UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2014

OR

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

For the transition period from __________ to __________

Commission File Number 00-50347

JEFFERSON BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Tennessee	45-0508261
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
120 Evans Avenue, Morristown, Tennessee	37814
(Address of principal executive offices)	(Zip code)

(423) 586-8421

(Registrant’s telephone number, including area code)

Not Applicable

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

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

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

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

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☐	Smaller reporting company ☒
(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 ☐     No ☒

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

At May 15, 2014, the registrant had 6,595,301 shares of common stock, $0.01 par value per share, outstanding.

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements	Page
	Consolidated Balance Sheets - Unaudited Nine months ended March 31, 2014 and year ended June 30, 2013	1
	Consolidated Statements of Earnings - Unaudited Three and nine months ended March 31, 2014 and 2013	2
	Consolidated Statements of Comprehensive Income – Unaudited Three and nine months ended March 31, 2014 and 2013	3
	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited Nine months ended March 31, 2014 and 2013	4
	Consolidated Statements of Cash Flows - Unaudited Nine months ended March 31, 2014 and 2013	5
	Notes to Consolidated Financial Statements - Unaudited	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
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	36
Item 3.	Defaults Upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	37
SIGNATURES		38

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

Jefferson Bancshares, Inc. and Subsidiary
Consolidated Balance Sheets
(Dollars in Thousands)
	March 31,			June 30,
	2014			2013
Assets	(Unaudited)
Cash and cash equivalents	$	12,526		$	8,837
Interest-earning deposits		8,362			15,677
Investment securities classified as available for sale, net		88,008			96,024
Federal Home Loan Bank stock		4,635			4,735
Bank owned life insurance		7,281			7,100
Loans receivable, net of allowance for loan losses of $3,919 and $5,660		342,303			321,299
Loans held-for-sale		165			97
Premises and equipment, net		25,025			25,636
Foreclosed real estate, net		4,928			5,433
Accrued interest receivable:
Investments		305			349
Loans receivable		1,016			1,060
Deferred tax asset		10,342			10,911
Core deposit intangible		898			1,151
Other assets		1,012			4,719
Total Assets	$	506,806		$	503,028
Liabilities and Stockholders’ Equity
Deposits
Noninterest-bearing	$	55,396		$	54,765
Interest-bearing		328,578			344,877
Repurchase agreements		593			551
Federal Home Loan Bank advances		59,899			37,626
Subordinated debentures		7,442			7,358
Other liabilities		500			4,826
Accrued income taxes
Total liabilities		452,408			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 6,595,301 shares outstanding at March 31, 2014 and 6,601,091 shares outstanding at June 30, 2013		92			92
Additional paid-in capital		78,218			78,302
Unearned ESOP shares		(2,160	)		(2,376	)
Unearned compensation		(1,046	)		(1,046	)
Accumulated other comprehensive income		(217	)		(111	)
Retained earnings		11,043			9,661
Treasury stock, at cost (2,587,070 and 2,581,280 shares)		(31,532	)		(31,497	)
Total stockholders’ equity		54,398			53,025
Total liabilities and stockholders’ equity	$	506,806		$	503,028

See accompanying notes to financial statements.

1

Jefferson Bancshares, Inc. and Subsidiary
Consolidated Statements of Earnings (Unaudited)
(Dollars in Thousands, Except Net Earnings Per Share)
	Three Months Ended					Nine Months Ended
	March 31,					March 31,
	2014		2013			2014		2013
Interest income:
Interest on loans receivable	$	4,094	$	4,277		$	12,364	$	13,197
Interest on investment securities		475		437			1,429		1,266
Other interest		52		67			166		218
Total interest income		4,621		4,781			13,959		14,681
Interest expense:
Deposits		302		358			959		1,190
Repurchase agreements		—		1			1		4
Advances from FHLB		226		313			720		950
Subordinated debentures		77		79			235		242
Total interest expense		605		751			1,915		2,386
Net interest income		4,016		4,030			12,044		12,295
Provision for loan losses		—		200			—		800
Net interest income after provision for loan losses		4,016		3,830			12,044		11,495
Noninterest income:
Mortgage origination fee income		31		97			111		374
Service charges and fees		237		251			732		780
Gain on investments		—		—			1		12
Gain (loss) on sale of fixed assets		—		—			—		1
BOLI increase in cash value		60		61			182		181
Other		165		145			508		452
Total noninterest income		493		554			1,534		1,800
Noninterest expense:
Compensation and benefits		1,638		1,712			5,165		5,159
Occupancy expense		345		322			1,005		1,025
Equipment and data processing expense		615		589			1,872		1,805
Deposit insurance premiums		166		278			504		695
Advertising		10		82			165		171
Legal and professional services		189		123			399		368
Valuation adjustment and expenses on OREO		96		128			329		607
Gain (loss) on sale of foreclosed real estate, net		17		(28	)		81		181
Amortization of intangible assets		78		92			252		294
Other		687		547			1,773		1,616
Total noninterest expense		3,841		3,845			11,545		11,921
Earnings before income taxes		668		539			2,033		1,374
Income taxes:
Current		17		4			17		27
Deferred		211		149			634		318
Total income taxes		228		153			651		345
Net earnings	$	440	$	386		$	1,382	$	1,029
Net earnings per share, basic	$	0.07	$	0.06		$	0.22	$	0.16
Net earnings per share, diluted	$	0.07	$	0.06		$	0.22	$	0.16

See accompanying notes to financial statements.

2

Jefferson Bancshares, Inc. and Subsidiary
Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in Thousands)
	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
Net earnings	$	440		$	386		$	1,382		$	1,029
Other comprehensive income:
Unrealized holding gain (loss)		670			(272	)		(171	)		(71	)
Income tax benefit (expense)		(257	)		104			65			27
Comprehensive income (loss)	$	853		$	218		$	1,276		$	985

See accompanying notes to financial statements.

3

Jefferson Bancshares, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Nine Months Ended March 31, 2014 and 2013

(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		—		—			—			—			—			1,382		—			1,382
Other comprehensive income		—		—			—			—			(106	)		—		—			(106	)
Shares committed to be released by the ESOP		—		(87	)		216			—			—			—		—			129
Stock options expensed		—		3			—			—			—			—		—			3
Purchase of common stock (5,790 shares)		—		—			—			—			—			—		(35	)		(35	)
Balance at March 31, 2014	$	92	$	78,218		$	(2,160	)	$	(1,046	)	$	(217	)	$	11,043	$	(31,532	)	$	54,398

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

See accompanying notes to financial statements.

4

Jefferson Bancshares, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in Thousands)
	Nine Months Ended
	March 31, 2014
	2014			2013
Cash flows from operating activities:
Net earnings	$	1,382		$	1,029
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities:
Allocated ESOP shares		129			98
Depreciation and amortization expense		1,365			1,352
Amortization of premiums (discounts), net on investment securities		466			474
Provision for loan losses		—			800
Amortization of deferred loan fees, net		(87	)		(132	)
(Gain) loss on sale of investment securities		(1	)		(12	)
(Gain) loss on sale of foreclosed real estate, net		81			181
(Gain) loss on sale of fixed assets, net		—			(1	)
Deferred tax expense (benefit)		634			318
Stock options expensed		4			4
Originations of mortgage loans held for sale		(4,242	)		(15,004	)
Proceeds from sale of mortgage loans		4,174			14,910
Increase in cash value of life insurance		(182	)		(181	)
Decrease (increase) in:
Accrued interest receivable		88			140
Other assets		3,707			182
Increase (decrease) in other liabilities and accrued income taxes		(4,326	)		580
Net cash provided by (used for) operating activities		3,192			4,738
Cash flows used for investing activities:
Loan originations, net of principal collections		(22,258	)		7,934
Investment securities classifed as available-for-sale:
Proceeds from maturities, calls and prepayments		18,279			23,373
Proceeds from sale		—			80
Purchase of securities		(10,900	)		(39,889	)
Proceeds from sale of premises and equipment		—			—
Purchase of premises and equipment		(163	)		(281	)
Proceeds from sale of (additions to) foreclosed real estate, net		1,382			1,440
Net cash provided by (used for) investing activities		(13,660	)		(7,343	)
Cash flows from financing activities:
Net decrease in deposits		(15,668	)		(18,517	)
Net increase (decrease) in repurchase agreements		42			209
Repayment of FHLB advances		56,000			(178	)
Proceeds from FHLB advances		(33,497	)		—
Purchase of treasury stock		(35	)		(137	)
Net cash provided by (used for) financing activities		6,842			(18,623	)
Net increase (decrease) in cash, cash equivalents and interest-earning deposits		(3,626	)		(21,228	)
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	$	20,888		$	35,465
Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	961		$	1,201
Interest on borrowed funds	$	477		$	782
Interest on subordinated debentures	$	151		$	158
Income taxes		—		$	45
Real estate acquired in settlement of loans	$	1,275		$	3,689

See accompanying notes to financial statements.

5

Notes To Consolidated Financial Statements

(1) Basis of Presentation

The condensed consolidated financial statements include the accounts of Jefferson Bancshares, Inc. (the “Company” or “Jefferson Bancshares”) and its wholly-owned subsidiary, Jefferson Federal Bank (the “Bank” or “Jefferson Federal”). The accompanying interim condensed consolidated financial statements, presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”), are unaudited and reflect all adjustments which, in the opinion of management, are necessary for a fair statement of financial condition and results of operations for the interim periods. The results of operations for the three and nine months ended March 31, 2014 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.

6

(5) Earnings Per Common Share

Earnings per common share and diluted earnings per common share have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding, exclusive of unallocated employee stock ownership plan (“ESOP”) shares. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method. For the three and nine months ended March 31, 2014, 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				Weighted-Average Shares
	Outstanding for the				Outstanding for the
	Three Months Ended				Nine Months Ended
	March 31,				March 31,
	2014		2013		2014		2013
Weighted average number of common shares used in computing basic earnings per common share		6,311,614		6,292,214		6,284,605		6,271,036
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		6,311,614		6,292,214		6,284,605		6,271,036

(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.

7

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 $3.9 million at March 31, 2014 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 March 31, 2014:

	March 31, 2014
	Accrual		Non-accrual		Total
	Status		Status		TDRs
Residential mortgage	$	952	$	—	$	952
Multi-family		612		—		612
Construction and land development		262		—		262
Non-residential real estate		182		1,134		1,316
Owner occupied		254		299		553
Commercial		—		157		157
HELOC and junior Lien		—		—		—
Total	$	2,262	$	1,590	$	3,852

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.

8

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2014:

	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		(75	)		(398	)		(248	)		(619	)		—			(539	)		(4	)		(62	)		(1,945	)
Recoveries		—			—			49			—			66			77			—			12			204
Provision		298			(26	)		576			510			(4	)		(1,379	)		(16	)		41			—
Balance at March 31, 2014	$	888		$	51		$	868		$	872		$	409		$	640		$	148		$	43		$	3,919
Ending balance, Individually Evaluated	$	—		$	—		$	—		$	54		$	—		$	97		$	—		$	—		$	151
Ending balance, Collectively Evaluated	$	888		$	51		$	868		$	818		$	409		$	543		$	148		$	43		$	3,768
Loans:
Balance at March 31, 2014	$	78,449		$	9,351		$	37,836		$	63,232		$	74,570		$	63,269		$	17,392		$	2,588		$	346,687
Ending balance, Individually Evaluated	$	—		$	—		$	122		$	1,134		$	—		$	540		$	—		$	—		$	1,796
Ending balance, Collectively Evaluated	$	78,449		$	9,351		$	37,714		$	62,098		$	74,570		$	62,729		$	17,392		$	2,588		$	344,891

9

The following table is an aging analysis of the loan portfolio at March 31, 2014:

	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	$	1,565	$	17	$	—	$	1,917	$	3,499	$	74,950	$	78,449
Multi-family		—		—		—		—		—		9,351		9,351
Construction/land development		9		—		—		600		609		37,227		37,836
Non-residential real estate		347		—		—		1,598		1,945		61,287		63,232
Owner occupied		—		—		—		1,061		1,061		73,509		74,570
Commercial		80		—		—		1,626		1,706		61,563		63,269
HELOC and Junior Lien		—		—		—		25		25		17,367		17,392
Consumer		6		—		—		—		6		2,582		2,588
Total	$	2,007	$	17	$	—	$	6,827	$	8,851	$	337,836	$	346,687

The following table summarizes the credit risk profile by internally assigned grade at March 31, 2014:

	Residential Mortgage		Multi-family		Constr and land dev.		Non-residential real estate		Owner occupied		Comm’l		HELOC and Junior Lien		Consumer		Total
Grade:
Pass	$	73,104	$	8,648	$	35,607	$	52,991	$	71,905	$	60,942	$	17,112	$	2,586	$	322,895
Watch		2,996		612		700		7,096		1,604		605		255		2		13,870
Special mention		—		—		—		—		—		—		—		—		—
Substandard		2,349		91		1,529		3,145		1,061		1,722		25		—		9,922
Doubtful		—		—		—		—		—		—		—		—		—
Loss		—		—		—		—		—		—		—		—		—
Total:	$	78,449	$	9,351	$	37,836	$	63,232	$	74,570	$	63,269	$	17,392	$	2,588	$	346,687

10

The following table summarizes the composition of impaired loans, the associated specific reserves, and interest income recognized on impaired loans at March 31, 2014:

	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized
With an allowance recorded:
Residential mortgage	$	—	$	—	$	—	$	—
Multi-family		—		—		—		—
Construction and land development		122		122		—		7
Non-residential real estate		1,080		1,134		54		—
Owner occupied		—		—		—		—
Commercial		443		540		97		5
HELOC and junior lien		—		—		—		—
Consumer		—		—		—		—
Total	$	1,645	$	1,796	$	151	$	12
With no related allowance:
Residential mortgage	$	1,399	$	1,399	$	—	$	47
Multi-family		612		612		—		39
Construction and land development		1,050		1,050		—		8
Non-residential real estate		1,286		1,286		—		33
Owner occupied		810		810		—		1
Commercial		—		—		—		—
HELOC and junior lien		—		—		—		—
Consumer		—		—		—		—
Total	$	5,157	$	5,157	$	—	$	128
Total:
Residential mortgage	$	1,399	$	1,399	$	—	$	47
Multi-family		612		612		—		39
Construction and land development		1,172		1,172		—		15
Non-residential real estate		2,366		2,420		54		33
Owner occupied		810		810		—		1
Commercial		443		540		97		5
HELOC and junior lien		—		—		—		—
Consumer		—		—		—		—
Total	$	6,802	$	6,953	$	151	$	140
Average impaired loans for the nine months ended March 31, 2014	$	9,320

11

(7) Financial Instruments With Off-Balance Sheet Risk

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

At March 31, 2014, we had approximately $16.6 million in commitments to extend credit, consisting entirely of commitments to fund real estate loans. In addition to commitments to originate loans, at March 31, 2014, we had $547,000 in unused letters of credit and approximately $30.1 million in unused lines of credit.

(8) Dividends

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

(9) Stock Incentive Plans

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

The table below summarizes the status of the Company’s stock option plans as of March 31, 2014:

	Nine Months Ended
	March 31, 2014
				Weighted-
				average
	Shares			exercise price
Outstanding at beginning of period		360,638		$	13.04
Granted during the nine-month period		—			—
Options forfeited		(340,638	)		13.69
Options exercised		—			—
Outstanding at March 31, 2014		20,000		$	1.97
Options exercisable at March 31, 2014		4,000		$	1.97

The following information applies to options outstanding at March 31, 2014:

Number outstanding		20,000
Range of exercise prices	$	1.97
Weighted-average exercise price	$	1.97
Weighted-average remaining contractual life		8.33
Number of options remaining for future issuance		678,750

12

The fair value of stock options granted is amortized as compensation expense on a straight-line basis over the five year vesting period of the grant. Compensation expense related to stock options was approximately $4,000 for the nine months ended March 31, 2014.

(10) Investment Securities

Investment securities are summarized as follows:

At March 31, 2014
	Amortized			Unrealized		Unrealized			Fair
	Cost			Gains		Losses			Value
	(Dollars in thousands)
Securities available-for-sale
Debt securities:
Federal agency	$	17,420		$	46	$	(504	)	$	16,962
Mortgage-backed		62,392			887		(711	)		62,568
Municipals		7,940			192		(147	)		7,985
Other Securities		607			—		(114	)		493
Total securities available-for-sale	$	88,359		$	1,125	$	(1,476	)	$	88,008
Weighted-average rate		2.13	%
Pledged at March 31, 2014	$	39,673

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

13

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

	Less than 12 months					12 months or more					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(Dollars in thousands)
March 31, 2014
Federal agency securities	$	9,527	$	(440	)	$	936	$	(64	)	$	10,463	$	(504	)
Mortgage-backed securities		20,387		(429	)		7,042		(282	)		27,429		(711	)
Municipal securities		2,373		(114	)		902		(33	)		3,275		(147	)
Other securities		—		—			493		(114	)		493		(114	)
	$	32,287	$	(983	)	$	9,373	$	(493	)	$	41,660	$	(1,476	)

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 $504,000 for these eleven 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 March 31, 2014.

GSE Residential Mortgage-Backed Securities – The unrealized losses of $711,000 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 March 31, 2014.

Municipal Securities – The unrealized losses of $147,000 for these seven investments in municipal securities were caused by changes in market interest rates. The contractual cash flows of these investments are guaranteed by municipal agencies themselves. Accordingly it is expected that the securities would not be settled at a price less than the amortized bases of the Company’s investments. Because the decline in market value is attributable to changes in market interest rates and not credit quality, and because the Company does not intend to sell the investments before recovery of their amortized cost bases and it is not more likely than not the Company 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 March 31, 2014.

14

Other Securities – The unrealized loss of $114,000 on this collateralized debt obligation (“CDO”) was a result of updated variables and inputs that comprise the model used in the semi-annual independent valuation of this security. The collateral for the CDO investment is comprised of trust preferred securities and senior and subordinated debt issued by banks, insurance companies, REITs, real estate operating companies and homebuilding companies. The CDO is valued by evaluating all relevant credit and structural aspects of the instrument, determining appropriate performance assumptions and performing a discounted cash flow analysis. Given the expected improvement in the future performance of the collateral, the unrealized loss is not deemed to be attributable to credit quality. Since the Company does not intend to sell this investment before recovery of its amortized cost basis, which may be maturity, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2014.

Maturities of debt securities at March 31, 2014 are summarized as follows:

					Weighted
	Amortized		Fair		Average
	Cost		Value		Yield
Within 1 year	$	2,790	$	2,798		1.36	%
Over 1 year through 5 years		6,842		6,769		1.53	%
After 5 years through 10 years		20,500		20,368		1.88	%
Over 10 years		58,227		58,073		2.20	%
	$	88,359	$	88,008		2.05	%

(11) Fair Value Disclosures

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

Level 1

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

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.

15

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.

Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2014, 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.

16

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

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

	March 31, 2014
							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		—	$	87,136	$	872	$	88,008	$	88,008

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

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

	March 31, 2014
							Total Gains
Description	Level 1		Level 2		Level 3		(Losses)
Impaired Loans		—		—	$	6,802		—
Other real estate owned		—		—		4,928		—

17

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

	At						At
	March 31, 2014						June 30, 2013
	Carrying			Fair			Carrying			Fair
	Amount			Value			Amount			Value
Financial assets:
Cash and due from banks and interest-earning deposits with banks	$	20,888		$	20,888		$	24,514		$	24,514
Available-for-sale securities		88,008			88,008			96,024			96,024
Federal Home Loan Bank stock		4,635			4,635			4,735			4,735
Bank owned life insurance		7,281			7,281			7,100			7,100
Loans receivable, net		342,303			344,897			321,299			329,268
Accrued interest receivable		1,321			1,321			1,409			1,409
Loans held-for-sale		165			165			97			97
Financial liabilities:
Deposits		(383,974	)		(375,586	)		(399,642	)		(391,442	)
Borrowed funds		(60,492	)		(61,124	)		(38,177	)		(39,505	)
Subordinated debentures		(7,442	)		(5,650	)		(7,358	)		(4,950	)
Off-balance sheet assets (liabilities):
Commitments to extend credit		—			16,577			—			15,330
Unused letters of credit		—			547			—			320
Unused lines of credit		—			30,142			—			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 beginning on Page 17 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.

18

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

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

.

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

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

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

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

(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, 2013, 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 March 31, 2014. No items were identified during this evaluation that required adjustment to or disclosure in the accompanying financial statements.

19

(14) Agreement and Plan of Merger

On January 22, 2014, the Company and HomeTrust Bancshares, Inc., a Maryland corporation (“HomeTrust”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) pursuant to which, upon the terms and subject to the conditions set forth therein, the Company will merge with and into HomeTrust (the “Merger”), with HomeTrust as the surviving corporation in the Merger. Immediately after the effective time of the Merger (the “Effective Time”), HomeTrust intends to merge the Bank with and into HomeTrust Bank, a wholly owned subsidiary of HomeTrust (the “Bank Merger”), with HomeTrust Bank as the surviving institution in the Bank Merger.

Subject to the terms and conditions of the Merger Agreement, at the Effective Time, each share of the common stock of the Company outstanding immediately prior to the Effective Time will be converted into the right to receive $4.00 in cash plus a fraction of a share of the common stock of HomeTrust equal to the quotient of $4.00 divided by the average of the volume weighted price of HomeTrust common stock on the NASDAQ Stock Market for the ten trading days ending on the fifth trading day immediately preceding the Merger closing date, with the exchange ratio fixed at .2667 if the average HomeTrust price is equal to or less than $15.00 and at .2222 if the average HomeTrust price is equal to or greater than $18.00. All in-the-money Company stock options outstanding immediately prior to the Effective Time will be canceled in exchange for a cash payment as provided in the Merger Agreement.

The completion of the Merger is subject to customary conditions, including approval of the Merger Agreement by the Company’s shareholders and the receipt of required regulatory approvals. The Merger is expected to be completed in the second calendar quarter of 2014. The Merger Agreement provides certain termination rights for both HomeTrust and the Company and further provides that a termination fee of $1,950,000 will be payable by the Company upon termination of the Merger Agreement under certain circumstances.

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.

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.

20

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, changes in the quality or composition of the Company’s loan or investment portfolios, and the Company’s pending merger with HomeTrust Bancshares, Inc. 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 and Nine Months Ended March 31, 2014 and 2013

Net Income

For the three months ended March 31, 2014, net income totaled $440,000, or $0.07 per diluted share, compared to net income of $386,000, or $0.06 per diluted share, for the quarter ended March 31, 2013. For the nine months ended March 31, 2014, net income totaled $1.4 million, or $0.22 per diluted share, compared to net income of $1.0 million, or $0.16 per diluted share, for the nine months ended March 31, 2013. The improvement in net income is largely the result of a lower provision for loan losses and lower noninterest expense which more than offset a decrease in net interest income and noninterest income during the three and nine months ended March 31, 2014.

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
	(Dollars in thousands,						(Dollars in thousands,
	except per share data)						except per share data)
Net earnings	$	440		$	386		$	1,382		$	1,029
Net earnings per share, basic	$	0.07		$	0.06		$	0.22		$	0.16
Net earnings per share, diluted	$	0.07		$	0.06		$	0.22		$	0.16
Return on average assets (annualized)		0.35	%		0.30	%		0.37	%		0.27	%
Return on average equity (annualized)		3.23	%		2.87	%		3.42	%		2.56	%

21

Net Interest Income

Net interest income before loan loss provision remained relatively unchanged at $4.0 million for the three months ended March 31, 2014 compared to the same period in 2013. The interest rate spread and net interest margin for the quarter ended March 31, 2014 were 3.60% and 3.67%, respectively, compared to 3.54% and 3.63%, respectively, for the same period in 2013.

The following table summarizes changes in interest income and expense for the three month periods ended March 31, 2014 and 2013:

	Three Months Ended
	March 31,
	2014		2013		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	4,094	$	4,277	$	(183	)		(4.3	%)
Investment securities		475		437		38			8.7	%
Interest-earning deposits		4		16		(12	)		(75.0	%)
FHLB stock		48		51		(3	)		(5.9	%)
Total interest income		4,621		4,781		(160	)		(3.3	%)
Interest expense:
Deposits		302		358		(56	)		(15.6	%)
Repurchase agreements		—		1		(1	)		(100.0	%)
Borrowings		226		313		(87	)		(27.8	%)
Subordinated notes & debentures		77		79		(2	)		(2.5	%)
Total interest expense		605		751		(146	)		(19.4	%)
Net interest income	$	4,016	$	4,030	$	(14	)		(0.3	%)

For the nine months ended March 31, 2014, net interest income decreased $251,000, or 2.0%, to $12.0 million compared to $12.3 million for the same period in 2013. The interest rate spread and net interest margin for the nine months ended March 31, 2014 were 3.55% and 3.63%, respectively, compared to 3.54% and 3.63%, respectively, for the same period in 2013.

22

The following table summarizes changes in interest income and expense for the nine month periods ended March 31, 2014 and 2013:

	Nine Months Ended
	March 31,
	2014		2013		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	12,364	$	13,197	$	(833	)		(6.3	%)
Investment securities		1,429		1,266		163			12.9	%
Interest-earning deposits		20		60		(40	)		(66.7	%)
FHLB stock		146		158		(12	)		(7.6	%)
Total interest income		13,959		14,681		(722	)		(4.9	%)
Interest expense:
Deposits		959		1,190		(231	)		(19.4	%)
Repurchase agreements		1		4		(3	)		(75.0	%)
Borrowings		720		950		(230	)		(24.2	%)
Subordinated notes & debentures		235		242		(7	)		(2.9	%)
Total interest expense		1,915		2,386		(471	)		(19.7	%)
Net interest income	$	12,044	$	12,295	$	(251	)		(2.0	%)

The following table summarizes average balances and average yields and costs for the three and nine months ended March 31, 2014 and 2013.

	Three Months Ended March 31,										Nine Months Ended March 31,
	2014					2013					2014					2013
	Average		Yield/			Average		Yield/			Average		Yield/			Average		Yield/
	Balance		Cost			Balance		Cost			Balance		Cost			Balance		Cost
	(Dollars in thousands)										(Dollars in thousands)
Loans	$	339,249		4.89	%	$	318,078		5.45	%	$	330,112		4.99	%	$	322,346		5.45	%
Investment securities		92,128		2.15	%		98,485		1.86	%		96,374		2.01	%		91,112		1.92	%
Interest-earning deposits		9,646		0.17	%		30,526		0.21	%		11,867		0.22	%		34,540		0.23	%
FHLB stock		4,697		4.14	%		4,735		4.37	%		4,722		4.12	%		4,735		4.45	%
Deposits		331,877		0.37	%		354,076		0.41	%		338,783		0.38	%		355,887		0.45	%
FHLB advances		55,654		1.65	%		37,657		3.37	%		44,897		2.14	%		37,721		3.35	%
Repurchase agreements		957		0.00	%		972		0.42	%		1,100		0.12	%		959		0.56	%
Subordinated debentures		7,423		4.21	%		7,311		4.38	%		7,395		4.23	%		7,284		4.43	%

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.

23

	Three Months									Nine Months
	Ended March 31,									Ended March 31,
	2014 Compared to 2013									2014 Compared to 2013
	Increase (Decrease)									Increase (Decrease)
	Due To									Due To
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)									(In thousands)
Interest income:
Loans receivable	$	273		$	(456	)	$	(183	)	$	312		$	(1,145	)	$	(833	)
Investment securities		(28	)		66			38			83			80			163
Daily interest-earning deposits and other interest-earning assets		(9	)		(6	)		(15	)		(39	)		(13	)		(52	)
Total interest-earning assets		236			(396	)		(160	)		356			(1,078	)		(722	)
Interest expense:
Deposits		(22	)		(34	)		(56	)		(55	)		(176	)		(231	)
FHLB advances		113			(200	)		(87	)		158			(388	)		(230	)
Repurchase agreements		—			(1	)		(1	)		1			(4	)		(3	)
Subordinated debentures		1			(3	)		(2	)		3			(10	)		(7	)
Total interest-bearing liabilities		92			(238	)		(146	)		107			(578	)		(471	)
Net change in interest income	$	144		$	(158	)	$	(14	)	$	249		$	(500	)	$	(251	)

Total interest income decreased $160,000, or 3.3%, to $4.6 million for the three months ended March 31, 2014 and decreased $722,000, or 4.9%, to $14.0 million for the nine months ended March 31, 2014 compared to the prior year periods due primarily to lower market interest rates. The average yield on interest-earning assets was 4.22% and 4.20%, respectively, for the three and nine months ended March 31, 2014 compared to 4.31% and 4.33%, respectively, for the same periods in 2013.

Interest on loans decreased $183,000, or 4.3%, to $4.1 million for the three months ended March 31, 2014 and decreased $833,000, or 6.3%, to $12.4 million for the nine months ended March 31, 2014 compared to the prior year periods. The average balance of loans increased $21.2 million, or 6.7%, to $339.2 million for the three months ended March 31, 2014 and increased $7.8 million, or 2.4%, to $330.1 million for the nine months ended March 31, 2014. The increase in the average balance of loans is due to an increase in loan demand. The average yield on loans was 4.89% and 4.99%, respectively, for the three and nine months ended March 31, 2014, compared to 5.45% and 5.45%, respectively, for the same periods in 2013.

Interest on investment securities increased $38,000, or 8.7%, to $475,000 for the three months ended March 31, 2014 and increased $163,000, or 12.9%, to $1.4 million for the nine months ended March 31, 2014 compared to the prior year periods. The average balance of investment securities decreased $6.4 million to $92.1 million for the three months ended March 31, 2014 and increased $5.3 million to $96.4 million for the nine months ended March 31, 2014 compared to the same periods in 2013. The average yield on investment securities increased 29 basis points to 2.15% for the three months ended March 31, 2014 and increased 9 basis points to 2.01% for the nine months ended March 31, 2014 compared to the same periods in 2013.

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Total interest expense decreased $146,000, or 19.4%, to $605,000 for the three month period ended March 31, 2014 and decreased $471,000, or 19.7%, to $1.9 million for the nine month period ended March 31, 2014 compared to the prior year periods. The decrease for both periods was primarily due to lower interest rates on interest-bearing liabilities. Interest expense on deposits decreased $56,000, or 15.6%, to $302,000 for the three month period ended March 31, 2014 and decreased $231,000, or 19.4%, to $959,000 for the nine months ended March 31, 2014 compared to the same periods in 2013. The decrease in interest expense on deposits was primarily due to downward repricing of certificates of deposit coupled with a lower average balance. The average rate paid on deposits decreased 4 basis points to 0.37% for the three months ended March 31, 2014 and decreased 7 basis points to 0.38% for the nine months ended March 31, 2014 compared to the prior year periods. Interest expense on FHLB advances decreased $87,000, or 27.8%, to $226,000 for the three months ended March 31, 2014 and decreased $230,000, or 24.2%, to $720,000 for the nine months ended March 31, 2014 compared to the same periods in 2013. The decrease in interest expense on advances is due to lower rates paid on FHLB advances partially offset by a higher average balance.

Provision for Loan Losses

There was no provision for loan losses for the three and nine month periods ended March 31, 2014 compared to $200,000 and $800,000, respectively, for the same periods in 2013. The decrease in the provision for loan losses is the result of improvements in asset quality. Net charge-offs for the three and nine month periods ended March 31, 2014 amounted to $54,000 and $1.7 million, respectively, compared to $232,000 and $982,000 for the comparable periods in 2013. A significant portion of the loan charge-offs during the nine months ended March 31, 2014 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 decreased $61,000, or 11.0%, to $493,000 for the three months ended March 31, 2014 and decreased $266,000, or 14.8%, to $1.5 million for the nine months ended March 31, 2014 compared to the same periods in 2013. The decrease was primarily the result of a decrease in mortgage origination fee income totaling $66,000 and $263,000, respectively, for the three and nine months ended March 31, 2014 compared to the prior year periods. The decrease in mortgage origination fee is due to a decline in refinance originations.

The following table summarizes changes in noninterest income for the three month periods ended March 31, 2014 and 2013:

	Three Months Ended
	March 31,				$			%
	2014		2013		Change			Change
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	31	$	97	$	(66	)		(68.0	%)
Service charges and fees		237		251		(14	)		(5.6	%)
BOLI increase in cash value		60		61		(1	)		(1.6	%)
Other		165		145		20			13.8	%
Total noninterest income	$	493	$	554	$	(61	)		(11.0	%)

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The following table summarizes changes in noninterest income for the nine month periods ended March 31, 2014 and 2013:

	Nine Months Ended
	March 31,				$			%
	2014		2013		Change			Change
	(Dollars in thousands)
Noninterest income:
Mortgage origination fee income	$	111	$	374	$	(263	)		(70.3	%)
Service charges and fees		732		780		(48	)		(6.2	%)
Gain on sale of fixed assets		—		1		(1	)		(100.0	%)
Gain on investment securities		1		12		(11	)		(91.7	%)
BOLI increase in cash value		182		181		1			0.6	%
Other		508		452		56			12.4	%
Total noninterest income	$	1,534	$	1,800	$	(266	)		(14.8	%)

Noninterest Expense

Noninterest expense remained relatively unchanged at $3.8 million for the three months ended March 31, 2014 compared to the same period in 2013. Noninterest expense for the three months ended March 31, 2014 included acquisition related expenses totaling $226,000.

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the three months ended March 31, 2014 compared to the same period in 2013.

	Three Months Ended
	March 31,					$			%
	2014		2013			Change			Change
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	1,638	$	1,712		$	(74	)		(4.3	%)
Occupancy expense		345		322			23			7.1	%
Equipment and data processing expense		615		589			26			4.4	%
Deposit insurance premiums		166		278			(112	)		(40.3	%)
Advertising		10		82			(72	)		(87.8	%)
Professional services		189		123			66			53.7	%
Valuation adjustment and expenses on OREO		96		128			(32	)		(25.0	%)
		17		(28	)		45			(160.7	%)
Amortization of intangible assets		78		92			(14	)		(15.2	%)
Other		687		547			140			25.6	%
Total noninterest expense	$	3,841	$	3,845		$	(4	)		(0.1	%)

Noninterest expense decreased $376,000, or 3.2%, to $11.5 million for the nine months ended March 31, 2014 compared to $11.9 million for the same period in 2013. Noninterest expense for the nine months ended March 31, 2014 included acquisition related expenses totaling $244,000. Valuation adjustments and expenses on OREO decreased $278,000, or 45.8%, to $329,000 for the nine months ended March 31, 2014 compared to $607,000 for the same period in 2013. Loss on sale of foreclosed property decreased $100,000, or 55.2%, to $81,000 for the nine months ended March 31, 2014 compared to $181,000 for the same period in 2013. Deposit insurance premiums decreased $191,000, or 27.5%, to $504,000 for the nine months ended March 31, 2014 compared to $695,000 for the same period in 2013.

26

The following table summarizes the dollar amounts for each category of noninterest expense, and the dollar and percent changes for the nine months ended March 31, 2014 compared to the same period in 2013.

	Nine Months Ended
	March 31,				$			%
	2014		2013		Change			Change
	(Dollars in thousands)
Noninterest expense:
Compensation and benefits	$	5,165	$	5,159	$	6			0.1	%
Occupancy expense		1,005		1,025		(20	)		(2.0	%)
Equipment and data processing expense		1,872		1,805		67			3.7	%
Deposit insurance premiums		504		695		(191	)		(27.5	%)
Advertising		165		171		(6	)		(3.5	%)
Professional services		399		368		31			8.4	%
Valuation adjustment and expenses on OREO		329		607		(278	)		(45.8	%)
Loss on foreclosed real estate, net		81		181		(100	)		(55.2	%)
Amortization of intangible assets		252		294		(42	)		(14.3	%)
Other		1,773		1,616		157			9.7	%
Total noninterest expense	$	11,545	$	11,921	$	(376	)		(3.2	%)

Income Taxes

Income tax expense for the three and nine months ended March 31, 2014 increased to $228,000 and $651,000, respectively, compared to income tax expense of $153,000 and $345,000, respectively, for the same periods in 2013. The increase in income tax expense for both periods was due to higher taxable income.

Financial Condition

Cash, Cash Equivalents and Interest-Earning Deposits

Cash, cash equivalents, and interest-earning deposits totaled $20.9 million at March 31, 2014 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 decreased to $88.0 million at March 31, 2014 compared to $96.0 million at June 30, 2013. The decrease in the investment portfolio reflects sales, paydowns and calls of securities totaling approximately $18.3 million partially offset by security purchases totaling $10.9 million. Investments classified as available-for-sale are carried at fair market value and reflect an unrealized loss of $351,000, or $217,000 net of taxes, at March 31, 2014.

Loans

Net loans increased $21.0 million, or 6.5%, to $342.3 million at March 31, 2014, compared to $321.3 million at June 30, 2013 due to an increase in loan demand.

27

Loans receivable, net, are summarized as follows:

	At						At
	March 31,						June 30,
	2014						2013
				Percent						Percent			$			%
	Amount			of Portfolio			Amount			of Portfolio			Change			Change
	(Dollars in thousands)
Real estate loans:
Residential one-to four-family	$	81,117			23.4	%	$	87,233			26.7	%	$	(6,116	)		(7.0	%)
Home equity line of credit		17,391			5.0	%		16,259			5.0	%		1,132			7.0	%
Commercial		133,676			38.6	%		120,205			36.7	%		13,471			11.2	%
Multi-family		9,351			2.7	%		13,509			4.1	%		(4,158	)		(30.8	%)
Construction		16,881			4.9	%		6,692			2.0	%		10,189			152.3	%
Land		22,361			6.4	%		22,296			6.8	%		65			0.3	%
Total real estate loans		280,777			81.0	%		266,194			81.3	%		14,583			5.5	%
Commercial business loans		63,322			18.3	%		57,288			17.5	%		6,034			10.5	%
Consumer loans:
Automobile loans		473			0.1	%		510			0.2	%		(37	)		(7.3	%)
Loans secured by deposits		370			0.1	%		340			0.1	%		30			8.8	%
Other consumer loans		1,745			0.5	%		2,971			0.9	%		(1,226	)		(41.3	%)
Total consumer loans		2,588			0.7	%		3,821			1.2	%		(1,233	)		(32.3	%)
Total gross loans		346,687			100.0	%		327,303			100.0	%		19,384			5.9	%
Less:
Deferred loan fees, net		(465	)					(344	)					(121	)		35.2	%
Allowance for losses		(3,919	)					(5,660	)					1,741			(30.8	%)
Loans receivable, net	$	342,303					$	321,299					$	21,004			6.5	%

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. 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.

28

The allowance for loan losses was $3.9 million at March 31, 2014 compared to $5.7 million at June 30, 2013. Our allowance for loan losses represented 1.13% of total loans and 57.40% of nonperforming loans at March 31, 2014 compared to 1.73% of total loans and 44.23% of nonperforming loans at June 30, 2013.

	Three Months Ended						Nine Months Ended
	March 31,						March 31,
	2014			2013			2014			2013
	(Dollars in thousands)						(Dollars in thousands)
Balance at beginning of period	$	3,973		$	5,702		$	5,660		$	5,852
Provision for loan losses		—			200			—			800
Recoveries		4			27			204			427
Charge-offs		(58	)		(259	)		(1,945	)		(1,409	)
Net charge-offs		(54	)		(232	)		(1,741	)		(982	)
Allowance at end of period	$	3,919		$	5,670		$	3,919		$	5,670
Net charge-offs to average outstanding loans during the period, annualized		0.06	%		0.29	%		0.70	%		0.41	%

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 $12.6 million, or 2.49% of total assets, at March 31, 2014, compared to $19.2 million, or 3.81% of total assets, at June 30, 2013. Nonaccrual loans totaled $6.8 million at March 31, 2014 compared to $12.8 million at June 30, 2013. TDRs were $3.9 million at March 31, 2014 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 $2.3 million at March 31, 2014 compared to $1.6 million at June 30, 2013. Foreclosed real estate totaled $4.9 million at March 31, 2014 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 March 31, 2014 consisted of vacant land totaling $3.2 million, residential property totaling $946,000, and commercial real estate totaling $812,000.

29

	At			At
	March 31,			June 30,
	2014			2013
	(Dollars in thousands
Nonaccrual loans:
Real estate	$	3,768		$	4,597
Commercial business		1,469			211
Consumer		—			439
Total nonaccrual loans		5,237			5,247
Nonaccrual restructured loans:
Real estate		1,433			7,312
Commercial business		157			237
Consumer		—			—
Total nonaccrual restructured loans		1,590			7,549
Total nonperforming loans		6,827			12,796
Nonaccrual investments		872			942
Real estate owned		4,928			5,433
Other nonperforming assets		—			—
Total nonperforming assets	$	12,627		$	19,171
Accruing restructured loans	$	2,262		$	1,553
Accruing restructured loans and nonperforming loans	$	9,089		$	14,349
Total nonperforming loans to total loans		1.97	%		3.91	%
Total nonperforming loans to total assets		1.35	%		2.54	%
Total nonperforming assets to total assets		2.49	%		3.81	%

The following table summarizes activity in OREO during the nine months ended March 31, 2014:

OREO balance at beginning of period	$	5,433
OREO acquired		1,275
OREO sold		(1,500	)
Initial valuation adjustments		(229	)
Subsequent valuation adjustments		(51	)
OREO ending balance	$	4,928

Bank Owned Life Insurance

We hold bank owned life insurance (“BOLI”) to help offset the cost of employee benefit plans. BOLI provides earnings from accumulated cash value growth and provides tax advantages inherent in a life insurance contract. The cash surrender value of the BOLI at March 31, 2014 was $7.3 million.

Deposits

Total deposits decreased $15.7 million to $384.0 million at March 31, 2014 compared to $399.6 million at June 30, 2013 primarily due to planned runoff of certificates of deposit through lower interest rates and fluctuations in existing customer balances. Certificates of deposit decreased $10.0 million, or 6.7%, to $138.2 million while transaction accounts decreased $5.7 million, or 2.3%, to $245.8 million at March 31, 2014. Certificates of deposit comprised 36.0% of total deposits at March 31, 2014 compared to 37.1% of total deposits at June 30, 2013.

30

	At		At
	March 31,		June 30,
	2014		2013		$ Change			% Change
	(Dollars in thousands)
Noninterest-bearing accounts	$	55,395	$	54,765	$	630			1.2	%
NOW accounts		53,555		54,164		(609	)		(1.1	%)
Savings accounts		87,327		91,280		(3,953	)		(4.3	%)
Money market accounts		49,546		51,324		(1,778	)		(3.5	%)
Certificates of deposit		138,151		148,109		(9,958	)		(6.7	%)
Total	$	383,974	$	399,642	$	(15,668	)		(3.9	%)

Advances

FHLB advances totaled $59.9 million at March 31, 2014 compared to $37.6 million at June 30, 2013. Additional FHLB advances have been utilized to manage daily liquidity needs and to support loan growth.

Stockholders’ Equity

Stockholders’ equity was $54.4 million at March 31, 2014 compared to $53.0 million at June 30, 2013. The increase was primarily due to net income of $1.4 million for the nine months ended March 31, 2014. Unrealized gains and losses, net of taxes, in the available-for-sale investment portfolio are reflected as an adjustment to stockholders’ equity. At March 31, 2014, the adjustment to stockholders’ equity was a net unrealized loss of $217,000 compared to an unrealized loss of $111,000 at June 30, 2013.

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents and marketable investment securities that are not pledged as collateral. The levels of these assets are dependent on operating, financing, lending and investing activities during any given period. At March 31, 2014, cash and cash equivalents totaled $20.9 million compared to $24.5 million at June 30, 2013. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $88.0 million at March 31, 2014 compared to $96.0 million at June 30, 2013. At March 31, 2014, approximately $39.7 million of the investment portfolio was pledged as collateral for municipal deposits, FHLB borrowings and repurchase agreements. Municipal deposits totaled $5.7 million at March 31, 2014. 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 $59.9 million at March 31, 2014 compared to $37.6 million at June 30, 2013. At March 31, 2014, borrowing capacity with the FHLB totaled $70.1 million based on pledged collateral, of which $10.3 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 March 31, 2014, the Company had approximately $21.5 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.

31

The Company anticipates that it will have sufficient funds available to meet current loan commitments. At March 31, 2014, we had approximately $16.6 million in loan commitments, consisting of commitments to fund real estate loans. In addition to commitments to originate loans, we had $547,000 in unused letters of credit and approximately $30.1 million in unused lines of credit. At March 31, 2014, we had approximately $72.2 million in certificates of deposit due within one year, $24.8 million in certificates of deposit without specific maturities and $245.8 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 $15.7 million during the nine-month period ended March 31, 2014.

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

Off-Balance Sheet Arrangements

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

For the three months ended March 31, 2014, 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.

Capital Compliance

The Bank is subject to various regulatory capital requirements administered by the banking regulatory agencies. As of March 31, 2014, Jefferson Federal met each of its capital requirements. The Company and Bank’s actual capital amounts and ratios as of March 31, 2014 and June 30, 2013 are presented in the table below:

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	Actual					For Capital Adequacy Purposes						To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
	(Dollars in thousands)
At March 31, 2014
Total Risk-Based Capital (To Risk Weighted Assets)
Consolidated	$	55,327		15.17	%	$	29,170	≥		8.0	%	NA
Jefferson Federal Bank		52,078		14.28	%		29,165	≥		8.0	%		36,457	≥		10.0	%
Tier 1 Capital (To Risk Weighted Assets)
Consolidated		51,408		14.10	%		14,585	≥		4.0	%	NA
Jefferson Federal Bank		48,159		13.21	%		14,583	≥		4.0	%		21,874	≥		6.0	%
Tier 1 Capital (To Average Assets)
Consolidated		51,408		10.47	%		19,647	≥		4.0	%	NA
Jefferson Federal Bank		48,159		9.81	%		19,644	≥		4.0	%		24,555	≥		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	%

Under the capital regulations of the FDIC, Jefferson Federal must satisfy various capital requirements. Banks supervised by the FDIC must maintain a minimum leverage ratio of core (“Tier I”) capital to average adjusted assets of at least 3.00% if a particular institution has the highest examination rating and at least 4.00% for all others. At March 31, 2014, Jefferson Federal’s leverage capital ratio was 9.81%. The FDIC’s risk-based capital rules require banks supervised by the FDIC to maintain a ratio of risk-based capital to risk-weighted assets of at least 8.00%. Risk-based capital for Jefferson Federal is defined as Tier 1 capital plus Tier 2 capital. At March 31, 2014, Jefferson Federal had a ratio of total capital to risk-weighted assets of 14.28%. At March 31, 2014, the Bank met the minimum regulatory capital requirements, and the Bank was “well-capitalized” within the meaning of federal regulatory requirements.

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Item 3.    Quantitative and Qualitative Disclosures About Market Risk

For a discussion of the Company’s asset and liability management policies, as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see Item 7A in the Company’s Annual Report on Form 10-K for the year ended June 30, 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 March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.    Legal Proceedings

On January 31, 2014, a class action complaint, captioned William P. Cooper III v. Jefferson Bancshares, Inc., et al., was filed under Case No. 2014-cv-35 in the Chancery Court of Hamblen County, Tennessee, against the Company, its directors, the Bank, HomeTrust Bancshares, Inc. (“HomeTrust”) and HomeTrust Bank challenging the merger of the Company with and into HomeTrust. On April 1, 2014, the plaintiff filed an amended class action complaint. The complaint alleges, among other things, that the Company’s directors breached their fiduciary duties to the Company and its stockholders by agreeing to the proposed merger at an unfair price pursuant to a flawed sales process, by agreeing to terms with HomeTrust that discourages other bidders and by filing an initial Form S-4 registration statement which included a preliminary proxy statement/prospectus that purportedly omits material information. The plaintiff further alleges that the Company’s directors and officers were not independent or disinterested with respect to the merger. The plaintiff also alleges that HomeTrust and HomeTrust Bank aided and abetted the Company directors’ breaches of fiduciary duties. The complaint seeks, among other things, an order enjoining the defendants from consummating the merger, as well as attorneys’ and experts’ fees and certain other damages. The Company, its directors, and HomeTrust believe this action is without merit and intend to vigorously defend against the lawsuit. On April 24, 2014, the Company and the other defendants filed a motion to dismiss the lawsuit in the Chancery Court of Hamblen County, Tennessee.

Except as described above, 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. Except as described above, 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.

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

Period	(a) Total Number of Shares (or units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Progams		(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) That May Yet Be Purchased Under the Plans or Programs
Month #1
January 1, 2014 through January 31, 2014		—		—		—	403,553	(1)
Month #2
February 1, 2014 through February 28, 2014		—		—		—	403,553	(1)
Month #3
March 1, 2014 through March 31, 2014		—		—		—	403,553	(1)
Total		—		—		—	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.

Item 3.  Defaults Upon Senior Securities

None.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

None.

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Item 6.   Exhibits

31.1	Rule 13a-14(a)/15d-14(a) certification of the principal executive officer
31.2	Rule 13a-14(a)/15d-14(a) certification of the principal financial officer
32.0	Section 1350 certification
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Earnings, (iii) Consolidated Statements of Comprehensive Income; (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.

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SIGNATURES

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

	JEFFERSON BANCSHARES, INC.
May 15, 2014	/s/ Anderson L. Smith
	Anderson L. Smith
	President and Chief Executive Officer
May 15, 2014	/s/ Jane P. Hutton
	Jane P. Hutton
	Chief Financial Officer, Treasurer and Secretary

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