Plan of Conversion, who continue to maintain deposits in the Bank after the conversion. In the unlikely event of a complete liquidation of the Bank, and only in such event, each eligible account holder and supplemental eligible account holder would receive a liquidation distribution, prior to any payment to the holder of the Bank’s common stock. This distribution would be based upon each eligible account holder’s and supplemental eligible account holder’s proportionate share of the then total remaining qualifying deposits.At the time of the conversion, the liquidation account, which is an off-balance sheet memorandum account, amounted to $29.5 million.

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Nature Of Business And Summary Of Significant Accounting Policies Details Narrative
Interest bearing deposits in other depository institutions	$ 15,677	$ 53,650
Principal balance for loans evaluated every quarter	250
Troubled debt restructurings	9,102	10,800
Threshold cost for assets to be capitalized	1
Portion of unvested portion of options expensed in period	3
Amount of remaining unrecognized service cost due to unvested options	$ (12)
Expected dividend yield of options	0.00%
Expected volatility of options	65.52%
Risk free rate of return of options	1.11%
Amortization period of core deposit intangible	10 years

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MINIMUM REGULATORY CAPITAL REQUIREMENTS (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Actual
Total Risk-Based Capital (To Risk Weighted Assets)	$ 49,773	$ 46,815
Total Risk-Based Capital Ratio (To Risk Weighted Assets)	14.18%	13.42%
Tier 1 Capital (To Risk Weighted Assets)	45,361	42,437
Tier 1 Capital Ratio (To Risk Weighted Assets)	12.93%	12.17%
Tier 1 Capital (To Average Assets)	45,361	42,437
Tier 1 Capital Ratio (To Average Assets)	9.21%	8.23%
Minimum Required for Capital Adequacy Purposes
Total Risk-Based Capital (To Risk Weighted Assets)	28,075	27,900
Total Risk-Based Capital Ratio (To Risk Weighted Assets)	8.00%	8.00%
Tier 1 Capital (To Risk Weighted Assets)	14,037	13,950
Tier 1 Capital Ratio (To Risk Weighted Assets)	4.00%	4.00%
Tier 1 Capital (To Average Assets)	19,695	20,634
Tier 1 Capital Ratio (To Average Assets)	4.00%	4.00%
Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
Total Risk-Based Capital (To Risk Weighted Assets)	35,093	34,875
Total Risk-Based Capital Ratio (To Risk Weighted Assets)	10.00%	10.00%
Tier 1 Capital (To Risk Weighted Assets)	21,056	20,925
Tier 1 Capital Ratio (To Risk Weighted Assets)	6.00%	6.00%
Tier 1 Capital (To Average Assets)	24,619	25,792
Tier 1 Capital Ratio (To Average Assets)	5.00%	5.00%
Consolidated
Actual
Total Risk-Based Capital (To Risk Weighted Assets)	53,507	50,937
Total Risk-Based Capital Ratio (To Risk Weighted Assets)	15.25%	14.63%
Tier 1 Capital (To Risk Weighted Assets)	49,104	46,566
Tier 1 Capital Ratio (To Risk Weighted Assets)	13.99%	13.37%
Tier 1 Capital (To Average Assets)	49,104	46,566
Tier 1 Capital Ratio (To Average Assets)	9.97%	9.03%
Minimum Required for Capital Adequacy Purposes
Total Risk-Based Capital (To Risk Weighted Assets)	28,078	27,857
Total Risk-Based Capital Ratio (To Risk Weighted Assets)	8.00%	8.00%
Tier 1 Capital (To Risk Weighted Assets)	14,039	13,929
Tier 1 Capital Ratio (To Risk Weighted Assets)	4.00%	4.00%
Tier 1 Capital (To Average Assets)	$ 19,697	$ 20,637
Tier 1 Capital Ratio (To Average Assets)	4.00%	4.00%

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LOANS RECEIVABLE, NET (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended							12 Months Ended
	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2013	Jun. 30, 2012
Allowance for loan losses:
Beginning Balance			$ 5,852					$ 5,852
Charge offs								(1,431)
Recoveries								439
Provision	200	300	300	600	600	5,687	2,986	800	9,873
Ending balance				5,852				5,660	5,852
Individually evaluated for impairment								1,843
Collectively evaluated for impairment								3,817
Net Loans receivable:
Gross Loans				328,674				327,303	328,674
Individually evaluated for impairment								10,227
Collectively evaluated for impairment								317,076
Residential Mortgage
Allowance for loan losses:
Beginning Balance			699					699
Charge offs								(648)
Provision								614
Ending balance								665
Collectively evaluated for impairment								665
Net Loans receivable:
Gross Loans								86,539
Individually evaluated for impairment								40
Collectively evaluated for impairment								86,499
Multi-family Real Estate Loans
Allowance for loan losses:
Beginning Balance			596					596
Provision								(121)
Ending balance								475
Individually evaluated for impairment								423
Collectively evaluated for impairment								52
Net Loans receivable:
Gross Loans								13,509
Individually evaluated for impairment								4,923
Collectively evaluated for impairment								8,586
Construction and Land Development Loans
Allowance for loan losses:
Beginning Balance			777					777
Charge offs								(138)
Recoveries								23
Provision								(171)
Ending balance								491
Individually evaluated for impairment								200
Collectively evaluated for impairment								291
Net Loans receivable:
Gross Loans								30,679
Individually evaluated for impairment								510
Collectively evaluated for impairment								30,169
Nonresidential Real Estate Loans
Allowance for loan losses:
Beginning Balance			1,047					1,047
Charge offs								(31)
Provision								(35)
Ending balance								981
Individually evaluated for impairment								467
Collectively evaluated for impairment								514
Net Loans receivable:
Gross Loans								50,128
Individually evaluated for impairment								1,834
Collectively evaluated for impairment								48,294
Owner Occupied Loans
Allowance for loan losses:
Beginning Balance			347					347
Charge offs								(23)
Recoveries								13
Provision								10
Ending balance								347
Collectively evaluated for impairment								347
Net Loans receivable:
Gross Loans								68,327
Collectively evaluated for impairment								68,327
Commercial Loans
Allowance for loan losses:
Beginning Balance			2,130					2,130
Charge offs								(442)
Recoveries								386
Provision								407
Ending balance								2,481
Individually evaluated for impairment								753
Collectively evaluated for impairment								1,728
Net Loans receivable:
Gross Loans								57,171
Individually evaluated for impairment								2,504
Collectively evaluated for impairment								54,667
HELOC and Junior Liens
Allowance for loan losses:
Beginning Balance			234					234
Charge offs								(109)
Recoveries								2
Provision								41
Ending balance								168
Collectively evaluated for impairment								168
Net Loans receivable:
Gross Loans								17,085
Individually evaluated for impairment								416
Collectively evaluated for impairment								16,669
Consumer Loans
Allowance for loan losses:
Beginning Balance			22					22
Charge offs								(40)
Recoveries								15
Provision								55
Ending balance								52
Collectively evaluated for impairment								52
Net Loans receivable:
Gross Loans								3,865
Collectively evaluated for impairment								$ 3,865

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DEPOSITS (Details Narrative) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Deposits Details Narrative
Aggregate amount of time deposits greater than $100	$ 57,198	$ 67,502
FDIC Deposit Insurance Threshold	250
Overdrafts reclassified as loans	$ 77	$ 75

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MINIMUM REGULATORY CAPITAL REQUIREMENTS (Tables)

12 Months Ended

Jun. 30, 2013

Mortgage Banking [Abstract]

Schedule of compliance with regulatory capital requirements

												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
	(Dollars in thousands)
At June 30, 2013
Total Risk-Based Capital
(To Risk Weighted Assets)
Consolidated	$	53,507		15.25	%	$	28,078	≥		8.0	%	NA
Jefferson Federal Bank		49,773		14.18	%		28,075	≥		8.0	%		35,093	≥		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)
Consolidated		49,104		13.99	%		14,039	≥		4.0	%	NA
Jefferson Federal Bank		45,361		12.93	%		14,037	≥		4.0	%		21,056	≥		6.0	%
Tier 1 Capital
(To Average Assets)
Consolidated		49,104		9.97	%		19,697	≥		4.0	%	NA
Jefferson Federal Bank		45,361		9.21	%		19,695	≥		4.0	%		24,619	≥		5.0	%
At June 30, 2012
Total Risk-Based Capital
(To Risk Weighted Assets)
Consolidated	$	50,937		14.63	%	$	27,857	≥		8.0	%	NA
Jefferson Federal Bank		46,815		13.42	%		27,900	≥		8.0	%		34,875	≥		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)
Consolidated		46,566		13.37	%		13,929	≥		4.0	%	NA
Jefferson Federal Bank		42,437		12.17	%		13,950	≥		4.0	%		20,925	≥		6.0	%
Tier 1 Capital
(To Average Assets)
Consolidated		46,566		9.03	%		20,637	≥		4.0	%	NA
Jefferson Federal Bank		42,437		8.23	%		20,634	≥		4.0	%		25,792	≥		5.0	%

Reconciliation between GAAP capital and the various categories of regulatory capital

The following table provides reconciliation between GAAP capital and the various categories of regulatory capital:

	Bank
	June 30,
	2013			2012
GAAP Capital	$	57,053		$	56,290
Adjustments:
Deferred Taxes		(10,652	)		(11,221	)
Unrealized gains		111			(1,095	)
Disallowed intangibles		(1,151	)		(1,537	)
Core, Tangible and Tier 1 Capital		45,361			42,437
Adjustments:
Allowance for losses		4,412			4,378
Total Capital	$	49,773		$	46,815

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DEPOSITS (Tables)

12 Months Ended

Jun. 30, 2013

Deposits Tables

Schedule of Deposits

Deposits are summarized as follows:

	June 30,
	2013			2012
Non-interest bearing accounts	$	54,765		$	52,436
NOW accounts, 0.10% and 0.12%, respectively		54,164			52,958
Savings accounts, 0.23% and 0.23%, respectively		91,280			96,588
Money market accounts, 0.23% and 0.23%, respectively		51,324			51,492
Total transaction accounts		251,533			253,474
Certificates:
0.00 - 1.00%	$	115,563		$	129,619
1.01 - 2.00%		31,306			36,538
2.01 - 3.00%		533			2,313
3.01 - 4.00%		35			64
4.01 - 5.00%		672			1,874
Total Certificates, 0.66% and 0.91%, respectively		148,109			170,408
Total Deposits	$	399,642		$	423,882
Weighted-average rate - deposits		0.34	%		0.46	%

Scheduled maturities of time deposits

At June 30, 2013, the scheduled maturities of time deposits are as follows:

CD Maturities:
2014	$	110,024
2015		21,336
2016		11,530
2017		2,205
2018		3,014
Total	$	148,109

Interest on deposits

Following is a summary of interest on deposits:

	June 30,
	2013		2012
NOW	$	59	$	77
Savings		207		485
MMA		119		311
Certificates		1,150		2,092
		1,535		2,965
Less : penalties		—		—
Total	$	1,535	$	2,965

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FHLB ADVANCES (Tables)

12 Months Ended

Jun. 30, 2013

Fhlb Advances Tables

Schedule of maturities and weighted average rates of fixed rate FHLB advances

Maturities and weighted average rates of fixed rate FHLB advances at June 30, 2013 and 2012 are as follows:

	Amount				Weighted Avg Rate
	2013		2012		2013			2012
Fixed Rate Advances Maturing:
Less than 1 year	$	26,997	$	—		3.41	%		0.00	%
1 to 2 years		5,048		26,993		3.22	%		3.41	%
2 to 3 years		—		5,082		0.00	%		3.20	%
3 to 4 years		—		—		0.00	%		0.00	%
4 to 5 years		5,110		—		3.33	%		0.00	%
5 to 10 years		—		5,134		0.00	%		3.31	%
After 10 years		471		654		2.65	%		2.66	%
Total FHLB Advances	$	37,626	$	37,863		3.36	%		3.36	%

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INVESTMENT SECURITIES

12 Months Ended

Jun. 30, 2013

Investment Securities

Investment Securities

NOTE 5 – INVESTMENT SECURITIES

Investment securities are summarized as follows:

	June 30, 2013
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency securities	$	21,985		$	88	$	(420	)	$	21,653
Mortgage-backed securities		65,607			1,096		(835	)		65,868
Municipal securities		8,004			172		(171	)		8,005
Other securities		607			—		(109	)		498
Total securities available-for-sale	$	96,203		$	1,356	$	(1,535	)	$	96,024
Weighted-average rate		1.83	%

	June 30, 2012
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities Available-for-Sale
Debt securities:
Federal agency securities	$	24,033		$	263	$	—		$	24,296
Mortgage-backed securities		52,822			1,658		(65	)		54,415
Municipal securities		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	%

Investment securities with a carrying value of $11,017 and $13,021 were pledged to secure public funds, repurchase agreements and/or advances from the Federal Home Loan Bank at June 30, 2013 and 2012, respectively.

At June 30, 2013, the Company held no securities of any single issue (excluding the U.S. Government and federal agencies) with a book value that exceeded 10% of stockholders’ equity.

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
June 30, 2013
Federal agency securities	$	9,555	$	(420	)	$	—	$	—		$	9,555	$	(420	)
Mortgage-backed securities		25,078		(832	)		443		(3	)		25,521		(835	)
Municipal securities		3,798		(171	)		—		—			3,798		(171	)
Other securities		—		—			498		(109	)		498		(109	)
	$	38,431	$	(1,423	)	$	941	$	(112	)	$	39,372	$	(1,535	)
	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
June 30, 2012
Federal agency securities	$	—	$	—		$	—	$	—		$	—	$	—
Mortgage-backed securities		2,100		(9	)		569		(56	)		2,669		(65	)
Municipal securities		—		—			—		—			—		—
Other securities		—		—			207		(400	)		207		(400	)
	$	2,100	$	(9	)	$	776	$	(456	)	$	2,876	$	(465	)

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 foregoing unrealized losses in other comprehensive income. There were no other-than-temporary impairment charges for the year ending June 30, 2013. Unrealized losses on all securities as shown above are considered to be temporary in nature. The Company neither has the intent to sell nor is it forecasting the need or requirement to sell the securities before their anticipated recovery.

Federal Agency Securities – The unrealized losses of $420 for these ten 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 June 30, 2013.

GSE Residential Mortgage-Backed Securities – The unrealized losses of $832 for these thirty-three 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 June 30, 2013.

Private-Label Residential Mortgage-Backed Securities - The unrealized loss of $3 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 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 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 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.

Municipal Securities – The unrealized losses of $171 for these eight 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 June 30, 2013.

Other Securities – The unrealized loss of $109 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 June 30, 2013.

Maturities of debt securities at June 30, 2013 are summarized as follows:

					Weighted
			Fair		Average
	Cost		Value		Yield
Within 1 year	$	6,763	$	6,808		1.26	%
Over 1 year through 5 years		4,579		4,615		1.67	%
After 5 years through 10 years		23,836		23,576		1.58	%
Over 10 years		61,025		61,025		2.00	%
	$	96,203	$	96,024		1.83	%

Proceeds from sale of debt securities and gross realized gains and losses on these sales are summarized as follows:

	Year ended June 30,
	2013		2012
Proceeds from sales	$	83	$	3,619
Gross realized gains		8		156
Gross realized losses		—		(135	)
Net gains (losses)	$	8	$	21

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PREMISES AND EQUIPMENT, NET (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Components of premises and equipment, net
Premises and equipment, gross	$ 34,778	$ 34,458
Accumulated depreciation and amortization	9,142	8,097
Premises and equipment, net	25,636	26,361
Land
Components of premises and equipment, net
Premises and equipment, gross	6,772	6,772
Office Building
Components of premises and equipment, net
Premises and equipment, gross	22,117	21,982
Furniture and equipment
Components of premises and equipment, net
Premises and equipment, gross	$ 5,889	$ 5,704

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FAIR VALUE DISCLOSURES (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Other real estate owned	$ 5,433	$ 6,075
Fair Value measured on a Non-Recurring Basis | Level 3
Impaired Loans	12,594	21,549
Other real estate owned	5,433	6,075
Fair Value measured on a Non-Recurring Basis | Total Gains (Losses)
Impaired Loans	(927)	(1,509)
Other real estate owned	$ (60)	$ (481)

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NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Jun. 30, 2013

Nature Of Business And Summary Of Significant Accounting Policies Policies

Principles of Consolidation

Principles of Consolidation - The consolidated financial statements include the accounts of Jefferson Bancshares, Inc. and its wholly owned subsidiaries Jefferson Federal Bank and State of Franklin Bank Statutory Trust II.All significant intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

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.

Significant Group Concentrations of Credit Risk

Significant Group Concentrations of Credit Risk - The Company originates residential real estate loans, commercial real estate loans and, to a lesser extent, consumer loans primarily to customers located in Upper East Tennessee.The ability of the Company's debtors to honor their contracts is dependent upon the real estate and general economic conditions in this area.

Cash and cash equivalents

a. For purposes of reporting cash flows, cash and cash equivalents include cash and balances due from depository institutions, interest-bearing deposits in other depository institutions and fed funds sold with original maturities of three months or less. Interest-bearing deposits in other depository institutions were $15,677 and $53,650 at June 30, 2013 and 2012, respectively.

Marketable securities

b. Investments in debt securities are classified as "held-to-maturity" or "available-for-sale" depending upon the intent of management with respect to the particular investments.Investments classified as "held-to-maturity" are carried at cost while those identified as "available-for-sale" are carried at fair value.All securities are adjusted for amortization of premiums and accretion of discounts over the term of the security using the interest method.Management has the positive intent and ability to carry those securities classified as "held-to-maturity" to maturity for long-term investment purposes and, accordingly, such securities are not adjusted for temporary declines in market value."Available-for-sale" securities are adjusted for changes in fair value through a direct entry to a separate component of stockholders' equity (i.e., other comprehensive income).Investments in equity securities are carried at the lower of cost or market.The cost of securities sold is determined by specific identification.

Loans receivable

c. Loans receivable, net, which management has the intent and ability to hold until maturity or pay-off, are generally carried at unpaid principal balances less loans in process, net deferred loan fees, unearned discount on loans and allowances for losses. Loan origination and commitment fees and certain direct loan origination costs are deferred and amortized to interest income over the contractual life of the loan using the interest method.

Mortgage Loans

d. The Company originates mortgage loans conforming to guidelines for sale in the secondary mortgage market. Because commitment letters are only given to the borrower after an underwriter agrees to purchase the loan according to the stated terms, the Company’s maximum time between funding the loan and completing the sale to the underwriter is generally three weeks.The loans are carried at the lower of aggregate cost or fair market value as determined by the amount committed to by the underwriter. The loans are sold without recourse and the mortgage servicing rights are sold as part of the loan package.

Allowance for loan and lease loss

e. 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 write-down to fair value is charged to the allowance for loan and lease losses.Any subsequent write-down 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. Loan pools include residential mortgage loans, multi-family loans, construction and land development loans, non-residential real estate loans (owner occupied and non-owner occupied), commercial loans, consumer loans, HELOC and junior liens.Commercial business loans and loans secured by commercial real estate are generally larger and involve a greater degree of risk than residential mortgage loans.In addition, loans secured by commercial real estate are more likely to be negatively impacted by adverse conditions in the real estate market or the economy.Management utilizes a loan grading system and assigns a loan grade of “Pass”, “Watch”, “Special Mention”, “Substandard”, “Doubtful” or “Loss” based on risk characteristics of loans.Lending staff reviews the loan grades of customers on a regular basis and makes changes as needed given that the creditworthiness of customers may change over time.

Descriptions of loan grades are as follows:

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

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

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

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

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

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

Specific valuation allowances are established for impaired loans.The Company considers a loan to be impaired when, based on current information and events, it is probable that the company will be unable to collect all amounts due according to the contractual terms of the loan agreement on a timely basis.A specific reserve represents the difference between the recorded value of the loan and either its estimated fair value less estimated disposition costs, or the net present value as determined by a discounted cash flow analysis.On a quarterly basis, management evaluates individual loans which have an outstanding principal balance of $250,000 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 2011-02in 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 $9.1 million and $10.8 million at June 30, 2013 and 2012, respectively.

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 placed on non-accrual or charged off is reversed against interest income.The interest on these loans is accounted for on the cash basis or cost-recovery method until the loan is returned to accrual status.Loans are returned to accrual status when future payments are reasonably assured.Payments received on non-accrual loans are applied to the remaining principal balance of the loans.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The evaluation of the allowance for loan and lease losses is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available.The Company is subject to periodic examination by regulatory agencies, which may require the Company to record increases in the allowances based on the regulator’s evaluation of available information.There can be no assurance that the Company’s regulators will not require further increases to the allowances.

Tabular information related to loan grades, composition of loan portfolio and activity in the allowance for loan losses is included in Note 6.

Financial instruments

f. Credit related financial instruments arising in the ordinary course of business consist primarily of commitments to extend credit.Such financial instruments are recorded when they are funded.

Premises and equipment

g. Premises and equipment are carried at cost, less accumulated depreciation. Expenditures for assets with a life greater than one year and costing more than $1,000 are generally capitalized.Depreciation of premises and equipment is computed using the straight-line and accelerated methods based on the estimated useful lives of the related assets. Estimated lives for buildings, leasehold improvements, equipment and furniture are thirty-nine, thirty- nine, five and seven years, respectively.Estimated lives for building improvements are evaluated on a case-by-case basis and depreciated over the estimated remaining life of the improvement.

Foreclosed real estate

h. Foreclosed real estate is initially recorded, and subsequently carried, at the lower of cost or fair value less estimated selling costs.Costs related to improvement of foreclosed real estate are capitalized.

Income taxes

i. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method.Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.

Share based compensation

j. GAAP requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award - the requisite service period.

The Company utilizes the prospective application transition method. This method requires the Company to expense the unvested portion of options granted in fiscal 2013, which reduces net earnings by approximately $3, net of taxes for the fiscal year ending June 30, 2013 and by approximately $12 in the remaining requisite service period. GAAP provides for the use of alternative models to determine compensation cost related to stock option grants. The Company has determined the estimated fair value of stock options at grant date using the Black-Scholes option-pricing model based on market data as of June 30, 2012. The expected dividend yield of 0.0% and expected volatility of 65.52% were used to model the value. The risk free rate of return equaled 1.11%, 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.

Core Deposit Intangible

Core Deposit Intangible – The core deposit intangible (CDI) is an asset arising from the acquisition of State of Franklin Bank. The CDI was initially measured at fair value and then amortized using an accelerated method over ten years. The core deposit intangible asset is assessed at least annually for impairment and any such impairment will be recognized in the period identified.

Segment Reporting

Segment Reporting – The Company’s operations are solely in the financial services industry and include providing to its customers traditional banking and other financial services.The Company operates primarily in Tennessee.Management makes operating decisions and assesses performance based on an ongoing review of the Company’s financial results.Therefore, the Company has a single operating segment for financial reporting purposes.

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FAIR VALUE DISCLOSURES (Tables)

12 Months Ended

Jun. 30, 2013

Fair Value Disclosures Tables

Schedule of assets and liabilities recorded at fair value on a recurring basis

Below are tables that present information about certain assets and liabilities measured at fair value:

	June 30, 2013
							Total Carrying
							Amount in		Assets/Liabilities
	Fair Value Measurement Using						Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	$	—	$	95,082	$	942	$	96,024	$	96,024

	June 30, 2012
							Total Carrying
							Amount in		Assets/Liabilities
	Fair Value Measurement Using						Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	$	—	$	82,738	$	745	$	83,483	$	83,483

Schedule of changes in Level 3 assets measured at fair value on a recurring basis

The following table below presents, for the year ending June 30, 2013, the changes in Level 3 assets that are measured at fair value on a recurring basis:

					Other					Transfers
	Balance at				Comprehensive					In or Out		Balance at
	June 30, 2012		Net Income		Income		Paydowns			of Level 3		June 30, 2013
Securities available for sale	$	745	$	—	$	345	$	(148	)	$	—	$	942

Schedule of assets and liabilities recorded at fair value on a nonrecurring basis

Assets measured at fair value on a nonrecurring basis at June 30, 2013 and 2012 are included in the table below.

	June 30, 2013									June 30, 2012
							Total Gains									Total Gains
Description	Level 1		Level 2		Level 3		(Losses)			Level 1		Level 2		Level 3		(Losses)
Impaired Loans	$	—	$	—	$	12,594	$	(927	)	$	—	$	—	$	21,549	$	(1,509	)
Other real estate owned		—		—		5,433		(60	)		—		—		6,075		(481	)

Schedule of carrying value and estimated fair value of financial instruments

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

	June 30, 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	$	24,514		$	24,514		$	56,693		$	56,693
Available-for-sale securities		96,024			96,024			83,483			83,483
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Bank owned life insurance		7,100			7,100			6,861			6,861
Loans receivable		321,299			329,268			322,499			330,664
Accrued interest receivable		1,409			1,409			1,575			1,575
Loans held-for-sale		97			97			381			381
Financial liabilities:
Deposits		(399,642	)		(391,442	)		(423,882	)		(424,523	)
Borrowed funds		(38,177	)		(39,505	)		(38,261	)		(40,064	)
Subordinated debentures		(7,358	)		(4,950	)		(7,245	)		(4,200	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			15,330			—			8,452
Unused letters of credit		—			320			—			4,454
Unused lines of credit		—			27,663			—			31,409

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DEPOSITS

12 Months Ended

Jun. 30, 2013

Deposits

DEPOSITS

NOTE 8 - DEPOSITS

Deposits are summarized as follows:

	June 30,
	2013			2012
Non-interest bearing accounts	$	54,765		$	52,436
NOW accounts, 0.10% and 0.12%, respectively		54,164			52,958
Savings accounts, 0.23% and 0.23%, respectively		91,280			96,588
Money market accounts, 0.23% and 0.23%, respectively		51,324			51,492
Total transaction accounts		251,533			253,474
Certificates:
0.00 - 1.00%	$	115,563		$	129,619
1.01 - 2.00%		31,306			36,538
2.01 - 3.00%		533			2,313
3.01 - 4.00%		35			64
4.01 - 5.00%		672			1,874
Total Certificates, 0.66% and 0.91%, respectively		148,109			170,408
Total Deposits	$	399,642		$	423,882
Weighted-average rate - deposits		0.34	%		0.46	%

The aggregate amount of time deposits in denominations of $100 or more was $57,198 and $67,502, respectively, at June 30, 2013 and 2012.

The Deposit Insurance Fund, as administrated by the Federal Deposit Insurance Corporation, insures deposits up to applicable limits.Deposit amounts in excess of $250,000 are generally not federally insured.

The total amount of overdrafts reclassified as loans was $77 and $75, respectively, at June 30, 2013 and 2012.

At June 30, 2013, the scheduled maturities of time deposits are as follows:

CD Maturities:
2014	$	110,024
2015		21,336
2016		11,530
2017		2,205
2018		3,014
Total	$	148,109

Following is a summary of interest on deposits:

	June 30,
	2013		2012
NOW	$	59	$	77
Savings		207		485
MMA		119		311
Certificates		1,150		2,092
		1,535		2,965
Less : penalties		—		—
Total	$	1,535	$	2,965

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CORE DEPOSIT INTANGIBLE (CDI) (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Core Deposit Intangible Cdi Details Narrative
Amortization expense - CDI	$ 386	$ 441
Amortization period	10 years
Amortization method	Accelerated Method

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INCOME TAXES (Details 2) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Deferred tax liabilities
FHLB stock dividends	$ (959)	$ (959)
Depreciation	(12)	(27)
FHLB advance restructuring penalty	(72)	(181)
Allowance for "available-for-sale" securities		(679)
[us-gaap:DeferredIncomeTaxLiabilities]	(1,043)	(1,846)
Deferred tax assets:
Fair value adjustment from acquisition, net	708	533
Subsequent writedowns on foreclosed property	434	831
Nonaccrual interest on securities	58	48
NOL carryforward	7,596	8,023
Deferred loan fees, net	132	124
Deferred compensation	62	55
Capital loss on Silverton Bank Stock	141	141
Allowance for losses on loans	2,895	2,908
Allowance for "available-for-sale" securities	69
Gross deferred tax assets	12,095	12,663
Valuation allowance	(141)	(141)
Deferred tax asset	11,954	12,522
Net deferred tax asset	$ 10,911	$ 10,676

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RECENT ACCOUNTING PRONOUNCEMENTS

12 Months Ended

Jun. 30, 2013

Recent Accounting Pronouncements

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 4 – RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2013-11 –In July 2013, the FASB issued Accounting Standards Update 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss, a Similar Tax Loss, or a Tax Credit Carryforward Exists – a consensus of the FASM Emerging Issues Tax Force”. This update provides explicit guidance on the presentation in the financial statements. This standards update helps to bring consistency to a wide ranging diversity that currently exists in practice on the presentation of such unrecognized tax benefits.The amendments in this update become effective for public companies for fiscal years and interim periods within those years, beginning after December 31, 2013. Management does not believe this update will have a material, if any, impact on the Company’s consolidated financial statements.

ASU 2013-02 –In February 2013, the FASB issued Accounting Standards Update 2013-02, “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.” This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The Company adopted this update prospectively as of the quarter ended March 31, 2013. Accordingly, the Company’s financial statements now include consolidated statements of comprehensive income disclosing the required information.

ASU 2011-11 – In December 2011, the FASB issued ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities.” This update requires entities to disclose both gross information and net information about instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The scope of this update includes derivatives, sale and repurchase agreements and reverse sale and repurchase agreements and securities borrowing and lending arrangements. The Company is required to adopt this update retrospectively for annual periods beginning after January 1, 2013. Management does not anticipate that adoption will have a material impact on the Company’s consolidated financial position, results of operations or cash flows. ASU 2013-01 clarifies certain of the provisions of ASU 2011-11.

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Consolidated Statements of Changes in Stockholders' Equity (Parenthetical)	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Statement of Stockholders' Equity [Abstract]
Purchase of common stock, shares	30,897	2,534

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FAIR VALUE DISCLOSURES (Details 3) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Financial assets:
Securities available for sale	$ 96,024	$ 83,483
Bank owned life insurance	7,100	6,861
Accrued interest receivable	349	383
Off-balance sheet assets (liabilities):
Fair Value Off-balance sheet assets (liabilities)	29,500
Carrying Amount
Financial assets:
Cash and due from banks and interest-earning deposits with banks	24,514	56,693
Securities available for sale	96,024	83,483
Federal Home Loan Bank stock	4,735	4,735
Bank owned life insurance	7,100	6,861
Loans receivable, net	321,299	322,499
Accrued interest receivable	1,409	1,575
Loans held-for-sale	97	381
Financial liabilities:
Deposits	(399,642)	(423,882)
Borrowed funds	(38,177)	(38,261)
Subordinated debentures	(7,358)	(7,245)
Fair Value
Financial assets:
Cash and due from banks and interest-earning deposits with banks	24,514	56,693
Securities available for sale	96,024	83,483
Federal Home Loan Bank stock	4,735	4,735
Bank owned life insurance	7,100	6,861
Loans receivable, net	329,268	330,664
Accrued interest receivable	1,409	1,575
Loans held-for-sale	97	381
Financial liabilities:
Deposits	(391,442)	(424,523)
Borrowed funds	(39,505)	(40,064)
Subordinated debentures	(4,950)	(4,200)
Fair Value | Commitment to Fund Loans
Off-balance sheet assets (liabilities):
Fair Value Off-balance sheet assets (liabilities)	15,330	8,452
Fair Value | Unused letters of credit
Off-balance sheet assets (liabilities):
Fair Value Off-balance sheet assets (liabilities)	320	4,454
Fair Value | Line of Credit
Off-balance sheet assets (liabilities):
Fair Value Off-balance sheet assets (liabilities)	$ 27,663	$ 31,409

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LOANS RECEIVABLE, NET (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Loans receivable, net
Gross Loans	$ 327,303	$ 328,674
Deferred loan fees, net	(344)	(323)
Allowance for loan losses	(5,660)	(5,852)
Loans receivable, net	321,299	322,499
Weighted average rate	5.30%	5.82%
Residential One- to Four-Family Real Estate Loan
Loans receivable, net
Gross Loans	87,233	97,182
Allowance for loan losses		(699)
Multi-family Real Estate Loans
Loans receivable, net
Gross Loans	13,509	11,564
Commercial Real Estate Loans
Loans receivable, net
Gross Loans	120,205	127,185
Land Real Estate Loans
Loans receivable, net
Gross Loans	22,296	27,487
Home Equity Line of Credit
Loans receivable, net
Gross Loans	16,259	18,395
Real Estate Loans
Loans receivable, net
Gross Loans	266,194	282,361
Commercial Loans
Loans receivable, net
Gross Loans	57,288	42,107
Loans secured by deposit accounts
Loans receivable, net
Gross Loans	340	381
Other consumer loans
Loans receivable, net
Gross Loans	2,971	2,989
Loans secured by automobiles
Loans receivable, net
Gross Loans	510	833
Mobile home loans
Loans receivable, net
Gross Loans		3
Non-Real Estate Loans
Loans receivable, net
Gross Loans	$ 3,821	$ 4,206

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INVESTMENT SECURITIES (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Securities pledged to secure public funds, repurchase agreements and advances from the Federal Home Loan Bank	$ 11,017	$ 13,021
Unrealized losses on securities	1,535	465
Federal agency
Unrealized losses on securities	420
Number of securities in unrealized loss position	10
GSE Residential Mortgage-Backed Securities
Unrealized losses on securities	832
Number of securities in unrealized loss position	33
Private-Label Residential Mortgage-Backed Securities
Unrealized losses on securities	3
Number of securities in unrealized loss position	1
Municipal Securities
Unrealized losses on securities	171
Number of securities in unrealized loss position	8
Other Securities
Unrealized losses on securities	$ 109	$ 400
Number of securities in unrealized loss position	1

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CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Details 1) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2013	Jun. 30, 2012
Interest income									$ 17,529	$ 20,271
Other income									283	261
Interest expense	744	751	789	846	939	1,073	1,203	1,355	3,130	4,570
Other operating expenses	3,806	3,873	3,961	3,906	3,806	3,772	5,095	4,020	15,546	16,693
Income before Taxes and Equity in Undistributed Net Income of Jefferson Federal Bank	764	539	462	373	381	365	(5,632)	(1,638)	2,138	(6,524)
Income tax	199	153	114	78	90	31	(1,965)	(680)	544	(2,524)
Net income	565	386	348	295	291	334	(3,667)	(958)	1,594	(4,000)
Parent Company
Interest income									132
Total Income									132
Interest expense									325
Other operating expenses									150
Income before Taxes and Equity in Undistributed Net Income of Jefferson Federal Bank									(343)
Income tax									(131)
[ProfitLoss]									(212)
Equity in undistributed earnings of subsidiary									1,806
Net income									$ 1,594

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LOANS RECEIVABLE, NET (Tables)

12 Months Ended

Jun. 30, 2013

Loans Receivable Net Tables

Schedule of loans receivable, net

Loans receivable, net are summarized as follows:

	June 30,
	2013			2012
Real estate loans:
Residential one-to four-family	$	87,233		$	97,182
Multi-family		13,509			11,564
Construction		6,692			548
Commercial		120,205			127,185
Land		22,296			27,487
Home equity line of credit		16,259			18,395
Total real estate loans		266,194			282,361
Commercial business loans		57,288			42,107
Consumer Loans:
Loans secured by deposit accounts		340			381
Other consumer loans		2,971			2,989
Loans secured by automobiles		510			833
Mobile home loans		—			3
Total non-real estate loans		3,821			4,206
Total gross loans		327,303			328,674
Less:
Deferred loan fees, net		(344	)		(323	)
Allowance for losses		(5,660	)		(5,852	)
Loans receivable, net	$	321,299		$	322,499
Weighted average rate		5.30	%		5.82	%

Schedule of impaired and non-accrual loans

The following is a summary of information pertaining to impaired and non-accrual loans:

	June 30,
	2013		2012
Impaired loans without a valuation allowance	$	4,210	$	12,359
Impaired loans with a valution allowance		10,227		12,051
Total impaired loans	$	14,437	$	24,410
Valuation allowance for impaired loans	$	1,843	$	2,861
Total non-accrual loans	$	12,796	$	18,562
Average investment in impaired loans	$	19,915	$	30,415
Interest income recognized on impaired loans	$	344	$	825

Schedule of activity in the allowance for loan losses

The following is a table summarizing the activity in the allowance for loan losses for the year ending June 30, 2013:

	Resid. Mtg.			Multi-family			Const. and land dev.			Non-resid real estate			Owner occupied			Comm'l			HELOC/ Junior Liens			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	)		(23	)		(442	)		(109	)		(40	)		(1,431	)
Recoveries		—			—			23			—			13			386			2			15			439
Provision		614			(121	)		(171	)		(35	)		10			407			41			55			800
Balance at June 30, 2013	$	665		$	475		$	491		$	981		$	347		$	2,481		$	168		$	52		$	5,660
	`
Ending balance, Individually Evaluated	$	—		$	423		$	200		$	467		$	—		$	753		$	—		$	—		$	1,843
Ending balance, Collectively Evaluated	$	665		$	52		$	291		$	514		$	347		$	1,728		$	168		$	52		$	3,817
Loans:
Balance at June 30, 2013	$	86,539		$	13,509		$	30,679		$	50,128		$	68,327		$	57,171		$	17,085		$	3,865		$	327,303
Ending balance, Individually Evaluated	$	40		$	4,923		$	510		$	1,834		$	—		$	2,504		$	416		$	—		$	10,227
Ending balance, Collectively Evaluated	$	86,499		$	8,586		$	30,169		$	48,294		$	68,327		$	54,667		$	16,669		$	3,865		$	317,076

Schedule of aging analysis of the loan portfolio

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

	30-59 days past due		60-89 days past due		90 or more days past due and still accruing		Nonaccrual		Total past due		Total Current		Total loans receivable
Residential Mortgage	$	256	$	44	$	—	$	1,918	$	2,218	$	84,321	$	86,539
Multi-family		—		—		—		4,927		4,927		8,582		13,509
Construction/land development						—		1,011		1,011		29,668		30,679
Non-residential real estate		58		103		—		3,120		3,281		46,847		50,128
Owner occupied				123		—		868		991		67,336		68,327
Commercial		101		227		—		448		776		56,395		57,171
Heloc and junior lien						—		65		65		17,020		17,085
Consumer		10		—		—		439		449		3,416		3,865
Total	$	425	$	497	$	—	$	12,796	$	13,718	$	313,585	$	327,303

Schedule of credit risk profile by internally assigned grade

The following table summarizes the credit risk profile by internally assigned grade at June 30, 2013:

	Resid Mtg.		Multi-family		Const. and land dev.		Non-residential real estate		Owner occupied		Commercial		HELOC/ Junior Liens		Consumer		Total
Grade:
Pass	$	80,268	$	7,872	$	27,382	$	40,291	$	65,527	$	52,740	$	16,150	$	3,447	$	293,677
Watch		2,800		621		1,726		5,802		1,643		1,563		71		410		14,636
Special mention		—		—		—		—		—		—		—		—		—
Substandard		3,471		5,016		1,571		4,035		1,157		2,868		864		8		18,990
Doubtful		—		—		—		—				—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total:	$	86,539	$	13,509	$	30,679	$	50,128	$	68,327	$	57,171	$	17,085	$	3,865	$	327,303

Schedule of composition of impaired loans

The following table summarizes the composition of impaired loans, the associated specific reserves and interest income recognized on impaired loans as of June 30, 2013:

	Recorded investment		Unpaid principal balance		Specific allowance			Interest income recognized
With an allowance recorded:
Residential Mortgage	$	40	$	40	$	—		$	1
Multi-family		4,500		4,923		(423	)		—
Construction and land development		310		510		(200	)		11
Non-residential real estate		1,367		1,834		(467	)		—
Owner occupied		—		—		—			—
Commercial		1,751		2,504		(753	)		185
Heloc and junior lien		416		416		—			15
Consumer		—		—		—			—
Total	$	8,384	$	10,227	$	(1,843	)	$	212
With no related allowance:
Residential Mortgage	$	890	$	890	$	—		$	61
Multi-family		—		—		—			—
Construction and land development		300		300		—			4
Non-residential real estate		1,744		1,744		—			61
Owner occupied		653		653		—			—
Commercial		—		—		—			—
Heloc and junior lien		193		193					6
Consumer		430		430		—			—
Total	$	4,210	$	4,210	$	—		$	132
Total:
Residential Mortgage	$	930	$	930	$	—		$	62
Multi-family		4,500		4,923		(423	)		—
Construction and land development		610		810		(200	)		15
Non-residential real estate		3,111		3,578		(467	)		61
Owner occupied		653		653		—			—
Commercial		1,751		2,504		(753	)		185
Heloc and junior lien		609		609		—			21
Consumer		430		430		—			—
Total	$	12,594	$	14,437	$	(1,843	)	$	344

Schedule of troubled debt restructuring and modifications of loans

The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of June 30, 2013:

	June 30, 2013
	Accrual Status		Non-Accrual Status		Number of Loans		Total TDR's
Residential Mortgage	$	664	$	—		2	$	664
Multi-family		621		4,923		2		5,544
Construction and land development		146		—		1		146
Non-residential real estate		122		2,010		3		2,132
Owner occupied		—		379		2		379
Commercial		—		237		2		237
HELOC and Junior Lien		—		—		—		—
Total	$	1,553	$	7,549		12	$	9,102

The following tables include the recorded investment and number of modifications for modified loans.The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured.During the years ended June 30, 2013 and 2012, there were no defaults of loans modified within the respective years.

	For the year ended June 30, 2013						For the year ended June 30, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
			Outstanding		Outstanding				Outstanding		Outstanding
	Number		Recorded		Recorded		Number		Recorded		Recorded
	of loans		Investment		Investment		of loans		Investment		Investment
Multi-family		—	$	—	$	—		2	$	7,775	$	5,284
Non-residential real estate		1		191		191		1		3,025		2,000
Total		1	$	191	$	191		3	$	10,800	$	7,284

Schedule of loans to directors, executive officers and associates

Following is a summary of loans to directors, executive officers and associates of such persons:

Balance at June 30, 2012	$	839
Additions		25
Reclassifications		—
Repayments		(2	)
Balance at June 30, 2013	$	862

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CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012	Jun. 30, 2011
Assets
Cash and due from banks	$ 8,837	$ 3,043
Other assets	4,719	2,054
Total assets	503,028	522,930
Liabilities and Stockholders' Equity
Other liabilities	4,826	913
Subordinated debentures	7,358	7,245
Stockholders' equity	53,025	52,629	55,919
Total liabilities and stockholders' equity	503,028	522,930
Parent Company
Assets
Cash and due from banks	928	659
Investment in common stock of Jefferson Federal Bank	57,052
Investment in common stock of State of Franklin Statutory Trust II	1
Loan receivable from ESOP	3,082
Other assets	95
Total assets	61,158
Liabilities and Stockholders' Equity
Accrued expenses	361
Other liabilities	413
Subordinated debentures	7,359
Stockholders' equity	53,025
Total liabilities and stockholders' equity	$ 61,158

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FAIR VALUE DISCLOSURES (Details 1) (Fair Value measured on a Recurring Basis, Level 3, Available-for-sale Securities, USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013
Fair Value measured on a Recurring Basis | Level 3 | Available-for-sale Securities
Balance, beginning	$ 745
Other comprehensive income	345
Paydowns	(148)
Balance, ending	$ 942

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DEPOSITS (Details) (USD $) In Thousands, unless otherwise specified	Jun. 30, 2013	Jun. 30, 2012
Non-interest bearing accounts	$ 54,765	$ 52,436
NOW accounts	54,164	52,958
Savings accounts	91,280	96,588
Money market accounts	51,324	51,492
Total transaction accounts	251,533	253,474
Certificates:
Total Certificates	148,109	170,408
Total Deposits	399,642	423,882
Weighted-average rate - Total Deposits	0.34%	0.46%
Weighted-average rate - NOW	0.10%	0.12%
Weighted-average rate - Savings	0.23%	0.23%
Weighted-average rate - Money Market	0.23%	0.23%
Weighted-average rate - Certificates Of Deposit	0.66%	0.91%
0.00%-1.00%
Certificates:
Total Certificates	115,563	129,619
1.01%-2.00%
Certificates:
Total Certificates	31,306	36,538
2.01%-3.00%
Certificates:
Total Certificates	533	2,313
3.01%-4.00%
Certificates:
Total Certificates	35	64
4.01%-5.00%
Certificates:
Total Certificates	$ 672	$ 1,874

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LOANS RECEIVABLE, NET (Details 7) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013 Loans	Jun. 30, 2012 Loans
Loans modified during the period
Number of Loans	1	3
Pre-Modification Outstanding Recorded Investment	$ 191	$ 10,800
Post-Modification Outstanding Recorded Investment	191	7,284
Multi-family Real Estate Loans
Loans modified during the period
Number of Loans		2
Pre-Modification Outstanding Recorded Investment		7,775
Post-Modification Outstanding Recorded Investment		5,284
Nonresidential Real Estate Loans
Loans modified during the period
Number of Loans	1	1
Pre-Modification Outstanding Recorded Investment	191	3,025
Post-Modification Outstanding Recorded Investment	$ 191	$ 2,000

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CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY (Details 2) (USD $) In Thousands, unless otherwise specified	3 Months Ended								12 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2013	Jun. 30, 2012
Cash flows from operating activities:
Net income	$ 565	$ 386	$ 348	$ 295	$ 291	$ 334	$ (3,667)	$ (958)	$ 1,594	$ (4,000)
Adjustments to reconcile net income to net cash provided by operating activities:
Deferred tax expense									514	(2,524)
Amortization/accretion of intangibles									386	441
Increase in other assets									2,665	(4,925)
Net cash provided by (used for) operating activities									7,068	6,339
Cash flows from investing activities:
Net cash provided by (used for) investing activities									(14,826)	40,722
Cash flows from financing activities:
Purchase of treasury stock									(156)	(7)
Net cash provided by (used for) financing activities									(24,421)	(30,916)
Net increase in cash and cash equivalents									(32,179)	16,145
Cash and cash equivalents at beginning of year				3,043					3,043
Cash and cash equivalents at end of year	8,837				3,043				8,837	3,043
Parent Company
Cash flows from operating activities:
Net income									1,594
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed (earnings) loss of subsidiaries									(1,806)
Deferred tax expense									(131)
Amortization/accretion of intangibles									112
Increase in other assets									10
Increase in other liabilities									199
Net cash provided by (used for) operating activities									(22)
Cash flows from investing activities:
Return of principal on loan to ESOP									447
Net cash provided by (used for) investing activities									447
Cash flows from financing activities:
Purchase of treasury stock									(156)
Net cash provided by (used for) financing activities									(156)
Net increase in cash and cash equivalents									269
Cash and cash equivalents at beginning of year				659					659
Cash and cash equivalents at end of year	$ 928								$ 928

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EMPLOYEE BENEFIT PLANS

12 Months Ended

Jun. 30, 2013

Employee Benefit Plans

EMPLOYEE BENEFIT PLANS

NOTE 11 – EMPLOYEE BENEFIT PLANS

401 (K) RETIREMENT PLAN.The Company has a defined contribution pension plan covering all employees having attained the age of 20 and one-half and completing six months of service.Normal retirement date is the participant’s sixty-fifth birthday.

Before the Company established the Employee Stock Ownership Plan (effective July 1, 2003), the 401(k) plan was funded by annual employer contributions of 10% of the total plan compensation of all participants in the plan.The amount contributed by the employer was divided among the participants in the same proportion that each participant’s compensation bore to the aggregate compensation of all participants.Employer contributions vest to employees over a seven-year period.Employees are permitted to make contributions of up to 50% of their compensation subject to certain limits based on federal tax laws.

EMPLOYEE STOCK OWNERSHIP PLAN.The Bank maintains an Employee Stock Ownership Plan (ESOP).On July 1, 2003, the ESOP purchased 670,089 shares of Jefferson Bancshares, Inc. from proceeds provided by the Company in the form of a loan.Thus, the ESOP is considered a leveraged plan.Employees are eligible for participation in the plan upon attaining 20 and one-half years of age and completing six consecutive calendar months during which they have performed at least 500 hours of service.Each plan year, the Bank may, in its discretion, make a contribution to the plan; however, at a minimum, the Bank has agreed to make as a contribution the amount necessary to service the debt incurred to acquire the stock.

Shares are scheduled for release as the loan is repaid.The present amortization schedule calls for 43,207 shares to be released each December 31.Dividends on unallocated shares are used to repay the loan while dividends paid on allocated shares become part of the plan’s assets.Accounting for the ESOP consists of recognizing compensation expense for the fair market value of the shares as of the date of release.Allocated shares are included in earnings per share calculations while unallocated shares are not included.

ESOP compensation expense was $158 and $109 for the years ended June 30, 2013 and 2012. The original number of shares committed was 670,089 and 43,207 were released during the years ended June 30, 2013 and 2012, respectively. The 259,239 remaining unearned shares had an approximate fair market value of $1,465 at June 30, 2013.

The Bank has also established a SERP to provide for supplemental retirement benefits with respect to the ESOP. The plan provides certain executives with benefits that cannot be provided under the ESOP as a result of the limitations imposed by the Internal Revenue Code, but that would have been provided under the ESOP but for such limitations. The Plan was amended in 2007 to change the first allocation period to December 31, 2007. Compensation expense under the SERP was $1 and $(2) for the years ended June 30, 2013 and 2012, respectively.

STOCK COMPENSATION PLANS. The Company maintains stock-based benefit plans under which certain employees and directors are eligible to receive restricted stock grants or options.Under the 2005 Stock-Based Benefit Plan, the maximum number of shares that may be granted as restricted stock is 279,500, and a maximum of 698,750 shares may be issued through the exercise of non-statutory 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 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. Compensation expense for grants vesting in 2013 and 2012 was $0 and $(27), respectively.

A summary of the status of the Company’s stock option plan is presented below:

	2013				2012
			Weighted-					Weighted-
			average					average
	Shares		exercise price		Shares			exercise price
Outstanding at beginning of period		340,638	$	13.69		525,287		$	12.69
Granted during the 12 month period		20,000	$	1.97		—		$	—
Options exercised		—				—
Options forfeited		—				(184,649	)	$	10.85
Outstanding at end of year		360,638	$	13.04		340,638		$	13.69
Options exercisable at end of year		340,638	$	13.69		340,638		$	13.69

Information pertaining to options outstanding at June 30, 2013 is as follows:

	Options Outstanding						Options Exercisable
			Weighted
			Average		Weighted
			Remaining		Average				Weighted
	Number		Contractual		Exercise		Number		Average
Range of Exercise Prices	Outstanding		Life		Price		Exercisable		Exercise Price
1.01 - 2.00		20,000		9.08	$	1.97		—	$	—
13.01 - 14.00		340,638		0.58	$	13.69		340,638	$	13.69

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PREMISES AND EQUIPMENT, NET

12 Months Ended

Jun. 30, 2013

Premises And Equipment Net

PREMISES AND EQUIPMENT, NET

NOTE 7 – PREMISES AND EQUIPMENT, NET

Premises and equipment, net are summarized as follows:

	June 30,
	2013		2012
Land	$	6,772	$	6,772
Office building		22,117		21,982
Furniture and equipment		5,889		5,704
		34,778		34,458
Less:accumulated depreciation and amortization		9,142		8,097
	$	25,636	$	26,361

Depreciation expense for the years ended June 30, 2013 and 2012 was $1,045 and $1,055, respectively.

Pursuant to the terms of non-cancelable lease agreements in effect at June 30, 2013, pertaining to real property, future minimum payments are as follows:

For the Year Ended
2014	$	9
2015		—
	$	9

Lease expense for June 30, 2013 and 2012 was $19 and $49, respectively.

The Company has also entered into a service contract for data processing services.Future minimum payments under this agreement are as follows:

For the Year Ended
2014	$	1,088
2015		682
2016		12
	$	1,782

Data processing service expense for June 30, 2013 and 2012 was $1,127 and $1,075, respectively.

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DEPOSITS (Details 2) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Interest on Deposits
NOW	$ 59	$ 77
Savings	207	485
MMA	119	311
Certificates	1,150	2,092
[us-gaap:InterestExpenseDomesticDepositLiabilities]	1,535	2,965
Total	$ 1,535	$ 2,965

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FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

12 Months Ended

Jun. 30, 2013

Financial Instruments With Off-Balance Sheet Risk

FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

NOTE 14 – FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK

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

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MINIMUM REGULATORY CAPITAL REQUIREMENTS

12 Months Ended

Jun. 30, 2013

Minimum Regulatory Capital Requirements

MINIMUM REGULATORY CAPITAL REQUIREMENTS

NOTE 12 – MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies.Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and Bank’s financial statements.Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and core and tangible capital (as defined) to tangible assets (as defined). Management believes as of June 30, 2013 and 2012, that the Bank met all capital adequacy requirements to which it was subject.

As of June 30, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables.There are no conditions or events since the notification that management believes have changed the Bank's category. The Company and Bank’s actual capital amounts and ratios as of June 30, 2013 and 2012 are also presented in the table.

												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
	(Dollars in thousands)
At June 30, 2013
Total Risk-Based Capital
(To Risk Weighted Assets)
Consolidated	$	53,507		15.25	%	$	28,078	≥		8.0	%	NA
Jefferson Federal Bank		49,773		14.18	%		28,075	≥		8.0	%		35,093	≥		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)
Consolidated		49,104		13.99	%		14,039	≥		4.0	%	NA
Jefferson Federal Bank		45,361		12.93	%		14,037	≥		4.0	%		21,056	≥		6.0	%
Tier 1 Capital
(To Average Assets)
Consolidated		49,104		9.97	%		19,697	≥		4.0	%	NA
Jefferson Federal Bank		45,361		9.21	%		19,695	≥		4.0	%		24,619	≥		5.0	%
At June 30, 2012
Total Risk-Based Capital
(To Risk Weighted Assets)
Consolidated	$	50,937		14.63	%	$	27,857	≥		8.0	%	NA
Jefferson Federal Bank		46,815		13.42	%		27,900	≥		8.0	%		34,875	≥		10.0	%
Tier 1 Capital
(To Risk Weighted Assets)
Consolidated		46,566		13.37	%		13,929	≥		4.0	%	NA
Jefferson Federal Bank		42,437		12.17	%		13,950	≥		4.0	%		20,925	≥		6.0	%
Tier 1 Capital
(To Average Assets)
Consolidated		46,566		9.03	%		20,637	≥		4.0	%	NA
Jefferson Federal Bank		42,437		8.23	%		20,634	≥		4.0	%		25,792	≥		5.0	%

The following table provides reconciliation between GAAP capital and the various categories of regulatory capital:

	Bank
	June 30,
	2013			2012
GAAP Capital	$	57,053		$	56,290
Adjustments:
Deferred Taxes		(10,652	)		(11,221	)
Unrealized gains		111			(1,095	)
Disallowed intangibles		(1,151	)		(1,537	)
Core, Tangible and Tier 1 Capital		45,361			42,437
Adjustments:
Allowance for losses		4,412			4,378
Total Capital	$	49,773		$	46,815

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Document and Entity Information (USD $)	12 Months Ended
	Jun. 30, 2013	Sep. 13, 2013	Dec. 30, 2012
Document And Entity Information
Entity Registrant Name	JEFFERSON BANCSHARES INC
Entity Central Index Key	0001222915
Document Type	10-K
Document Period End Date	Jun. 30, 2013
Amendment Flag	false
Current Fiscal Year End Date	--06-30
Is Entity a Well-known Seasoned Issuer?	No
Is Entity a Voluntary Filer?	No
Is Entity's Reporting Status Current?	Yes
Entity Filer Category	Smaller Reporting Company
Entity Public Float			$ 16,333,688
Entity Public Float, closing price per share			$ 2.70
Entity Common Stock, Shares Outstanding		6,597,739
Document Fiscal Period Focus	FY
Document Fiscal Year Focus	2013

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QUARTERLY FINANCIAL INFORMATION (Details) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended								12 Months Ended
	Jun. 30, 2013	Mar. 31, 2013	Dec. 31, 2012	Sep. 30, 2012	Jun. 30, 2012	Mar. 31, 2012	Dec. 31, 2011	Sep. 30, 2011	Jun. 30, 2013	Jun. 30, 2012
Quarterly Financial Information Details
Interest income	$ 4,820	$ 4,781	$ 4,931	$ 4,969	$ 5,235	$ 5,302	$ 5,775	$ 6,120	$ 19,501	$ 22,432
Interest expense	744	751	789	846	939	1,073	1,203	1,355	3,130	4,570
Net interest income	4,076	4,030	4,142	4,123	4,296	4,229	4,572	4,765	16,371	17,862
Provision for loan losses		200	300	300	600	600	5,687	2,986	800	9,873
Net interest income after provision for loan losses	4,076	3,830	3,842	3,823	3,696	3,629	(1,115)	1,779	15,571	7,989
Noninterest income	494	582	581	456	491	508	578	603	2,113	2,180
Noninterest expense	3,806	3,873	3,961	3,906	3,806	3,772	5,095	4,020	15,546	16,693
Earnings before income taxes	764	539	462	373	381	365	(5,632)	(1,638)	2,138	(6,524)
Income taxes	199	153	114	78	90	31	(1,965)	(680)	544	(2,524)
Net earnings	$ 565	$ 386	$ 348	$ 295	$ 291	$ 334	$ (3,667)	$ (958)	$ 1,594	$ (4,000)
Earnings per share, basic	$ 0.09	$ 0.06	$ 0.05	$ 0.05	$ 0.05	$ 0.05	$ (0.59)	$ (0.15)	$ 0.25	$ (0.64)
Earnings per share, diluted	$ 0.09	$ 0.06	$ 0.05	$ 0.05	$ 0.05	$ 0.05	$ (0.59)	$ (0.15)	$ 0.25	$ (0.64)

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RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

12 Months Ended

Jun. 30, 2013

Restrictions On Dividends Loans And Advances

RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

NOTE 13 – RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company.The total amount of dividends which may be paid at any date is generally limited to the retained earnings of the Bank, and loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis.

At June 30, 2013, the Bank’s retained earnings available for the payment of dividends was $0. Accordingly, $56,189 of the Company’s equity in the net assets of the Bank was restricted at June 30, 2013.Funds available for loans or advances by the Bank to the Company amounted to $5,705.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

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PREMISES AND EQUIPMENT, NET (Details Narrative) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013	Jun. 30, 2012
Premises And Equipment Net Details Narrative
Depreciation expense	$ 1,045	$ 1,055
Lease expense	19	49
Data processing service expense	$ 1,127	$ 1,075

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LOANS RECEIVABLE, NET (Details 8) (USD $) In Thousands, unless otherwise specified	12 Months Ended
	Jun. 30, 2013
Loans to directors, executive officers and associates of such person:
Balance, beginning	$ 839
Additions	25
Repayments	(2)
Balance, ending	$ 862

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SUBORDINATED DEBT (Details Narrative) (USD $) In Thousands, unless otherwise specified	0 Months Ended
	Dec. 13, 2006
Subordinated Debt Details Narrative
Issue of junior subordinated debenture to third party investors	$ 10,000
Common securites issued to State of Franklin by trust	310
Junior subordinated debentures owned by trust issued by State of Franklin	$ 10,310
Junior subordinated debentures, variable rate	3-month LIBOR
Junior subordinated debentures, variable rate spread	1.70%