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, 2013

OR

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

For the transition period from ________ to ________

Commission File Number 00-50347

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee	45-0508261
(State or other jurisdiction of 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, 2013, the registrant had 6,595,301 shares of common stock, $0.01 par value per share, outstanding.

INDEX

		Page
PART I.  FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Condition - Unaudited Three months ended September 30, 2013 and year ended June 30, 2013	3
	Consolidated Statements of Earnings - Unaudited Three months ended September 30, 2013 and 2012	4
	Consolidated Statements of Comprehensive Income – Unaudited Three months ended September 30, 2013 and 2012	5
	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited Three months ended September 30, 2013 and 2012	6
	Consolidated Statements of Cash Flows - Unaudited Three months ended September 30, 2013 and 2012	7
	Notes to Consolidated Financial Statements - Unaudited	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	34
Item 4.	Controls and Procedures	34
PART II.  OTHER INFORMATION
Item 1.	Legal Proceedings	35
Item 1A.	Risk Factors	35
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36

2 

PART I.   FINANCIAL INFORMATION

Item 1.  Financial Statements

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Balance Sheets

(Dollars in Thousands)

	September 30, 2013			June 30, 2013
Assets	(Unaudited)
Cash and cash equivalents	$	10,601		$	8,837
Interest-earning deposits		12,992			15,677
Investment securities classified as available for sale, net		100,960			96,024
Federal Home Loan Bank stock		4,735			4,735
Bank owned life insurance		7,161			7,100
Loans receivable, net of allowance for loan losses of $4,993 and $5,660		313,995			321,299
Loans held-for-sale		75			97
Premises and equipment, net		25,465			25,636
Foreclosed real estate, net		5,882			5,433
Accrued interest receivable:
Investments		339			349
Loans receivable		1,003			1,060
Deferred tax asset		10,836			10,911
Core deposit intangible		1,059			1,151
Other assets		3,462			4,719
Total Assets	$	498,565		$	503,028
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	56,350		$	54,765
Interest-bearing		339,622			344,877
Repurchase agreements		916			551
Federal Home Loan Bank advances		37,418			37,626
Subordinated debentures		7,386			7,358
Other liabilities		3,557			4,826
Total liabilities		445,249			450,003
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 6,597,739 shares outstanding at
September 30, 2013 and 6,601,091 shares outstanding at June 30, 2013		92			92
Additional paid-in capital		78,256			78,302
Unearned ESOP shares		(2,268	)		(2,376	)
Unearned compensation		(1,046	)		(1,046	)
Accumulated other comprehensive income		(361	)		(111	)
Retained earnings		10,159			9,661
Treasury stock, at cost (2,584,632 and 2,581,280 shares)		(31,516	)		(31,497	)
Total stockholders’ equity		53,316			53,025
Total liabilities and stockholders’ equity	$	498,565		$	503,028

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,
	2013			2012
Interest income:
Interest on loans receivable	$	4,073		$	4,485
Interest on investment securities		468			410
Other interest		60			74
Total interest income		4,601			4,969
Interest expense:
Deposits		336			444
Repurchase agreements		—			1
Advances from FHLB		229			319
Subordinated debentures		80			82
Total interest expense		645			846
Net interest income		3,956			4,123
Provision for loan losses		—			300
Net interest income after provision for loan losses		3,956			3,823
Noninterest income:
Mortgage origination fee income		48			146
Service charges and fees		256			253
Gain on investments		—			4
Gain (loss) on sale of fixed assets		—			1
Gain (loss) on sale of foreclosed real estate, net		(24	)		(156	)
BOLI increase in cash value		61			60
Other		153			148
Total noninterest income		494			456
Noninterest expense:
Compensation and benefits		1,728			1,680
Occupancy expense		334			362
Equipment and data processing expense		610			599
Deposit insurance premiums		170			207
Advertising		87			50
Legal and professional services		87			106
Valuation adjustment and expenses on OREO		100			211
Amortization of intangible assets		92			106
Other		514			585
Total noninterest expense		3,722			3,906
Earnings before income taxes		728			373
Income taxes:
Current		—			8
Deferred		230			70
Total income taxes		230			78
Net earnings	$	498		$	295
Net earnings per share, basic	$	0.08		$	0.05
Net earnings per share, diluted	$	0.08		$	0.05

4

Jefferson Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income
(Unaudited)
(Dollars in Thousands)
	Three Months Ended
	September 30,
	2013			2012
Net earnings (loss)	$	498		$	295
Other comprehensive income:
Unrealized holding gain (loss)		(406	)		362
Income tax benefit (expense)		156			(138	)
Comprehensive income	$	248		$	519

See accompanying notes to financial statements.

5

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended September 30, 2013 and 2012

(Dollars in Thousands)

						Unallocated						Accumulated
			Additional			Common						Other								Total
	Common		Paid-in			Stock in			Unearned			Comprehensive			Retained		Treasury			Stockholders’
	Stock		Capital			ESOP			Compensation			Income			Earnings		Stock			Equity
Balance at June 30, 2013	$	92	$	78,302		$	(2,376	)	$	(1,046	)	$	(111	)	$	9,661	$	(31,497	)	$	53,025
Net earnings		—		—			—			—			—			498		—			498
Other comprehensive income		—		—			—			—			(250	)		—		—			(250	)
Shares committed to be released by the ESOP		—		(47	)		108			—			—			—		—			61
Stock options expensed		—		1			—			—			—			—		—			1
Purchase of common stock (3,352 shares)		—		—			—			—			—			—		(19	)		(19	)
Balance at September 30, 2013	$	92	$	78,256		$	(2,268	)	$	(1,046	)	$	(361	)	$	10,159	$	(31,516	)	$	53,316

						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		—		—			—			—			—		295		—			295
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

See accompanying notes to financial statements.

6

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)

	Three Months Ended September 30,
	2013			2012
Cash flows from operating activities:
Net earnings	$	498		$	295
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		61			24
Depreciation and amortization expense		456			459
Amortization of premiums (discounts), net on investment securities		247			141
Provision for loan losses		—			300
Amortization of deferred loan fees, net		(29	)		(52	)
(Gain) loss on sale of investment securities		—			(4	)
(Gain) loss on sale of foreclosed real estate, net		24			156
(Gain) loss on sale of fixed assets, net		—			(1	)
Deferred tax expense (benefit)		230			70
Stock options expensed		1			1
Originations of mortgage loans held for sale		(1,593	)		(6,436	)
Proceeds from sale of mortgage loans		1,615			6,013
Increase in cash value of life insurance		(61	)		(60	)
Decrease (increase) in:
Accrued interest receivable		67			70
Other assets		1,257			525
Increase (decrease) in other liabilities and accrued income taxes		(1,269	)		214
Net cash provided by (used for) operating activities		1,504			1,715
Cash flows used for investing activities:
Loan originations, net of principal collections		6,468			7,254
Investment securities classifed as available-for-sale:
Proceeds from maturities, calls and prepayments		5,310			11,468
Proceeds from sale		—			—
Purchase of securities		(10,900	)		(13,849	)
Proceeds from sale of premises and equipment		—			—
Purchase of premises and equipment		(88	)		(48	)
Proceeds from sale of (additions to) foreclosed real estate, net		265			877
Net cash provided by (used for) investing  activities		1,055			5,702
Cash flows from financing activities:
Net decrease in deposits		(3,670	)		(16,526	)
Net increase (decrease) in repurchase agreements		365			266
Repayment of FHLB advances		(156	)		(167	)
Purchase of treasury stock		(19	)		(6	)
Net cash provided by (used for) financing activities		(3,480	)		(16,433	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(921	)		(9,016	)
Cash, cash equivalents and interest-earning deposits at beginning of period		24,514			56,693
Cash, cash equivalents and interest-earning deposits at end of period	$	23,593		$	47,677
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	331		$	452
Interest on borrowed funds	$	170		$	263
Interest on subordinated debentures	$	52		$	54
Income taxes		—			—
Real estate acquired in settlement of loans	$	810		$	2,112

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, 2013 are not necessarily indicative of the results which may be expected for the entire fiscal year or any other period. These unaudited consolidated financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2013, which was filed with the Securities and Exchange Commission on September 30, 2013.  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, the 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) a total risk-based capital ratio of less than 8.0%; (ii) a 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.

8

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares.  Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued.  Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.  For the three months ended September 30, 2013, stock options to purchase 360,638 shares were not included in the computation of diluted net income per share as their effect would have been anti-dilutive.  The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:

	Weighted-Average Shares Outstanding for the Three Months Ended September 30,
	2013		2012
Weighted average number of common shares used in computing basic earnings per common share		6,272,957		6,261,233
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		6,272,957		6,261,233

(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.  

9

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 $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 2011-02  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 $4.6 million at September 30, 2013 compared to $9.1 million at June 30, 2013.

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

	September 30, 2013
	Accrual		Non-accrual		Total
	Status		Status		TDRs
Residential mortgage	$	958	$	—	$	958
Multi-family		620		—		620
Construction and land development		144		—		144
Non-residential real estate		—		1,969		1,969
Owner occupied		184		350		534
Commercial		122		210		332
HELOC and junior Lien		—		—		—
Total	$	2,028	$	2,529	$	4,557

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

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

10

The following table summarizes the activity in the allowance for loan losses for the three months ended September 30, 2013:

	Resid. Mtg			Multi- family			Constr and land dev.			Non- residential real estate		Owner occupied		Comm’l			HELOC and junior lien		Consumer			Total
Allowance for Credit Losses:
Balance at June 30, 2013	$	665		$	475		$	491		$	981	$	347	$	2,481		$	168	$	52		$	5,660
Charge Offs		(15	)		(398	)		(29	)		—		—		(315	)		—		(7	)		(764	)
Recoveries		—			—			3			—		66		22			—		6			97
Provision		192			(2	)		(69	)		234		42		(418	)		35		(14	)		—
Balance at September 30, 2013	$	842		$	75		$	396		$	1,215	$	455	$	1,770		$	203	$	37		$	4,993
Ending balance,
Individually Evaluated	$	—		$	—		$	—		$	563	$	—	$	339		$	—	$	—		$	902
Ending balance,
Collectively Evaluated	$	842		$	75		$	396		$	652	$	455	$	1,431		$	203	$	37		$	4,091
Loans:
Balance at September 30, 2013	$	80,872		$	9,255		$	31,733		$	49,190	$	67,619	$	59,042		$	18,086	$	3,546		$	319,343
Ending balance,
Individually Evaluated	$	—		$	—		$	—		$	1,800	$	—	$	1,481		$	—	$	—		$	3,281
Ending balance,
Collectively Evaluated	$	80,872		$	9,255		$	31,733		$	47,390	$	67,619	$	57,561		$	18,086	$	3,546		$	316,062

The following table is an aging analysis of the loan portfolio at September 30, 2013:

	30-59 days past due		60-89 days past due		90 or more days past due and still accruing		Nonaccrual		Total past due and nonaccrual		Total Current		Total loans receivable
Residential Mortgage	$	32	$	—	$	—	$	1,967	$	1,999	$	78,873	$	80,872
Multi-family		—		—		—		3		3		9,252		9,255
Construction/land development		—		—		—		968		968		30,765		31,733
Non-residential real estate		78		—		—		2,742		2,820		46,370		49,190
Owner occupied		203		—		—		834		1,037		66,582		67,619
Commercial		15		—		—		1,813		1,828		57,214		59,042
HELOC and Junior Lien		63		—		—		64		127		17,959		18,086
Consumer		6		—		—		11		17		3,529		3,546
Total	$	397	$	—	$	—	$	8,402	$	8,799	$	310,544	$	319,343

11

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

	Residential Mortgage			Multi- family			Constr and land dev.			Non- residential real estate			Owner occupied			Comm’l			HELOC and Junior Lien			Consumer			Total
Grade:
Pass		$	74,133		$	8,544		$	28,073		$	39,117		$	64,695		$	56,164		$	17,571		$	3,138		$	291,435
Watch			3,333			620			1,716			6,409			1,624			934			261			401			15,298
Special mention			—			—			—			—			—			—			—			—			—
Substandard			3,406			91			1,944			3,664			1,300			1,944			254			7			12,610
Doubtful			—			—			—			—			—			—			—			—			—
Loss			—			—			—			—			—			—			—			—			—
Total:		$	80,872		$	9,255		$	31,733		$	49,190		$	67,619		$	59,042		$	18,086		$	3,546		$	319,343

12

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

	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized
With an allowance recorded:
Residential mortgage	$	—	$	—	$	—	$	—
Multi-family		—		—		—		—
Construction and land development		—				—		—
Non-residential real estate		1,237		1,800		563		—
Owner occupied		—		—		—		—
Commercial		1,142		1,481		339		—
HELOC and junior lien		—		—		—		—
Consumer		—		—		—		—
Total	$	2,379	$	3,281	$	902	$	—
With no related allowance:
Residential mortgage	$	792	$	792	$	—	$	9
Multi-family		620		620		—		12
Construction and land development		1,407		1,407		—		6
Non-residential real estate		1,418		1,418		—		11
Owner occupied		810		810		—		—
Commercial		—		—		—		—
HELOC and junior lien		415		415		—		3
Consumer		—		—		—		—
Total	$	5,462	$	5,462	$	—	$	41
Total:
Residential mortgage	$	792	$	792	$	—	$	9
Multi-family		620		620		—		12
Construction and land development		1,407		1,407		—		6
Non-residential real estate		2,655		3,218		563		11
Owner occupied		810		810		—		—
Commercial		1,142		1,481		339		—
HELOC and junior lien		415		415		—		3
Consumer		—		—		—		—
Total	$	7,841	$	8,743	$	902	$	41
Average impaired loans for the three months ended September 30, 2013	$	11,590

13

(7) Financial Instruments With Off-Balance Sheet Risk

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

At September 30, 2013, we had approximately $18.6 million in commitments to extend credit, consisting of commitments to fund real estate loans.  In addition to commitments to originate loans, at September 30, 2013, we had $310,000 in unused letters of credit and approximately $29.5 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, 2013:

	Three Months Ended September 30, 2013
			Weighted-
			average
	Shares		exercise price
Outstanding at beginning of period		360,638	$	13.04
Granted during the three-month period		—		—
Options forfeited		—		—
Options exercised		—		—
Outstanding at September 30, 2013		360,638	$	13.04
Options exercisable at September 30, 2013		344,638	$	13.55

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The following information applies to options outstanding at September 30, 2013:

Number outstanding		360,638
Range of exercise prices	$	1.97 - $13.69
Weighted-average exercise price	$	13.04
Weighted-average remaining contractual life		0.8
Number of options remaining for future issuance		338,112

The fair value of stock options granted is amortized as compensation expense on a straight-line basis over the five year vesting period of the grant.  Compensation expense related to stock options was approximately $1,300 for the three months ended September 30, 2013.  

(10)  Investment Securities

Investment securities are summarized as follows:

At September 30, 2013
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	24,904		$	67	$	(551	)	$	24,420
Mortgage-backed		68,068			937		(881	)		68,124
Municipals		7,967			165		(216	)		7,916
Other Securities		607			—		(107	)		500
Total securities available-for-sale	$	101,546		$	1,169	$	(1,755	)	$	100,960
Weighted-average rate		1.97	%
Pledged at September 30, 2013	$	16,395

At June 30, 2013
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	21,985		$	88	$	(420	)	$	21,653
Mortgage-backed		65,607			1,096		(835	)		65,868
Municipals		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	%
Pledged at June 30, 2013	$	11,017

15

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

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
September 30, 2013
Federal agency securities	$	13,846	$	(551	)	$	—	$	—		$	13,846	$	(551	)
Mortgage-backed securities		29,345		(864	)		818		(17	)		30,163		(881	)
Municipal securities		2,325		(167	)		1,416		(49	)		3,741		(216	)
Other securities		—		—			500		(107	)		500		(107	)
	$	45,516	$	(1,582	)	$	2,734	$	(173	)	$	48,250	$	(1,755	)

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

Federal Agency Securities – The unrealized losses of $551,000 for these thirteen 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 will be required 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 September 30, 2013.

GSE Residential Mortgage-Backed Securities – The unrealized losses of $864,000 for these thirty-eight 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 will be required 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 September 30, 2013.

Private-Label Residential Mortgage-Backed Securities – The unrealized loss of $17,000 for this private-label mortgage-backed security is primarily driven by higher projected collateral losses, wider credit spreads and changes in interest rates as indicated by the semi-annual independent valuation of the investment. The valuation methodology used is a future cash flow analysis which is built upon a model based on collateral-specific assumptions as they relate to the underlying loans. Given the expected improvement in the future performances of the expected cash flow, the unrealized losses are not deemed to be attributable to credit quality. Accordingly it is expected that the security would not be settled at a price less than the amortized bases of the Company’s investment. Because the decline in market value is attributable to higher projected collateral losses, wider credit spreads and changes in interest rates and not credit quality, the Company expects to recover the entire amortized cost bases of this security.

16

Municipal Securities – The unrealized losses of $216,000 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 will be required 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 September 30, 2013.

Other Securities – The unrealized loss of $107,000 on this collateralized debt obligation (“CDO”) was a result of updated variables and inputs that comprise the model used in the semi-annual independent valuation of this security. The collateral for the CDO investment is comprised of trust preferred securities and senior and subordinated debt issued by banks, insurance companies, REITs, real estate operating companies and homebuilding companies. The CDO is valued by evaluating all relevant credit and structural aspects of the instrument, determining appropriate performance assumptions and performing a discounted cash flow analysis. Given the expected improvement in the future performance of the collateral, the unrealized loss is not deemed to be attributable to credit quality. Since the Company does not intend to sell this investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at September 30, 2013.

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

					Weighted
	Amortized		Fair		Average
	Cost		Value		Yield
Within 1 year	$	6,780	$	6,810		1.27	%
Over 1 year through 5 years		6,002		6,024		1.31	%
After 5 years through 10 years		25,765		25,417		1.77	%
Over 10 years		62,999		62,709		2.19	%
	$	101,546	$	100,960		1.97	%

(11) Fair Value Disclosures

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

17

Level 1

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

Level 2

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

Level 3

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

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

Investment Securities Available for Sale

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

Impaired Loans

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

18

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

	September 30, 2013
							Total Carrying
							Amount in		Assets/Liabilities
							Statement of		Measured at
Description	Level 1		Level 2		Level 3		Financial Condition		Fair Value
Securities available for sale	—	$	100,030	$	930	$	100,960	$	100,960

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

	September 30, 2013
							Total Gains
Description	Level 1		Level 2		Level 3		(Losses)
Impaired Loans		—		—	$	3,403	$	(131	)
Other real estate owned		—		—		5,882		—

19

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

	September 30, 2013						June 30, 2013
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Financial assets:
Cash and due from banks and interest-earning deposits with banks	$	23,593		$	23,593		$	24,514		$	24,514
Available-for-sale securities		100,960			100,960			96,024			96,024
Federal Home Loan Bank stock		4,735			4,735			4,735			4,735
Bank owned life insurance		7,161			7,161			7,100			7,100
Loans receivable, net		313,995			319,956			321,299			329,268
Accrued interest receivable		1,342			1,342			1,409			1,409
Loans held-for-sale		75			75			97			97
Financial liabilities:
Deposits		(395,972	)		(387,696	)		(399,642	)		(391,442	)
Borrowed funds		(38,334	)		(39,136	)		(38,177	)		(39,505	)
Subordinated debentures		(7,386	)		(4,975	)		(7,358	)		(4,950	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			18,553			—			15,330
Unused letters of credit		—			310			—			320
Unused lines of credit		—			29,508			—			27,663

The following methods and assumptions were used by the Company 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 approximate fair value.

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

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

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

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

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

20

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

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

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

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

(12) Subordinated Debt

In connection with its October 2008 acquisition of State of Franklin Bancshares, Inc. (“State of Franklin”), the Company acquired State of Franklin Statutory Trust II (the “Trust”) and assumed the Trust’s obligation with respect to certain capital securities described below.  On December 13, 2006, State of Franklin issued $10.3 million of junior subordinated debentures to the Trust, a Delaware business trust wholly owned by State of Franklin.  The Trust (a) sold $10.0 million of capital securities through its underwriters to institutional investors and upstreamed the proceeds to State of Franklin and (b) issued $310,000 of common securities to State of Franklin.  The sole assets of the Trust are the $10.3 million of junior subordinated debentures issued by State of Franklin. The securities are redeemable at par after January 30, 2012, and have a final maturity of January 30, 2037.  The interest is payable quarterly at a floating rate equal to 3-month LIBOR plus 1.7%.

On September 25, 2013, the Company notified the Trustee of the Trust that, beginning with the October 30, 2013 interest payment period, the Company would end its prior election to defer all payments of interest on the junior subordinated debentures and pay all deferred interest and additional interest due on the junior subordinated debentures as of October 30, 2013.

(13) Subsequent Events

The Company has evaluated subsequent events for potential recognition and disclosure for the three months ended September 30, 2013.  No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

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

Management’s discussion and analysis of financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Jefferson Bancshares. The information contained in this section should be read in conjunction with the financial statements and accompanying notes thereto. For further information, refer to the financial statements and footnotes included in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013, which was filed with the Securities and Exchange Commission on September 30, 2013.

21

General

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

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

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

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

Private Securities Litigation Reform Act Safe Harbor Statement

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

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain.  These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of the Company’s loan or investment portfolios. Additional factors that may affect our results are discussed in the reports we file with the SEC, including our Annual Report on Form 10-K for the year ended June 30, 2013 under “Item 1A. Risk Factors.”  These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.  Jefferson Bancshares assumes no obligation to update any forward-looking statements.

Results of Operations for the Three Months Ended September 30, 2013 and 2012

Net Income

For the three months ended September 30, 2013, net income totaled $498,000, or $0.08 per diluted share, compared to $295,000, or $0.05 per diluted share, for the three months ended September 30, 2012.  The improvement in net income is largely the result of lower provision for loan losses and lower noninterest expense more than offsetting a decrease in net interest income during the quarter ended September 30, 2013.  

22

	Three Months Ended September 30,
	2013			2012
	(Dollars in thousands,
	except per share data)
Net earnings	$	498		$	295
Net earnings per share, basic	$	0.08		$	0.05
Net earnings per share, diluted	$	0.08		$	0.05
Return on average assets (annualized)		0.40	%		0.23	%
Return on average equity (annualized)		3.74	%		2.21	%

Net Interest Income

Net interest income before loan loss provision decreased $167,000, or 4.1%, to $4.0 million for the three months ended September 30, 2013 compared to $4.1 million for the same period in 2012.   The interest rate spread and net interest margin for the quarter ended September 30, 2013 were 3.49% and 3.56%, respectively, compared to 3.48% and 3.57%, respectively, for the same period in 2012.

The following table summarizes changes in interest income and expense for the three month periods ended September 30, 2013 and 2012:

	Three Months
	Ended
	September 30,
	2013		2012		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	4,073	$	4,485	$	(412	)		(9.2	%)
Investment securities		468		410		58			14.1	%
Interest-earning deposits		10		24		(14	)		(58.3	%)
FHLB stock		50		50		—			0.0	%
Total interest income		4,601		4,969		(368	)		(7.4	%)
Interest expense:
Deposits		336		444		(108	)		(24.3	%)
Repurchase agreements		—		1		(1	)		(100.0	%)
Borrowings		229		319		(90	)		(28.2	%)
Subordinated notes & debentures		80		82		(2	)		(2.4	%)
Total interest expense		645		846		(201	)		(23.8	%)
Net interest income	$	3,956	$	4,123	$	(167	)		(4.1	%)

23

The following table summarizes average balances and average yields and costs for the three months ended September 30, 2013 and 2012.  

	Three Months Ended September,
	2013					2012
	Average		Yield/			Average		Yield/
	Balance		Cost			Balance		Cost
	(Dollars in thousands)
Loans	$	325,219		4.97	%	$	327,245		5.44	%
Investment securities		98,078		1.95	%		83,961		2.01	%
Interest-earning deposits		14,206		0.28	%		43,283		0.22	%
FHLB stock		4,735		4.19	%		4,735		4.19	%
Deposits		345,324		0.39	%		361,490		0.49	%
FHLB advances		37,556		2.42	%		37,831		3.35	%
Repurchase agreements		1,054		0.00	%		833		0.48	%
Subordinated debentures		7,367		4.31	%		7,256		4.48	%

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

	Three Months
	Ended September 30,
	2013 Compared to 2012
	Increase (Decrease)
	Due To
	Volume			Rate			Net
	(In thousands)
Interest income:
Loans receivable	$	(28	)	$	(384	)	$	(412	)
Investment securities		73			(15	)		58
Daily interest-earning deposits and other interest-earning assets		(19	)		5			(14	)
Total interest-earning assets		26			(394	)		(368	)
Interest expense:
Deposits		(19	)		(89	)		(108	)
FHLB advances		(2	)		(88	)		(90	)
Repurchase agreements		0			(1	)		(1	)
Subordinatd debentures		1			(3	)		(2	)
Total interest-bearing liabilities		(20	)		(181	)		(201	)
Net change in interest income	$	46		$	(213	)	$	(167	)

Total interest income decreased $368,000, or 7.4%, to $4.6 million for the three months ended September 30, 2013 primarily due to lower market interest rates. The average yield on interest-earning assets was 4.14% for the three months ended September 30, 2013 compared to 4.31% for the same period in 2012. The average balance of interest-earning assets declined $17.0 million, or 3.70%, to $442.2 million for the three months ended September 30, 2013 compared to $459.2 million for the same period in 2012, due primarily to declines in daily interest-bearing deposits.    

24

Interest on loans decreased $412,000, or 9.2%, to $4.1 million for the three months ended September 30, 2013 due to a lower average yield and lower average balance of loans.  The average yield on loans was 4.97% for the three months ended September 30, 2013 compared to 5.44% for the same period in 2012.   The average balance of loans decreased $2.0 million to $325.2 million for the three months ended September 30, 2013 compared to the same period in 2012.   

Interest on investment securities increased $58,000, or 14.1%, to $468,000 for the three months ended September 30, 2013 compared to the same period in 2012.  The average balance of investment securities increased $14.1 million to $98.1 million for the three months ended September 30, 2013 compared to $84.0 million for the corresponding period in 2012.  The average yield on investment securities decreased to 1.95% for the three months ended September 30, 2013 compared to 2.01% for the same period in 2012 due to lower interest rates.  

Total interest expense decreased $201,000 to $645,000 for the three months ended September 30, 2013 compared to $846,000 for the corresponding period in 2012 primarily due to lower interest rates on interest-bearing liabilities.  Interest expense on deposits decreased $108,000, or 24.3%, to $336,000 for the three months ended September 30, 2013 as a result of lower interest rates combined with a lower average balance of certificates of deposit.  The average rate paid on deposits was 0.39% for the three months ended September 30, 2013, compared to 0.49% for the same period in 2012 due to downward repricing of interest bearing deposits in the current low interest rate environment.  Interest expense on FHLB advances decreased $90,000, or 28.2%, to $229,000 for the three months ended September 30, 2013 due to the restructuring of $15.0 million in FHLB advances.  Management expects further reductions in interest expense on FHLB advances due to the anticipated payoff of a $17.0 million advance maturing in March 2014.

Provision for Loan Losses

There was no provision for loan losses for the three month period ended September 30, 2013 compared to $300,000 for the prior year period.  The decrease in the provision for loan losses is the result of improvements in asset quality.  Net charge-offs for the three month period ended September 30, 2013 amounted to $667,000 compared to $391,000 for the comparable period in 2012.  A significant portion of the loan charge-offs during the three months ended September 30, 2013 were against specific reserves and did not require replenishment of the allowance for loan losses. Management reviews the level of the allowance for loan losses on a monthly basis and establishes the provision for loan losses based on changes in the nature and volume of the loan portfolio, the amount of impaired and classified loans, historical loan loss experience and other qualitative factors.  In addition, the Federal Deposit Insurance Corporation and Tennessee Department of Financial Institutions, as an integral part of their examination process, periodically review our allowance for loan losses and may require the Company to recognize adjustments to the allowance for loan losses based on their judgments about information available to them at the time of their examination.

Noninterest Income

Noninterest income increased $38,000, or 8.3%, to $494,000 for the quarter ended September 30, 2013 compared to $456,000 for the same period in 2012.The increase was primarily the result of a decline in net losses on sale of other real estate owned (“OREO”) totaling $132,000 more than offsetting a decrease in mortgage origination fee income totaling $98,000. The decrease in mortgage origination fee income is due to a decline in refinance originations.

25

The following table summarizes changes in noninterest income for the three month periods ended September 30, 2013 and 2012:

	Three Months Ended September 30,						$				%
	2013			2012			Change			Change
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	48		$	146		$	(98	)		(67.1	%)
Service charges and fees		256			253			3			1.2	%
Gain on sale of fixed assets		—			1			(1	)		(100.0	%)
Gain on investment securities		—			4			(4	)		(100.0	%)
Loss on sale of foreclosed real estate, net		(24	)		(156	)		132			(84.6	%)
BOLI increase in cash value		61			60			1			1.7	%
Other		153			148			5			3.4	%
Total noninterest income	$	494		$	456		$	38			8.3	%

Noninterest Expense

Total noninterest expense decreased $184,000, or 4.7%, to $3.7 million for the three months ended September 30, 2013 compared to $3.9 million for the corresponding period in 2012 due primarily to a decrease in valuation adjustments and expenses relating to OREO.  Valuation adjustments and expenses on OREO decreased $111,000, or 52.6% to $100,000 for the three months ended September 30, 2013.  

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended September 30, 2013 compared to the same period in 2012.  

	Three Months Ended September 30,				$			%
	2013		2012		Change			Change
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	1,728	$	1,680	$	48			2.9	%
Occupancy expense		334		362		(28	)		(7.7	%)
Equipment and data processing expense		610		599		11			1.8	%
Deposit insurance premiums		170		207		(37	)		(17.9	%)
Advertising		87		50		37			74.0	%
Professional services		87		106		(19	)		(17.9	%)
Valuation adjustment and expenses on OREO		100		211		(111	)		(52.6	%)
Amortization of intangible assets		92		106		(14	)		(13.2	%)
Other		514		585		(71	)		(12.1	%)
Total noninterest expense	$	3,722	$	3,906	$	(184	)		(4.7	%)

Income Taxes

Income tax expense for the three months ended September 30, 2013 was $230,000 compared to $78,000 for the same period in 2012.  

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Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits totaled $23.6 million at September 30, 2013 and $24.5 million at June 30, 2013.  

Investments

The Company’s investment security portfolio primarily consists of U.S. Government agency obligations, mortgage-backed securities issued by government-sponsored entities, and municipal bonds.  Investment securities increased to $101.0 million at September 30, 2013 compared to $96.0 million at June 30, 2013.  The increase in the investment portfolio reflects security purchases totaling $10.9 million, partially offset by sales, paydowns and calls of securities totaling approximately $5.3 million.  Investments classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $586,000, or $361,000 net of taxes, at September 30, 2013.

Loans

Net loans decreased $7.3 million, or 2.3%, to $314.0 million at September 30, 2013, compared to $321.3 million at June 30, 2013.  Although loan demand has increased during the quarter ended September 30, 2013, loan payoffs have exceeded the origination of new loans.  

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Loans receivable, net, are summarized as follows:

	At						At
	September 30,						June 30,
	2013						2013
				Percent						Percent			$			%
	Amount			of Portfolio			Amount			of Portfolio			Change			Change
	(Dollars in thousands)
Real estate loans:
Residential one-to four-family	$	81,107			25.4	%	$	87,233			26.7	%	$	(6,126	)		(7.0	%)
Home equity line of credit		17,280			5.4	%		16,259			5.0	%		1,021			6.3	%
Commercial		118,704			37.2	%		120,205			36.7	%		(1,501	)		(1.2	%)
Multi-family		9,255			2.9	%		13,509			4.1	%		(4,254	)		(31.5	%)
Construction		7,058			2.2	%		6,692			2.0	%		366			5.5	%
Land		23,285			7.3	%		22,296			6.8	%		989			4.4	%
Total real estate loans		256,689			80.4	%		266,194			81.3	%		(9,505	)		(3.6	%)
Commercial business loans		59,181			18.5	%		57,288			17.5	%		1,893			3.3	%
Consumer loans:
Automobile loans		517			0.2	%		510			0.2	%		7			1.4	%
Mobile home loans		—			0.0	%		—			0.0	%		—			—
Loans secured by deposits		343			0.1	%		340			0.1	%		3			0.9	%
Other consumer loans		2,613			0.8	%		2,971			0.9	%		(358	)		(12.0	%)
Total consumer loans		3,473			1.1	%		3,821			1.2	%		(348	)		(9.1	%)
Total gross loans		319,343			100.0	%		327,303			100.0	%		(7,960	)		(2.4	%)
Less:
Deferred loan fees, net		(355	)					(344	)					(11	)		3.2	%
Allowance for losses		(4,993	)					(5,660	)					667			(11.8	%)
Loans receivable, net	$	313,995					$	321,299					$	(7,304	)		(2.3	%)

Loan Loss Allowance

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

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

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

The allowance for loan losses was $5.0 million at September 30, 2013 compared to $5.7 million at June 30, 2013.  Our allowance for loan losses represented 1.56% of total loans and 59.43% of nonperforming loans at September 30, 2013 compared to 1.73% of total loans and 44.23% of nonperforming loans at June 30, 2013.

	Three Months Ended
	September 30,
	2013			2012
	(Dollars in thousands)
Balance at beginning of period	$	5,660		$	5,852
Provision for loan losses		—			300
Recoveries		97			392
Charge-offs		(764	)		(783	)
Net charge-offs		(667	)		(391	)
Allowance at end of period	$	4,993		$	5,761
Net charge-offs to average outstanding loans during the period, annualized		0.82	%		0.48	%

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming assets.  Loans are reviewed on a monthly basis and are generally placed on nonaccrual status when the loan becomes more than 90 days delinquent.  Nonperforming assets totaled $15.2 million, or 3.05% of total assets, at September 30, 2013, compared to $19.2 million, or 3.81% of total assets, at June 30, 2013.  Nonaccrual loans totaled $8.4 million at September 30, 2013 compared to $12.8 million at June 30, 2013.  TDRs were $4.6 million at September 30, 2013 compared to $9.1 million at June 30, 2013.  In general, a TDR exists when we grant a concession to a borrower experiencing financial difficulty that we normally would not otherwise consider.  These concessions can result in avoidance of foreclosure proceedings and can result in the full repayment of the loan principal amount.  The majority of the Bank’s TDRs involve a modification involving changes in amortization terms, reductions in interest rates, interest only payments and, in limited cases, concessions to outstanding loan balances.   The amount of accruing TDRs totaled $2.0 million at September 30, 2013 compared to $1.6 million at June 30, 2013.  Foreclosed real estate amounted to $5.9 million at September 30, 2013 compared to $5.4 million at June 30, 2013.  Foreclosed real estate is initially recorded at the lower of the amount of the loan or the fair value of the foreclosed real estate, less estimated selling costs.  Any initial writedown to fair value is charged to the allowance for loan losses.  Any subsequent writedown of foreclosed real estate is charged against earnings.  Foreclosed real estate at September 30, 2013 consisted of vacant land totaling $3.3 million, residential property totaling $1.7 million, and commercial real estate totaling $888,000.  

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	September 30,			June 30,
	2013			2013
	(Dollars in thousands
Nonaccrual loans:
Real estate	$	4,259		$	4,597
Commercial business		1,603			211
Consumer		11			439
Total nonaccrual loans		5,873			5,247
Nonaccrual restructured loans:
Real estate		2,319			7,312
Commercial business		210			237
Consumer		—			—
Total nonaccrual restructured loans		2,529			7,549
Total nonperforming loans		8,402			12,796
Nonaccrual investments		930			942
Real estate owned		5,882			5,433
Other nonperforming assets		—			—
Total nonperforming assets	$	15,214		$	19,171
Accruing restructured loans	$	2,028		$	1,553
Accruing restructured loans and nonperforming loans	$	10,430		$	14,349
Total nonperforming loans to total loans		2.63	%		3.91	%
Total nonperforming loans to total assets		1.69	%		2.54	%
Total nonperforming assets to total assets		3.05	%		3.81	%

The following table summarizes activity in OREO during the three months ended September 30, 2013:

OREO balance at beginning of period	$	5,433
OREO acquired		810
OREO sold		(320	)
Initial valuation adjustments		(41	)
Subsequent valuation adjustments		—
OREO ending balance	$	5,882

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans.  BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract.  The cash surrender value of the BOLI at September 30, 2013 was $7.2 million.  

Deposits

Total deposits decreased $3.7 million to $396.0 million at September 30, 2013 compared to $399.6 million at June 30, 2013 primarily due to planned runoff of certificates of deposit through lower interest rates.  Certificates of deposit decreased $3.3 million, or 2.2%, to $144.8 million while transaction accounts decreased $379,000 to $251.2 million at September 30, 2013.  Certificates of deposit comprised 36.6% of total deposits at September 30, 2013 compared to 37.1% of total deposits at June 30, 2013.

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	September 30,		June 30,
	2013		2013		$ Change			% Change
	(Dollars in thousands)
Noninterest-bearing accounts	$	56,350	$	54,765	$	1,585			2.9	%
NOW accounts		51,417		54,164		(2,747	)		(5.1	%)
Savings accounts		92,731		91,280		1,451			1.6	%
Money market accounts		50,656		51,324		(668	)		(1.3	%)
Certificates of deposit		144,818		148,109		(3,291	)		(2.2	%)
Total	$	395,972	$	399,642	$	(3,670	)		(0.9	%)

Advances

FHLB advances totaled $37.4 million at September 30, 2013 compared to $37.6 million at June 30, 2013. Additional FHLB advances may be utilized in the future to manage daily liquidity needs and to support loan growth.

Stockholders’ Equity

Stockholders’ equity was $53.3 million at September 30, 2013 compared to $53.0 million at June 30, 2013. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity.  At September 30, 2013, the adjustment to stockholders’ equity was a net unrealized loss of $361,000 compared to an unrealized loss of $111,000 at June 30, 2013.  Stock repurchases for the three months ended September 30, 2013 totaled 3,352 shares at an average cost of $5.71 per share.  On November 13, 2008, the Company announced its third stock repurchase program pursuant to which up to 620,770 shares of the Company’s outstanding common stock may be repurchased.  At September 30, 2013, 403,553 shares remained eligible for repurchase under the current stock repurchase program.

Liquidity and Capital Resources

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

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

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Our most liquid assets are cash and cash equivalents and marketable investment securities that are not pledged as collateral.  The levels of these assets are dependent on operating, financing, lending and investing activities during any given period.  At September 30, 2013, cash and cash equivalents totaled $23.6 million compared to $24.5 million at June 30, 2013.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $101.0 million at September 30, 2013 compared to $96.0 million at June 30, 2013.   At September 30, 2013, approximately $16.4 million of the investment portfolio was pledged as collateral for municipal deposits, FHLB borrowings and repurchase agreements.   Municipal deposits totaled $4.2 million at September 30, 2013.  The Company’s external sources of liquidity include borrowing capacity with the Federal Home Loan Bank of Cincinnati, the Federal Reserve, and other correspondent banks.  FHLB advances totaled $37.4 million at September 30, 2013 compared to $37.6 million at June 30, 2013.   At September 30, 2013, borrowing capacity with the FHLB totaled $44.0 million based on pledged collateral, of which $6.6 million was unused.  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 September 30, 2013, the Company had approximately $17.9 million of unused borrowing capacity based on pledged collateral with the Federal Reserve Bank discount window.  In addition, the Company also maintains federal funds lines with two correspondent banks totaling $18.5 million under which no borrowings were outstanding. These federal funds lines may be terminated at any time and may not be outstanding for more than 14 consecutive days.

The Company anticipates that it will have sufficient funds available to meet current loan commitments.  At September 30, 2013, we had approximately $18.6 million in loan commitments, consisting of commitments to fund real estate loans.  In addition to commitments to originate loans, we had $310,000 in unused letters of credit and approximately $29.5 million in unused lines of credit. At September 30, 2013, we had approximately $75.7 million in certificates of deposit due within one year, $25.9 million in certificates of deposit without specific maturities and $251.2 million in other deposits without specific maturities.  We believe, based on past experience, that a significant portion of those deposits will remain with us. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors.  We generally manage the pricing of our deposits to be competitive and to increase core deposits.  Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. We experienced a net decrease in total deposits of $3.7 million during the three-month period ended September 30, 2013.

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

Off-Balance Sheet Arrangements

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

For the three months ended September 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.

32

Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of September 30, 2013, Jefferson Federal met each of its capital requirements.  The Company and Bank’s actual capital amounts and ratios as of September 30, 2013 and June 30, 2013 are presented in the table below: 

										To Be Well
										Capitalized Under
					For Capital					Prompt Corrective
	Actual				Adequacy Purposes					Action Provisions
	Amount		Ratio		Amount			Ratio		Amount		Ratio
	(Dollars in thousands)
At September 30, 2013
Total Risk-Based Capital   (To Risk Weighted Assets)
Consolidated	$	53,470	15.57	%	$	27,479	>	8.0	%		NA
Jefferson Federal Bank		49,673	14.47	%		27,468	>	8.0	%	34,335	>	10.0	%
Tier 1 Capital       (To Risk Weighted Assets)
Consolidated		49,168	14.31	%		13,740	>	4.0	%		NA
Jefferson Federal Bank		45,502	13.25	%		13,734	>	4.0	%	20,601	>	6.0	%
Tier 1 Capital       (To Average Assets)
Consolidated		49,168	10.10	%		19,477	>	4.0	%		NA
Jefferson Federal Bank		45,502	9.35	%		19,469	>	4.0	%	24,336	>	5.0	%
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	%

33

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (“Tier I”) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At September 30, 2013, Jefferson Federal’s leverage capital ratio was 9.35%. The FDIC’s risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At September 30, 2013, Jefferson Federal had a ratio of total capital to risk-weighted assets of 14.47%. At September 30, 2013, the Bank met the minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.  Management, as part of its regular practices, performs periodic reviews of the impact of interest rate changes upon net interest income and the market value of the Company’s portfolio equity.  Based on, among other factors, such reviews, management believes that there have been no material changes in the market risk of the Company’s asset and liability position since June 30, 2013.  

Item 4.   Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”)  (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and  (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

34

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

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

Item 1A.  Risk Factors

There have been no material changes to the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended June 30, 2013.

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

							( d )
							Maximum Number
					( c )		(or Approximate
					Total Number of		Dollar Value)
	(a)		(b)		Shares (or Units)		of Shares (or
	Total Number		Average		Purchased as		Units) That May
	of Shares		Price Paid		Part of Publicly		Yet Be Purchased
	(or units)		per Share		Announced Plans		Under the Plans
Period	Purchased		(or Unit)		or Progams		or Programs
Month #1
July 1, 2013 through July 31, 2013		—		—		—		406,905	(1	)
Month #2
August 1, 2013 through August 31, 2013		1,684		5.93		1,684		405,221	(1	)
Month #3
September 1, 2013 through September 30, 2013		1,668		5.48		1,668		403,553	(1	)
Total		3,352		5.71		3,352		403,553

(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.

35

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

               Not applicable.

Item 5.  Other Information

None.

Item 6.  Exhibits 

31.1	Rule 13a-14(a)/15d-14(a) certification of the principal executive officer
31.2	Rule 13a-14(a)/15d-14(a) certification of the principal financial officer
32.0	Section 1350 certification
101.0*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 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.

*      Furnished, not filed.

36

SIGNATURES

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

	JEFFERSON BANCSHARES, INC.
November 14, 2013	/s/ Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer

November 14, 2013	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary