UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

OR

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

For the transition period from __________ to __________

Commission File Number 00-50347

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

(423) 586-8421

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date:

At November 14, 2012, the registrant had 6,629,753 shares of common stock, $0.01 par value per share, outstanding.

INDEX

		Page
Item 1.	Financial Statements
	Consolidated Statements of Condition - Unaudited Three months ended September 30, 2012 and year ended June 30, 2012	3
	Consolidated Statements of Earnings - Unaudited Three months ended September 30, 2012 and 2011	4
	Consolidated Statements of Comprehensive Income – Unaudited Three months ended September 30, 2012 and 2011	5
	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited Three months ended September 30, 2012 and 2011	6
	Consolidated Statements of Cash Flows - Unaudited Three months ended September 30, 2012 and 2011	7
	Notes to Consolidated Financial Statements - Unaudited	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
SIGNATURES

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

(Dollars in Thousands)

	September 30,			June 30,
	2012			2012
Assets	(Unaudited)
Cash and cash equivalents	$	4,200		$	3,043
Interest-earning deposits		43,477			53,650
Investment securities classified as available for sale, net		86,089			83,483
Federal Home Loan Bank stock		4,735			4,735
Bank owned life insurance		6,921			6,861
Loans receivable, net of allowance for loan losses of $5,761 and $5,852		313,205			322,499
Loans held-for-sale		804			381
Premises and equipment, net		26,150			26,361
Foreclosed real estate, net		6,753			6,075
Accrued interest receivable:
Investments		325			383
Loans receivable		1,180			1,192
Deferred tax asset		10,468			10,676
Core deposit intangible		1,431			1,537
Other assets		1,529			2,054
Total Assets	$	507,267		$	522,930
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	53,968		$	52,436
Interest-bearing		353,386			371,446
Repurchase agreements		664			398
Federal Home Loan Bank advances		37,682			37,863
Subordinated debentures		7,273			7,245
Other liabilities		1,093			913
Accrued income taxes		34			—
Total liabilities		454,100			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 6,629,753 shares outstanding at September 30, 2012 and 6,631,989 shares outstanding at June 30, 2012		92			92
Additional paid-in capital		78,489			78,571
Unearned ESOP shares		(2,701	)		(2,809	)
Unearned compensation		(1,046	)		(1,046	)
Accumulated other comprehensive income		1,319			1,095
Retained earnings		8,361			8,067
Treasury stock, at cost (2,552,619 and 2,550,383 shares)		(31,347	)		(31,341	)
Total stockholders’ equity		53,167			52,629
Total liabilities and stockholders’ equity	$	507,267		$	522,930

See accompanying notes to financial statements.

3

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Share)

	Three Months Ended
	September 30,
	2012			2011
Interest income:
Interest on loans receivable	$	4,485		$	5,572
Interest on investment securities		410			484
Other interest		74			64
Total interest income		4,969			6,120
Interest expense:
Deposits		444			956
Repurchase agreements		1			2
Advances from FHLB		319			320
Subordinated debentures		82			77
Total interest expense		846			1,355
Net interest income		4,123			4,765
Provision for loan losses		300			2,986
Net interest income after provision for loan losses		3,823			1,779
Noninterest income:
Mortgage origination fee income		146			95
Service charges and fees		253			292
Gain on investments		4			26
Gain (loss) on sale of fixed assets		1			(19	)
Loss on sale of foreclosed real estate, net		(156	)		(16	)
BOLI increase in cash value		60			59
Other		148			166
Total noninterest income		456			603
Noninterest expense:
Compensation and benefits		1,680			1,606
Occupancy expense		362			362
Equipment and data processing expense		599			602
DIF premiums		207			202
Advertising		50			20
Legal and professional services		106			171
Valuation adjustment and expenses on OREO		211			404
Amortization of intangible assets		106			120
Other		585			533
Total noninterest expense		3,906			4,020
Earnings (loss) before income taxes		373			(1,638	)
Income taxes:
Current		8			—
Deferred		70			(680	)
Total income taxes		78			(680	)

4

Net earnings (loss)	$	295	$	(958	)
Net earnings (loss) per share, basic	$	0.05	$	(0.15	)
Net earnings (loss) per share, diluted	$	0.05	$	(0.15	)
Net earnings (loss)	$	295	$	(958	)
Other comprehensive income, net of income taxes:
Unrealized holding gain during the period, net of deferred income tax provision of $139 and $353, respectively		224		569
Comprehensive income (loss)	$	519	$	(389	)

See accompanying notes to financial statements.

5

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended September 30, 2012 and 2011

(Dollars in Thousands)

						Unallocated						Accumulated
			Additional			Common						Other							Total
	Common		Paid-in			Stock in			Unearned			Comprehensive		Retained		Treasury			Stockholders’
	Stock		Capital			ESOP			Compensation			Income		Earnings		Stock			Equity
Balance at June 30, 2012	$	92	$	78,571		$	(2,809	)	$	(1,046	)	$	1,095	$	8,067	$	(31,341	)	$	52,629
Net earnings		—		—			—			—			—		294		—			294
Other comprehensive income		—		—			—			—			224		—		—			224
Shares committed to be released by the ESOP		—		(84	)		108			—			—		—		—			24
Stock options expensed		—		2			—			—			—		—		—			2
Purchase of common stock (2,236 shares)		—		—			—			—			—		—		(6	)		(6	)
Balance at September 30, 2012	$	92	$	78,489		$	(2,701	)	$	(1,046	)	$	1,319	$	8,361	$	(31,347	)	$	53,167

						Unallocated						Accumulated
			Additional			Common						Other								Total
	Common		Paid-in			Stock in			Unearned			Comprehensive		Retained			Treasury			Stockholders’
	Stock		Capital			ESOP			Compensation			Income		Earnings			Stock			Equity
Balance at June 30, 2011	$	92	$	78,895		$	(3,241	)	$	(1,019	)	$	459	$	12,067		$	(31,334	)	$	55,919
Net earnings		—		—			—			—			—		(958	)		—			(958	)
Other comprehensive income		—		—			—			—			569		—			—			569
Shares committed to be released by the ESOP		—		(76	)		108			—			—		—			—			32
Purchase of common stock (2,133 shares)		—		—			—			—			—		—			(6	)		(6	)
Balance at September 30, 2011	$	92	$	78,819		$	(3,133	)	$	(1,019	)	$	1,028	$	11,109		$	(31,340	)	$	55,556

6

Jefferson Bancshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Three Months Ended
	September 30,
	2012			2011
Cash flows from operating activities:
Net earnings	$	295		$	(958	)
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		24			32
Depreciation and amortization expense		459			485
Amortization of premiums (discounts), net on investment securities		141			(71	)
Provision for loan losses		300			2,986
Amortization of deferred loan fees, net		(52	)		(43	)
(Gain) loss on sale of investment securities		(4	)		(26	)
(Gain) loss on sale of foreclosed real estate, net		156			16
(Gain) loss on sale of fixed assets, net		(1	)		19
Deferred tax benefit		70			(680	)
Stock options expensed		1			—
Originations of mortgage loans held for sale		(6,436	)		(5,661	)
Proceeds from sale of mortgage loans		6,013			3,973
Increase in cash value of life insurance		(60	)		(59	)
Decrease (increase) in:
Accrued interest receivable		70			(3	)
Other assets		525			1,304
Increase (decrease) in other liabilities and accrued income taxes		214			(988	)
Net cash provided by (used for) operating activities		1,715			326
Cash flows used for investing activities:
Loan originations, net of principal collections		7,254			5,632
Investment securities classifed as available-for-sale:
Proceeds from maturities, calls and prepayments		11,468			30,216
Proceeds from sale		—			—
Purchase of securities		(13,849	)		(34,331	)
Proceeds from sale of premises and equipment		—			19
Purchase of premises and equipment		(48	)		(25	)
Proceeds from sale of (additions to) foreclosed real estate, net		877			230
Net cash provided by (used for) investing activities		5,702			1,741
Cash flows from financing activities:
Net decrease in deposits		(16,526	)		(10,132	)
Net increase (decrease) in repurchase agreements		266			(170	)
Repayment of FHLB advances		(167	)		(6	)
Purchase of treasury stock		(6	)		(6	)
Net cash provided by (used for) financing activities		(16,433	)		(10,314	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(9,016	)		(8,247	)
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	$	47,677		$	32,301
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	452		$	982
Interest on borrowed funds	$	263		$	263
Interest on subordinated debentures	$	54		$	49
Income taxes		—			—
Real estate acquired in settlement of loans	$	2,112		$	1,467

See accompanying notes to financial statements.

7

Notes To Consolidated Financial Statements

(1) Basis of Presentation

The condensed consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the “Company” or “Jefferson Bancshares”) and its wholly-owned subsidiary, Jefferson Federal Bank (the “Bank” or “Jefferson Federal”). The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the three months ended September 30, 2012 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2012, which was filed with the Securities and Exchange Commission on September 21, 2012 and amended on October 16, 2012. All dollar amounts, other than per-share amounts, are in thousands unless otherwise noted.

(2) Principles of Consolidation

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

(3) Use of Estimates

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

(4) Limitation on Capital Distributions

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

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

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

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential

8

common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method. For the three months ended September 30, 2012, stock options to purchase 360,638 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:

	Weighted-Average Shares
	Outstanding for the
	Three Months Ended
	September 30,
	2012		2011
Weighted average number of common shares used in computing basic earnings per common share		6,261,233		6,230,266
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		6,261,233		6,230,266

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

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

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

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

9

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 and lending relationships which have outstanding principal balances of $500,000 or more and which are classified as either substandard, doubtful or loss according to the loan grading policy for impairment. Troubled debt restructurings (“TDRs”) are also considered to be impaired, except for those that have been performing under the new terms for at least six consecutive months.

A TDR occurs when the Bank grants a concession to a borrower with financial difficulties that it would not otherwise consider. The Bank has adopted the guidance and definitions found in ASU 2011-02 in determining if a borrower is experiencing financial difficulties and if a concession has been granted. The majority of the Bank’s TDRs involve a modification involving changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances. A TDR may be non-accruing or it may accrue interest. A nonaccrual TDR will be returned to accruing status at such time when the borrower successfully performs under the new terms for at least six consecutive months. The Bank’s TDRs totaled $10.1 million at September 30, 2012 compared to $10.8 million at June 30, 2012.

10

The following table presents the Bank’s loans classified as TDRs by loan type and accrual status as of September 30, 2012:

	September 30, 2012
	Accrual		Non-accrual		Total
	Status		Status		TDRs
Residential Mortgage	$	896	$	170	$	1,066
Multi-family		628		5,155		5,783
Construction and land development		—		32		32
Non-residential real estate		—		1,933		1,933
Owner occupied		327		388		715
Commercial		122		306		428
HELOC and Junior Lien		171		—		171
Total	$	2,144	$	7,984	$	10,128

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

The evaluation of the allowance for loan and lease losses is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The Company 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.

11

The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2012:

	Resid. Mtg			Multi-family		Constr and land dev.		Non-residential real estate			Owner occupied			Comm’l			HELOC and junior lien		Consumer			Total
Allowance for Credit Losses:
Balance at June 30, 2012	$	699		$	596	$	777	$	1,047		$	347		$	2,130		$	234	$	22		$	5,852
Charge Offs		(465	)		—		—		—			—			(312	)		—		(6	)		(783	)
Recoveries		—			—		2		—			5			382			—		3			392
Provision		457			72		229		(207	)		(30	)		(322	)		98		3			300
Balance at September 30, 2012	$	691		$	668	$	1,008	$	840		$	322		$	1,878		$	332	$	22		$	5,761
Ending balance, Individually Evaluated	$	287		$	429	$	446	$	513		$	68		$	854		$	238	$	—		$	2,835
Ending balance, Collectively Evaluated	$	404		$	239	$	562	$	327		$	254		$	1,024		$	94	$	22		$	2,926
Loans:
Balance at September 30, 2012	$	91,244		$	11,310	$	29,751	$	48,836		$	71,408		$	43,983		$	18,215	$	4,512		$	319,259
Ending balance, Individually Evaluated	$	1,944		$	5,783	$	880	$	3,356		$	708		$	2,739		$	281	$	—		$	15,691
Ending balance, Collectively Evaluated	$	89,300		$	5,527	$	28,871	$	45,480		$	70,700		$	41,244		$	17,934	$	4,512		$	303,568

12

The following table is an aging analysis of the loan portfolio at September 30, 2012:

	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total Current		Total loans receivable
Residential Mortgage	$	292	$	—	$	3,724	$	4,016	$	87,228	$	91,244
Multi-family		92		4		5,155		5,251		6,059		11,310
Construction/land development		457		43		2,118		2,618		27,133		29,751
Non-residential real estate		2,465		—		3,327		5,792		43,044		48,836
Owner occupied		444		—		1,439		1,883		69,525		71,408
Commercial		114		90		1,254		1,458		42,525		43,983
HELOC and Junior Lien		75		—		231		306		17,909		18,215
Consumer		35		—		5		40		4,472		4,512
Total	$	3,974	$	137	$	17,253	$	21,364	$	297,895	$	319,259

The following table summarizes the credit risk profile by internally assigned grade at September 30, 2012:

	Residential Mortgage		Multi-family		Constr and land dev.		Non- residential real estate		Owner occupied		Comm’l		HELOC and Junior Lien		Consumer		Total
Grade:
Pass	$	82,333	$	5,431	$	25,507	$	29,116	$	63,073	$	39,312	$	16,713	$	4,086	$	265,571
Watch		2,269		—		1,444		13,564		6,361		1,319		89		414		25,460
Special mention		—		—		—		—		—		—		—		—		—
Substandard		6,642		5,879		2,800		6,156		1,974		3,352		1,413		12		28,228
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total:	$	91,244	$	11,310	$	29,751	$	48,836	$	71,408	$	43,983	$	18,215	$	4,512	$	319,259

13

The following table summarizes the composition of impaired loans, the associated specific reserves, and interest income recognized on impaired loans at September 30, 2012:

	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized
With an allowance recorded:
Residential Mortgage	$	1,657	$	1,944	$	287	$	10
Multi-family		5,353		5,783		429		15
Construction and land development		434		880		446		5
Non-residential real estate		2,843		3,356		513		3
Owner occupied		640		708		68		—
Commercial		1,885		2,739		854		57
HELOC and Junior Lien		44		281		238		2
Consumer		—		—		—		—
Total	$	12,856	$	15,691	$	2,835	$	92
With no related allowance:
Residential Mortgage	$	1,476	$	1,476	$	—	$	22
Multi-family		—		—		—		—
Construction and land development		1,758		1,758		—		6
Non-residential real estate		3,390		3,390		—		41
Owner occupied		585		585		—		—
Commercial		816		816		—		—
HELOC and Junior Lien		673		673				5
Consumer		—		—		—		—
Total	$	8,698	$	8,698	$	—	$	74
Total:
Residential Mortgage	$	3,133	$	3,420	$	287	$	32
Multi-family		5,353		5,783		429		15
Construction and land development		2,192		2,638		446		11
Non-residential real estate		6,233		6,746		513		44
Owner occupied		1,225		1,293		68		—
Commercial		2,701		3,555		854		57
HELOC and Jr Lien		717		954		238		7
Consumer		—		—		—		—
Total	$	21,554	$	24,389	$	2,835	$	166
Average impaired loans for the three months ended September 30, 2012	$	24,625

(7) Financial Instruments With Off-Balance Sheet Risk

Jefferson Bancshares is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments generally include commitments to originate mortgage loans.

14

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

At September 30, 2012, we had approximately $10.4 million in commitments to extend credit, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $4.5 million in unused letters of credit and approximately $30.5 million in unused lines of credit.

(8) Dividends

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

(9) Stock Incentive Plans

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

The table below summarizes the status of the Company’s stock option plans as of September 30, 2012.

	Three Months Ended
	September 30, 2012
			Weighted-
			average
	Shares		exercise price
Outstanding at beginning of period		340,638	$	13.69
Granted during the three-month period		20,000	$	1.97
Options forfeited		—		—
Options exercised		—		—
Outstanding at September 30, 2012		360,638