JEFFERSON BANCSHARES INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2004

¨	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

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

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

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

At May 14, 2004, the registrant had 8,385,517 shares of common stock, $.01 par value per share, outstanding.

INDEX


		Page
Part I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Condition - Unaudited nine months ended March 31, 2004 and year ended June 30, 2003	3

	Consolidated Statements of Earnings - Unaudited three and nine months ended March 31, 2004 and 2003	4

	Consolidated Statements of Changes in Stockholders’ Equity – Unaudited nine months ended March 31, 2004 and year ended June 30, 2003	5

	Consolidated Statements of Cash Flows - Unaudited nine months ended March 31, 2004 and 2003	7

	Notes to Consolidated Financial Statements - Unaudited	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	13

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29

Item 4.	Controls and Procedures	29

Part II – OTHER INFORMATION

Item 1.	Legal Proceedings	30
Item 2.	Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities	30
Item 3.	Defaults Upon Senior Securities	31
Item 4.	Submission of Matters to a Vote of Security Holders	31
Item 5.	Other Information	31
Item 6.	Exhibits and Reports on Form 8-K	31

SIGNATURES

Jefferson Bancshares, Inc.

Consolidated Statements of Condition

March 31, 2004 and June 30, 2003

(Dollars in Thousands)


	March 31, 2004			June 30, 2003
	(Unaudited)
Assets
Cash and cash equivalents	$	3,598		$	7,597
Interest-earning deposits		3,636			88,946
Investment securities classified as available for sale, net		98,586			76,400
Federal Home Loan Bank stock		1,565			1,518
Loans receivable, net		185,997			180,010
Premises and equipment, net		5,108			4,168
Foreclosed real estate, net		670			1,227
Accrued interest receivable:
Investments		528			368
Loans receivable		1,036			1,566
Deferred tax asset		1,800			472
Cash surrender value of life insurance		5,027			—
Other assets		683			1,330

Total Assets	$	308,234		$	363,602

Liabilities and Stockholders’ Equity
Deposits	$	209,131		$	324,247
Federal Home Loan Bank advances		4,000			2,000
Other liabilities		648			570
Accrued income taxes		—			160

Total liabilities		213,779			326,977

Commitments and contingent liabilities		—			—
Stockholders’ equity:
Preferred stock, $.01 par value; 10,000,000 shares authorized; shares issued and outstanding-none		—			—
Common stock, $.01 par value; 30,000,000 shares authorized; 8,385,517 shares issued and outstanding		84			1,876
Unearned ESOP shares		(6,372	)		—
Additional paid-in capital		71,468			1,167
Unearned compensation		(3,417	)		—
Accumulated other comprehensive income		567			898
Retained earnings		32,125			32,684

Total stockholders’ equity		94,455			36,625

Total liabilities and stockholders’ equity	$	308,234		$	363,602

See accompanying notes to financial statements

Jefferson Bancshares, Inc.

Consolidated Statements of Earnings (Unaudited)

(Dollars in Thousands, Except Net Earnings Per Common Share)


	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
Interest income:
Interest on loans receivable	$	3,182		$	3,647		$	9,625		$	11,242
Interest on mortgage-backed securities		125			225			432			797
Interest on investment securities		663			304			1,996			985
Other interest		26			46			148			142

Total interest income		3,996			4,222			12,201			13,166

Interest expense:
Deposits		1,105			1,470			3,648			4,996
Advances from FHLB		25			25			75			75

Total interest expense		1,130			1,495			3,723			5,071

Net interest income		2,866			2,727			8,478			8,095
Provision for loan losses		—			240			—			787

Net interest income after provision for loan losses		2,866			2,487			8,478			7,308

Noninterest income:
Dividends from investments		26			25			48			25
Service charges and fees		154			169			473			507
Gain on sale of fixed assets		—			—			1			—
Gain on sale of investment securities, net		—			—			22			81
Gain on sale of foreclosed real estate, net		11			(3	)		76			37
Other		74			51			131			111

Total noninterest income		265			242			751			761

Noninterest expense:
Compensation and benefits		900			625			2,370			1,802
Occupancy expense		64			64			189			199
Equipment and data processing expense		280			212			722			629
SAIF deposit insurance premium		8			10			29			30
REO Expense		26			117			156			264
Advertising		29			27			151			106
Contribution to Jefferson Federal Charitable Foundation		—			—			4,000			—
Other		363			286			1,115			845

Total noninterest expense		1,670			1,341			8,732			3,875

Earnings before income taxes		1,461			1,388			497			4,194

Income taxes:
Current		440			471			1,218			1,513
Deferred		(12	)		(94	)		(1,129	)		(82	)

Total income taxes		428			377			89			1,431

Net earnings (loss)	$	1,033		$	1,011		$	408		$	2,763

Net earnings per common share	$	0.13		$	0.13		$	0.05		$	0.34

Net earnings per common share- assuming dilution	$	0.13		$	0.13		$	0.05		$	0.34

See accompanying notes to financial statements

Jefferson Bancshares, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

Year Ended June 30, 2003

and Nine Months Ended March 31, 2004 (Unaudited)

(Dollars in Thousands)


	Common Stock			Additional Paid-in Capital			Unallocated common stock held by the Employee Stock Ownership Plan			Unearned Compensation		Accumulated Other Comprehensive Income			Retained Earnings			Total Stockholders’ Equity
Balance at June 30, 2002	$	1,876		$	1,167		$	—		$	—	$	537		$	29,321		$	32,901

Comprehensive income:
Net earnings		—			—			—			—		—			3,592			3,592
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $221		—			—			—			—		361			—			361

Total comprehensive income		—			—			—			—		—			—			3,953
Dividends		—			—			—			—		—			(229	)		(229	)

Balance at June 30, 2003		1,876			1,167			—			—		898			32,684			36,625

Comprehensive income:
Net earnings		—			—			—			—		—			(1,591	)		(1,591	)
Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($462)		—			—			—			—		(755	)		—			(755	)

Total comprehensive income		—			—			—			—		—			—			(2,346	)
Dividends		—			—			—			—		—			(335	)		(335	)
Merger of MHC into Jefferson Bancshares		—			100			—			—		—			11			111
Proceeds of stock conversion, net		66			64,406			—			—		—			—			64,472
Conversion of shares held under MHC structure		(1,876	)		1,876			—			—		—			—			—
Shares issued in exchange for shares held under MHC structure		14			(14	)		—			—		—			—			—
Contribution of stock to the Jefferson Federal Charitable Foundation		4			3,746			—			—		—			—			3,750
Common stock acquired by employee stock ownership plan		—			—			(6,701	)		—		—			—			(6,701	)
Shares committed to be released by the employee stock ownership plan		—			36			110			—		—			—			146

Balance at September 30, 2003		84			71,317			(6,591	)		—		143			30,769			95,722

(Continued)

Jefferson Bancshares, Inc.

Consolidated Statements of Changes in Stockholders’ Equity

Year Ended June 30, 2003

and Nine Months Ended March 31, 2004 (Unaudited)

(Dollars in Thousands)

(Continued)


	Common Stock	Additional Paid-in Capital	Unallocated common stock held by the Employee Stock Ownership Plan		Unearned Compensation	Accumulated Other Comprehensive Income		Retained Earnings		Total Stockholders’ Equity
Balance at September 30, 2003	84	71,317	(6,591	)	—	143		30,769		95,722

Comprehensive income:
Net earnings	—	—	—		—	—		966		966
Change in net unrealized gain (loss) on securities available for sale, net of taxes of ($7)	—	—	—		—	(12	)	—		(12	)

Total comprehensive income	—	—	—		—	—		—		954
Dividends	—	—	—		—	—		(307	)	(307	)
Stock options exercised	—	33								33
Shares committed to be released by the employee stock ownership plan	—	49	110		—	—		—		159


Tax benefit from exercise of nonqualifying stock options		—		28		—			—			—		—			28

Balance at December 31, 2003	$	84	$	71,427	$	(6,481	)	$	—		$	131	$	31,428		$	96,589
Comprehensive income:
Net earnings		—		—		—			—			—		1,033			1,033
Change in net unrealized gain (loss) on securities available for sale, net of taxes of $270		—		—		—			—			436		—			436

Total comprehensive income		—		—		—			—			—		—			1,469
Dividends		—		—		—			—			—		(336	)		(336	)
Shares committed to be released by the employee stock ownership plan		—		41		109			—			—		—			150
Stock grants under the 2004 Stock Incentive Plan		—		—		—			(3,527	)		—		—			(3,527	)
Earned portion of stock grants		—		—		—			110			—		—			110

Balance at March 31, 2004	$	84	$	71,468	$	(6,372	)	$	(3,417	)	$	567	$	32,125		$	94,455

See accompanying notes to financial statements

Jefferson Bancshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in Thousands)


	Nine Months ended March 31,
	2004			2003
Cash flows from operating activities:
Net earnings	$	408		$	2,763
Adjustments to reconcile net earnings to net cash provided by (used for) operating activities
Stock contributed to the Jefferson Federal Charitable Foundation		3,750			—
Allocated ESOP shares		455			—
Depreciation and amortization expense		205			218
Amortization of premiums (discounts), net on investment securities		(1	)		103
Provision for loan losses		—			787
Gain on sale of fixed assets		1			—
Gain on sale of investment securities and mortgage-backed securities, net		(22	)		(81	)
FHLB stock dividends		(47	)		(49	)
Amortization of deferred loan fees, net		(126	)		(116	)
Loss (gain) on foreclosed real estate, net		(76	)		(37	)
Earned portion of stock incentive plan		110			—
Increase in cash surrender value of life insurance		(27	)		—
Decrease (increase) in:
Accrued interest receivable		370			157
Other assets		647			(87	)
Deferred tax asset		(1,328	)		47
Increase (decrease) in other liabilities and accrued income taxes		(417	)		(250	)

Net cash provided by (used for) operating activities		3,902			3,455

Cash flows from investing activities:
Loan originations, net of principal collections		(5,393	)		1,517
Investment securities classified as available for sale:
Purchased		(74,479	)		(7,495	)
Proceeds from sale		24,914			3,725
Proceeds from maturity		21,500			7,565
Return of principal on mortgage-backed securities		5,373			6,171
Purchase of bank owned insurance		(5,000	)		—
Purchase of premises and equipment		(1,144	)		(229	)
Sale of fixed assets		1			—
Proceeds from sale of (additions to) foreclosed real estate, net		520			380

Net cash provided by (used for) investing activities		(33,708	)		11,634

Cash flows from financing activities:
Net increase (decrease) in deposits		(115,116	)		(4,518	)
Proceeds from stock conversion, net		57,771			—
Merger of MHC into Jefferson Bancshares		111			—
Proceeds from FHLB advances		3,500			—
Repayment of FHLB advances		(1,500	)		—
Purchase of company stock for stock based incentive plan		(3,527	)		—
Cash dividend paid on common stock		(776	)		(187	)
Proceeds from exercise of stock options		34			—

Net cash provided by (used for) financing activities		(59,503	)		(4,705	)

Net increase (decrease) in cash, cash equivalents, and interest-earning deposits		(89,309	)		10,384
Cash, cash equivalents, and interest-earning deposits at beginning of period		96,543			6,983

Cash, cash equivalents, and interest-earning deposits at end of period	$	7,234		$	17,367


Supplemental disclosures of cash flow information:
Cash paid during period for:
Interest on deposits	$	3,648	$	4,996
Interest on FHLB advances		75		75
Income taxes		1,642		1,739
Real estate acquired in settlement of loans	$	1,471	$	1,684

See accompanying notes to financial statements

(1)

Basis of Presentation

The accompanying unaudited 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”). Financial statements as of June 30, 2003 and earlier are for the Bank. The unaudited financial statements of Jefferson Bancshares, Inc. were prepared with generally accepted accounting principles and with instructions for Form 10-QSB and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations and cash flows. In the opinion of management, the accompanying unaudited financial statements contain all adjustments, which are normal and recurring in nature, necessary for fair presentation of the interim financial statements. The results of operations for the period ended March 31, 2004 are not necessarily indicative of the results which may be expected for the entire fiscal year. 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, 2003.

(2)

Corporate Reorganization and Stock Offering

On March 4, 2003, the Boards of Directors of Jefferson Bancshares, MHC (the “MHC”) and the Bank adopted a Plan of Conversion to convert the MHC from mutual to stock form and to complete a related stock offering in which shares of common stock representing the MHC’s ownership interest in the Bank would be sold to investors (the “Conversion”).

The Plan of Conversion was approved by the stockholders and depositors of the Bank on June 25, 2003. The reorganization and stock offering was completed on July 1, 2003. As of that date, the Company sold 6,612,500 shares of common stock for $10.00 per share. After taking into consideration estimated related expenses of approximately $1.6 million, net proceeds from the stock offering amounted to approximately $64.5 million. An additional 1,388,485 shares were issued to existing stockholders, based on an exchange rate of 4.2661 shares of Company common stock for each existing share of Bank common stock, and 375,000 shares were issued to the Jefferson Federal Charitable Foundation, resulting in the total issuance of 8,375,985 shares. Cash was paid in lieu of fractional shares.

Upon completion of the Conversion and stock offering, the MHC ceased to exist and its net assets of $111,000 were transferred into the Bank.

The Conversion was accounted for as a change in corporate form with no subsequent change in the historical basis of the Company’s assets, liabilities and equity.

(3)

Limitation on Capital Distributions

Office of Thrift Supervision regulations impose limitations upon all capital distributions by a savings institution, including cash dividends, payments to repurchase its shares and payments to shareholders of another institution in a cash-out merger. Under the regulations, an application to and the prior approval of the Office of Thrift Supervision is required prior to any capital distribution if the institution does not meet the criteria for “expedited treatment” of applications under Office of Thrift Supervision regulations (i.e., generally, examination ratings in the two top categories), the total capital distributions for the calendar year exceed net income for that year plus the amount of retained net income for the preceding two years, the institution would be undercapitalized following the distribution or the distribution would otherwise be contrary to a statute, regulation or agreement with or condition imposed by the Office of Thrift Supervision. If an application is not required, the institution must still provide prior notice to the Office of Thrift Supervision of the capital distribution if, like Jefferson Federal, it is a subsidiary of a holding company. In addition, the Office of Thrift Supervision could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the Office of Thrift Supervision determined that such distribution would constitute an unsafe or unsound practice. In the event Jefferson Federal’s capital falls below its regulatory requirements or the Office of Thrift Supervision notifies it that it is in need of more than normal supervision, Jefferson Federal’s ability to make capital distributions could be restricted. Jefferson Federal also may not make a capital distribution if the distribution would reduce its regulatory capital below the amount needed for the liquidation account established in connection with the Conversion described in Note 2.

(4)

Earnings Per Common Share

Earnings per common share and earnings per common share-assuming dilution have been computed on the basis of dividing net earnings by the weighted-average number of shares of common stock outstanding. The following table illustrates the number of weighted-average shares of common stock used in each corresponding earnings per common share calculation:


	Weighted-Average Shares Outstanding For The Three Months	Weighted-Average Shares Outstanding For The Nine Months
Shares used for:
Earnings Per Common Share March 31, 2003	7,330,982	7,330,982
Earnings Per Common Share-Assuming Dilution March 31, 2003	7,378,399	7,375,887
Earnings Per Common Share March 31, 2004	7,737,418	7,718,515
Earnings Per Common Share-Assuming Dilution March 31, 2004	7,784,096	7,765,484

(5)

Statements of Cash Flows

Dividends declared but not paid have been recorded in other liabilities; however, their non-effect on cash and operations dictates their exclusion from the cash flows until actually paid.

(6)

Accounting by Creditors for Impairment of a Loan

Impairment of loans having recorded investment of $358,000 at March 31, 2004 and an average investment of $232,000 during the nine-month period ended March 31, 2004 has been recognized in conformity with FASB Statement No. 118. The total allowance for loan losses related to these loans was $69,000 at March 31, 2004. Other nonaccrual loans at March 31, 2004 were approximately $1.3 million. For the nine months ended March 31, 2004, gross income which would have been recognized had impaired and nonaccrual loans been current in accordance with their original terms, amounted to approximately $81,000. The amount of interest income from impaired and non-accrual loans included in the Company’s interest income for the nine months ended March 31, 2004 was approximately $64,000. The amount of interest income from impaired loans included in net income for the nine months ended March 31, 2004 was approximately $14,000.

The following table summarizes the activity in the allowance for loan losses for the nine months ended March 31, 2004:


	Allowance for Loan Losses (Dollars in Thousands)
Balance at June 30, 2003				$	2,841
Provision for loan losses					—
Charge-offs	$	(536	)
Recoveries		219

Net (charge-offs)/recoveries					(317	)

Balance at March 31, 2004				$	2,524

(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.

The estimated fair values of the Company’s financial instruments are as follows:


	March 31, 2004						June 30, 2003
	Carrying Amount			Fair Value			Carrying Amount			Fair Value
	(Dollars in Thousands)
Financial assets:
Cash and due from banks and interest-earning deposits with banks	$	7,234		$	7,234		$	96,543		$	96,543
Available-for-sale securities		98,586			98,586			76,400			76,400
Federal Home Loan Bank stock		1,565			1,565			1,518			1,518
Loans receivable		185,997			185,330			180,010			182,715
Accrued interest receivable		1,564			1,564			1,934			1,934

Financial liabilities:
Deposits		(209,131	)		(206,155	)		(324,247	)		(325,855	)
FHLB advances		(4,000	)		(4,224	)		(2,000	)		(2,273	)

Off-balance sheet assets (liabilities):
Commitments to extend credit		—			(1,295	)		—			(3,238	)
Unused standby letters of credit		—			(141	)		—			(92	)
Unused lines of credit		—			(6,917	)		—			(1,848	)

(8)

Recapture of Tax Bad Debt Reserves

Current federal income tax law provides for elimination of the preferential tax bad debt deduction for thrift institutions and the recapture of tax bad debt reserves in excess of the base year reserves (pre-1988 reserves). The excess tax bad debt reserves is required to be recaptured to income ratably over a six-year period unless a thrift institution meets the “residential loan requirement” test and suspends the recapture for up to two years. For Jefferson Bancshares, this tax accounting change was effective for the year ending June 30, 1997. Because deferred taxes have been recorded for such excess tax bad debt reserves, this legislation has not had a material effect on the Company’s statement of condition or results of operation; however, it has resulted in an outflow of cash. The six-year recapture period began with the fiscal year ending June 30, 1999. The total amount of excess tax bad debt reserves to be recaptured during the six-year period amounted to $622,000, or $104,000 per year. On a cumulative basis, the Company has recaptured $519,000 in reserves during the five most recent fiscal years, which resulted in additional federal income taxes of $176,000. During the nine months ended March 31, 2004, Jefferson Bancshares recaptured $78,000 in excess tax bad debt reserves, which resulted in the cash payment of $26,000 in additional federal income tax.

(9)

Stock Incentive Plans

Under the Bank’s 1995 Stock Option Plan and the 1995 Management Recognition and Development Plan (“MRP”), the Company issued a combined total of 179,176 shares to officers, employees and non-employee directors. Both plans vested pro-rata over a five-year period, with the Stock Option Plan having an expiration date of April 1, 2007. As of March 31, 2004, there were 60,857 options outstanding and no remaining shares available for grant under the 1995 Stock Option Plan. During the nine-month period, 9,532 options were exercised.

On January 8, 2004, the Company adopted the 2004 Stock Incentive Plan which authorized the granting of 698,750 options and 279,500 restricted stock awards to employees and non-employee directors. As of March 31, 2004, there were 401,778 options and 160,711 restricted stock awards granted under this plan which will vest pro-rata over a five-year period. The 2004 plan has an expiration date of January 30, 2014.

The table below summarizes the status of the Company’s stock option plans as of March 31, 2004.


	Nine months ended March 31, 2004
	Shares		Weighted- average exercise price
Outstanding at beginning of period	70,389		$	4.08
Granted during the nine-month period	401,778		$	13.69
Options exercised	(9,532	)	$	3.52
Outstanding at March 31, 2004	462,635		$	12.44

Options exercisable at March 31, 2004	60,857		$	4.16

The following information applies to options outstanding at March 31, 2004:


Number outstanding		462,635
Range of exercise prices		$3.52-$13.69
Weighted-average exercise price		12.44
Weighted-average remaining contractual life		8.9 years
Number of options remaining for future issuance		296,972

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. 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, 2003.

General

Jefferson Bancshares, Inc. (also referred to as the “Company” or “Jefferson Bancshares”) was organized as a Tennessee corporation at the direction of Jefferson Federal Bank, formerly known as Jefferson Federal Savings and Loan Association of Morristown (referred to as the “Bank” or “Jefferson Federal”), in March 2003 to become the holding company for Jefferson Federal upon the completion of its “second-step” mutual-to-stock conversion (the “Conversion”) of Jefferson Bancshares, M.H.C. (the “MHC”). The Conversion was completed on July 1, 2003. As part of the Conversion, the MHC merged into Jefferson Federal thereby ceasing to exist and Jefferson Federal Savings and Loan Association of Morristown changed its name to “Jefferson Federal Bank.” The Company sold 6,612,500 shares of its common stock at a price of $10.00 per share to depositors of the Bank in a subscription offering raising approximately $64.5 million in net proceeds. The Company also exchanged approximately 1,389,000 shares of its common stock for all the outstanding shares of the Bank’s common stock (other than shares held by the MHC), representing an exchange ratio of 4.2661 for each share of Jefferson Federal outstanding. In addition, the Bank established the Jefferson Federal Charitable Foundation, which was funded with $250,000 and 375,000 shares of Company common stock.

The Company has no significant assets, other than all of the outstanding shares of the Bank and the portion of the net proceeds it retained from the Conversion, and no significant liabilities. 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 using such funds to originate loans secured by first mortgages on owner-occupied, one-to four- family residential properties, as well as to originate commercial real estate and multi-family mortgage loans, construction loans, consumer loans, commercial non-real estate loans and make other investments permitted by applicable laws and regulations.

The Bank’s savings accounts are insured up to the applicable legal limits by the Federal Deposit Insurance Corporation (“FDIC”) through the Savings Association Insurance Fund (“SAIF”). Jefferson Federal Bank 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, Inc.’s current expectations regarding its business strategies and their intended results and its 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. Factors which could affect actual results include interest rate trends, the general economic climate in the market area in which Jefferson Bancshares operates, as well as nationwide, Jefferson Bancshares’ ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation. 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, 2004 and 2003

Net Earnings

Net earnings increased $22,000, or 2.2%, to $1.0 million for the three months ended March 31, 2004. For the nine months ended March 31, 2004, net earnings decreased as a result of the nonrecurring expense associated with the $4.0 million contribution to the Jefferson Federal Charitable Foundation.


	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
	(Dollars in thousands, except per share data)
Net earnings	$	1,033		$	1,011		$	408		$	2,763
Net earnings per share, basic	$	0.13		$	0.13		$	0.05		$	0.34
Net earnings per share, diluted	$	0.13		$	0.13		$	0.05		$	0.34
Return on average assets (annualized)		1.33	%		1.55	%		0.13	%		1.40	%
Return on average equity (annualized)		4.35	%		11.39	%		0.43	%		10.64	%

Net Interest Income

Net interest income before loan loss provision increased $139,000, or 5.1%, to $2.9 million for the three months ended March 31, 2004. This increase was primarily the result of higher average earning assets, partially offset by a lower net interest margin. The net interest margin decreased 44 basis points to 3.87% for the three months ended March 31, 2004. The decline in net interest margin reflects growth in earning assets with lower yields due to current low market interest rates. The average balance of interest-earning assets increased $43.3 million to $296.6 million, while the average balance of interest-bearing liabilities decreased $13.0 million to $206.5 million. The average rate paid on interest-bearing liabilities decreased 53 basis points to 2.19%, while the average yield on interest-earning assets decreased 128 basis points to 5.39%. The interest rate spread was 3.20% and 3.94% for the quarters ended March 31, 2004 and 2003, respectively.

The following table summarizes changes in interest income and expense for the three-month period:


	Three Months Ended March 31,
	2004		2003		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	3,182	$	3,647	$	(465	)	(12.8	)%
Investment securities		663		304		359		118.1	%
Mortgage-backed securities		125		225		(100	)	(44.4	)%
Interest-earning deposits		10		31		(21	)	(67.7	)%
FHLB stock		16		15		1		6.7	%

Total interest income		3,996		4,222		(226	)	(5.4	)%
Interest expense:
Deposits		1,105		1,470		(365	)	(24.8	)%
Borrowings		25		25		—		0.0	%

Total interest expense		1,130		1,495		(365	)	(24.4	)%

Net interest income	$	2,866	$	2,727	$	139		5.1	%

For the nine months ended March 31, 2004, net interest income increased $383,000, or 4.7%, to $8.5 million. This increase was primarily the result of an increase in the average balance of earning assets which more than offset a decrease in the net interest margin. The net interest margin and interest rate spread were 3.73% and 3.02%, respectively, for the nine months ended March 31, 2004, compared to 4.23% and 3.84% for the comparable period in 2003.

The following table summarizes changes in interest income and expense for the nine-month period:


	Nine Months Ended March 31,
	2004		2003		$ Change			% Change
	(Dollars in thousands)
Interest income:
Loans	$	9,625	$	11,242	$	(1,617	)	(14.4	)%
Investment securities		1,996		985		1,011		102.6	%
Mortgage-backed securities		432		797		(365	)	(45.8	)%
Interest-earning deposits		102		93		9		9.7	%
FHLB stock		46		49		(3	)	(6.1	)%

Total interest income		12,201		13,166		(965	)	(7.3	)%
Interest expense:
Deposits		3,648		4,996		(1,348	)	(27.0	)%
Borrowings		75		75		—		0.0	%

Total interest expense		3,723		5,071		(1,348	)	(26.6	)%

Net interest income	$	8,478	$	8,095	$	383		4.7	%

The following table summarizes average balances and average yields and costs:


	Three Months Ended March 31,								Nine Months Ended March 31,
	2004				2003				2004				2003
	Average Balance		Yield/ Cost		Average Balance		Yield/ Cost		Average Balance		Yield/ Cost		Average Balance		Yield/ Cost
	(Dollars in thousands)
Loans	$	189,904	6.70	%	$	190,357	7.66	%	$	184,874	6.94	%	$	191,098	7.84	%
Investment securities		82,759	3.20	%		23,113	5.26	%		90,993	2.93	%		25,159	5.22	%
Mortgage-backed securities		14,428	3.47	%		24,895	3.62	%		15,986	3.59	%		25,560	4.16	%
Interest-earning deposits		7,924	0.50	%		13,422	0.92	%		9,673	1.41	%		11,743	1.06	%
FHLB stock		1,559	4.11	%		1,498	4.01	%		1,544	3.97	%		1,483	4.41	%
Deposits		203,783	2.17	%		217,459	2.70	%		209,419	2.32	%		220,194	3.03	%
Borrowings		2,667	3.75	%		2,000	5.00	%		2,222	4.56	%		2,000	5.00	%

Total interest income decreased $226,000, or 5.4%, to $4.0 million for the three months ended March 31, 2004 and decreased $965,000 or 7.3%, to $12.2 million for the nine months ended March 31, 2004. The decrease in interest income for both the three and nine month period was the result of a decrease in the average yield of interest-earning assets more than offsetting an increase in the average balance of interest-earning assets. Interest on loans decreased as a result of declining rates and a decrease in the average balance. The average yield on loans declined as we originated loans at lower interest rates due to the prevailing low interest rate environment, and loans with variable rates repriced to lower rates. Interest on investment securities increased due to an increase in the average balance which more than offset a decline in the average yield. The average balance of investments increased

as a result of the investment of Conversion proceeds in short-term securities. The average yield on investment securities decreased 117 basis points to 3.24% for the three month period and decreased 165 basis points to 3.03% for the nine month period. Approximately 15% of the investment portfolio is held in mortgage-backed securities (MBSs). A significant portion of our mortgage-backed securities has adjustable rates and has repriced downward in the current low interest rate environment. Dividends on FHLB stock were $16,000 for the three months ended March 31, 2004 and $15,000 for the same period in 2003. Dividends on FHLB stock are paid with additional shares of FHLB stock.

Interest expense decreased $365,000, or 24.4%, to $1.1 million for the three month period ended March 31, 2004 and decreased $1.3 million, or 26.6%, to $3.7 million for the nine month period ended March 31, 2004. The decline in the average balance of certificates of deposit more than offset increases in transaction accounts for both the three and nine month period ended March 31, 2004. The decline in certificates of deposit resulted from our decision not to aggressively compete for higher costing deposits. The average rate paid on deposits declined for both the three and nine month periods in 2004 as compared to the same periods in 2003 due to the current low interest rate environment.

Provision for Loan Losses

We review the level of the allowance on a monthly basis and establish the provision for loan losses based on the level of subprime loans in the loan portfolio, delinquency levels, loss experience, economic conditions, and other factors related to the collectibility of the loan portfolio. We use Beacon credit scores to predict the likelihood that an existing borrower will become a credit risk. We consider loans to borrowers with a Beacon credit score below 600 to be “subprime”. Provision for loan losses decreased $240,000 for the three months ended March 31, 2004 compared to the same period in 2003 due to lower estimated losses in the loan portfolio. For the nine months ended March 31, 2004, the provision for loan losses decreased $787,000 compared to the nine month period in 2003 as there were no additions to the allowance for loan losses during the nine month period ended March 31, 2004. Net charge-offs were $317,000 for the nine month period ended March 31, 2004 compared to $604,000 for the same period in 2003. Nonaccrual loans were $1.3 million at March 31, 2004 compared to $2.1 million at March 31, 2003.

Noninterest Income

Noninterest income increased $23,000, or 9.5%, to $265,000 for the three months ended March 31, 2004 due to a combination of factors, including gain on sale of foreclosed property more than offsetting a decrease in service charges and fees. In addition, the cash surrender value of life insurance, which was purchased during the current quarter, increased $27,000.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the three months ended March 31, 2004 compared to the same period in 2003.


	Three Months Ended March 31,					$ Change			% Change
	2004		2003			$ Change			% Change
	(Dollars in thousands)
Dividends from investments	$	26	$	25		$	1		4.0	%
Service charges and fees		154		169			(15	)	(8.9	)%
Gain on sale of fixed assets		—		—			—		NM
Gain on sale of foreclosed property		11		(3	)		14		NM
Other		74		51			23		45.1	%

Total noninterest income	$	265	$	242		$	23		9.5	%

Noninterest income decreased $10,000, or 1.3%, to $751,000 for the nine months ended March 31, 2004, primarily due to a decrease in gain on sale of investments and service charges and fees more than offsetting increases in dividends from investments and gain on sale of foreclosed property. The cash surrender value of life insurance increased $27,000 for the nine months ended March 31, 2004 compared to none for the comparable period in 2003.

The following table summarizes the dollar amounts for each category of noninterest income, and the dollar and percent changes for the nine months ended March 31, 2004 compared to the same period in 2003.


	Nine Months Ended March 31,				$ Change			% Change
	2004		2003		$ Change			% Change
	(Dollars in thousands)
Dividends from investments	$	48	$	25	$	23		92.0	%
Service charges and fees		473		507		(34	)	(6.7	)%
Gain on sale of fixed assets		1		—		1		NM
Gain on sale of investments		22		81		(59	)	(72.8	)%
Gain on sale of foreclosed property		76		37		39		105.4	%
Other		131		111		20		18.0	%

Total noninterest income	$	751	$	761	$	(10	)	(1.3	)%

Noninterest Expense

Noninterest expense increased $329,000 to $1.7 million for the three months ended March 31, 2004 due primarily to an increase in compensation and benefits. The increase in compensation and benefits was due primarily to expenses related to the Employee Stock Ownership Plan (ESOP) and the Stock Incentive Plan. Compensation expense is recognized for the ESOP in an amount equal to the fair market value of shares committed to be released for allocation to participant accounts. For the three-month period, compensation expense related to the ESOP was $150,000 and expense related to the Stock Incentive Plan was $110,000.

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, 2004 compared to the same period in 2003.


	Three Months Ended March 31,				$ Change			% Change
	2004		2003		$ Change			% Change
	(Dollars in thousands)
Compensation and benefits	$	900	$	625	$	275		44.0	%
Occupancy		64		64		—		0.0	%
Equipment and data processing		280		212		68		32.1	%
SAIF Deposit insurance premiums		8		10		(2	)	(20.0	)%
REO expense		26		117		(91	)	(77.8	)%
Advertising		29		27		2		7.4	%
Other		363		286		77		26.9	%

Total noninterest expense	$	1,670	$	1,341	$	329		24.5	%

Noninterest expense increased $4.9 million to $8.7 million for the nine months ended March 31, 2004 due primarily to the $4.0 million contribution to the Jefferson Federal Charitable Foundation. Compensation and benefits increased $568,000, or 31.5%, due primarily to expenses related to the ESOP. For the nine months, compensation expense related to the ESOP was $455,000 and expense related to the Stock Incentive Plan was $110,000.

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, 2004 compared to the same period in 2003.


	Nine Months Ended March 31,				$ Change			% Change
	2004		2003		$ Change			% Change
	(Dollars in thousands)
Compensation and benefits	$	2,370	$	1,802	$	568		31.5	%
Occupancy		189		199		(10	)	(5.0	)%
Equipment and data processing		722		629		93		14.8	%
SAIF Deposit insurance premiums		29		30		(1	)	(3.3	)%
REO expense		156		264		(108	)	(40.9	)%
Advertising		151		106		45		42.5	%
Contribution to the Jefferson Federal Charitable Foundation		4,000		—		4,000		NM
Other		1,115		845		270		32.0	%

Total noninterest expense	$	8,732	$	3,875	$	4,857		125.3	%

Income Taxes

Income tax expense for the three months ended March 31, 2004 was $428,000 compared to $377,000 for the same period in 2003. Income tax expense for the nine months ended March 31, 2004 was $89,000 compared to income tax expense of $1.4 million for the same period in 2003. The decrease in income tax expense (i.e. current and deferred) for the nine months was due to the contribution of cash and common stock to the Jefferson Federal Charitable Foundation. The contribution to the Foundation is tax deductible, subject to a limitation based on 10% of the Company’s annual taxable income. Any unused portion of the deduction may be carried forward for five years following the year in which the contribution is made.

Financial Condition

Assets

Total assets at March 31, 2004 were $308.2 million, a decrease of $55.4 million or 15.2%, from total assets of $363.6 million at June 30, 2003. At June 30, 2003, orders received in the subscription and community offering totaled in excess of $105.0 million. Approximately $39.1 million of unfilled orders was returned to subscribers during the following quarter.

Cash, Cash Equivalents and Interest-Earning Deposits

Cash and cash equivalents were $3.6 million at March 31, 2004 compared to $7.6 million at June 30, 2003. Interest-earning deposits decreased $85.3 million to $3.6 million at March 31, 2004. This decrease is primarily attributable to the investment of Conversion proceeds and the return of funds for unfilled stock orders.

Investments

Our investment portfolio consists primarily of Federal agency securities with maturities of seven years or less, municipal securities and mortgage-backed securities with stated final maturities of thirty years or less. Investment securities increased $22.2 million, or 29.0%, to $98.6 million due primarily to the investment of Conversion proceeds and the reinvestment of proceeds from called securities. Investment securities classified as available-for-sale are carried at fair market value and reflect an unrealized gain of $918,000, or $567,000 net of taxes.

The following table sets forth the carrying values of our investment securities portfolio at the dates indicated. All of our investment securities are classified as available-for-sale.


At March 31, 2004:
	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in Thousands)
Securities Available-for-Sale
Debt securities:
Federal agency	$	80,438		$	720	$	(16	)	$	81,142
Municipals	$	3,317		$	35	$	(5	)	$	3,347
Mortgage-backed		13,913			190		(6	)	$	14,097

Total securities available-for-sale	$	97,668		$	945	$	(27	)	$	98,586

Weighted-average rate		3.26	%

Federal Home Loan Bank of Cincinnati stock	$	1,565		$	—	$	—		$	1,565

Weighted-average rate		4.00	%


At June 30, 2003:
	Amortized Cost			Unrealized Gains		Unrealized Losses			Fair Value
	(Dollars in Thousands)
Securities Available-for-Sale
Debt securities:
Federal agency	$	55,646		$	928	$	—		$	56,574
Mortgage-backed		19,306			520		—			19,826

Total securities available-for-sale	$	74,952		$	1,448	$	—		$	76,400

Weighted-average rate		3.40	%

Federal Home Loan Bank of Cincinnati stock	$	1,518		$	—	$	—		$	1,518

Weighted-average rate		4.00	%

Loans

Net loans increased $6.0 million, or 3.3%, to $186.0 million at March 31, 2004. Our primary lending activity is the origination of loans secured by real estate. We originate real estate loans secured by one- to four-family homes, commercial real estate, multi-family real estate and land. We also originate construction loans and home equity loans. Mortgage loans increased $7.8 million, to $170.2 million at March 31, 2004. Mortgage loans represented 90.1% of gross loans at March 31, 2004. The largest segment of our mortgage loans is one- to four-family loans. One- to

four-family loans decreased $7.1 million, or 8.4%, to $77.5 million as borrowers refinanced their loans with other lenders in the low interest rate environment.

Commercial real estate loans are the second largest segment of our mortgage loan portfolio. We have emphasized this type of lending for several years and have grown this portfolio to $63.2 million at March 31, 2004, an increase of $14.2 million, or 29.0%, from the level at June 30, 2003.

During the nine months ended March 31, 2004, multi-family loans decreased $421,000, or 3.2%, to $12.8 million, construction loans decreased $714,000, or 19.9%, to $2.9 million, and land loans increased $903,000, or 8.9% to $11.1 million.

Commercial business loans decreased $1.0 million, or 7.7%, to $12.4 million at March 31, 2004. Most of the commercial business loans that we have originated have been tied to prime and will reprice quickly as interest rates change.

We originate a variety of consumer loans, including loans secured by automobiles, mobile homes and deposit accounts at Jefferson Federal. Consumer loans decreased $1.0 million, or 15.1%, to $6.2 million at March 31, 2004. We have tightened our underwriting standards and have originated fewer subprime loans in recent periods. In addition, we have experienced low demand for automobile loans as a result of low-cost financing offered through automobile dealers.

Loans receivable, net are summarized as follows:


	At March 31, 2004					At June 30, 2003
	Amount			Percent of Portfolio		Amount			Percent of Portfolio
	(Dollars in Thousands)
Real estate loans:
Residential one-to-four family	$	77,549		41.1	%	$	84,628		46.2	%
Multi-family		12,808		6.8	%		13,229		7.2	%
Construction		2,870		1.5	%		3,584		2.0	%
Commercial		63,176		33.4	%		49,020		26.7	%
Land		11,100		5.9	%		10,197		5.6	%
Home equity line of credit		2,668		1.4	%		1,736		0.9	%

Total real estate loans		170,171		90.1	%		162,394		88.6	%

Commercial business loans		12,440		6.6	%		13,472		7.4	%

Non-real estate loans:
Loans secured by deposit accounts		1,639		0.9	%		1,841		1.0	%
Other consumer loans		1,575		0.8	%		1,715		0.9	%
Loans secured by automobiles		2,452		1.3	%		3,081		1.7	%
Mobile home loans		577		0.3	%		719		0.4	%

Total non-real estate loans		6,243		3.3	%		7,356		4.0	%

Total commercial business and consumer loans		18,683		9.9	%		20,828		11.4	%

Subtotal		188,854		100.0	%		183,222		100.0	%
Less:
Deferred loan fees, net		(332	)				(366	)
Unearned discount on loans		(1	)				(5	)
Allowance for losses		(2,524	)				(2,841	)

Loans receivable, net	$	185,997				$	180,010

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 consider the level of subprime loans held in the portfolio

and delinquency levels and loss experience with respect to subprime and prime loans. In addition, we assess the allowance using factors that cannot be associated with specific credit or loan categories. These factors include our subjective evaluation of local and national economic and business conditions, portfolio concentration and changes in the character and size of the loan portfolio. The allowance methodology appropriately reflects a margin for the imprecision necessarily inherent in estimates of expected credit losses.

The Office of Thrift Supervision, as an integral part of its examination process, periodically reviews our allowance for loan losses. The Office of Thrift Supervision may require us to make additional provisions for loan losses based on judgments different from ours.

Due to net charge-offs, the allowance for loan losses decreased $317,000 to $2.5 million at March 31, 2004. There were no additions to the allowance for loan losses during the current nine-month period. At March 31, 2004, our allowance for loan losses represented 1.34% of total gross loans and 197.7% of nonperforming loans, compared to 1.54% of total gross loans and 161.79% of nonperforming loans at June 30, 2003.


	Three Months Ended March 31,						Nine Months Ended March 31,
	2004			2003			2004			2003
	(Dollars in thousands)
Balance at beginning of period	$	2,582		$	2,690		$	2,841		$	2,696
Provision for loan losses		—			240			—			787
Recoveries		44			75			219			354
Charge-offs		(102	)		(126	)		(536	)		(958	)

Net charge-offs		(58	)		(51	)		(317	)		(604	)

Allowance at end of period	$	2,524		$	2,879		$	2,524		$	2,879

Net charge-offs to average outstanding loans during the period		0.12	%		0.11	%		0.23	%		0.42	%

Nonperforming Assets

We consider repossessed assets and nonaccrual loans to be nonperforming. Loans are reviewed on a monthly basis and are generally placed on a nonaccrual status when the loan becomes more than 90 days delinquent. Nonperforming loans decreased $479,000, or 27.3%, to $1.3 million at March 31, 2004. Foreclosed real estate decreased $557,000, to $670,000 at March 31, 2004 from $1.2 million at June 30, 2003. Foreclosed real estate 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 losses. Any subsequent writedown of foreclosed real estate is charged against earnings.


	March 31, 2004			June 30, 2003
	(Dollars in thousands)
Nonaccruing loans:
Real Esate	$	1,225		$	1,352
Commercial		20			387
Consumer		32			17

Total nonaccrual loans		1,277			1,756
Real estate owned		670			1,227
Other repossessed assets		3			16

Total nonperforming assets	$	1,950		$	2,999

Total nonperforming assets to total assets		0.63	%		0.82	%
Total nonperforming loans to net loans		0.69	%		0.98	%
Allowance for loan losses to total nonperforming loans		197.65	%		161.79	%

Bank Owned Life Insurance

During the quarter ended March 31, 2004, we purchased 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 at the end of the period was $5.0 million.

Deposits

Total deposits decreased $115.1 million, or 35.5% to $209.1 million at March 31, 2004. This decrease was primarily attributable to the funds held in the Conversion account at June 30, 2003, for the purchase of Jefferson Bancshares common stock.


	March 2004		June 2003		$ Change			% Change
	(Dollars in thousands)
Certificates of deposit	$	144,153	$	159,437	$	(15,284	)	(9.6	)%
Savings accounts		14,151		19,346		(5,195	)	(26.9	)%
Money market accounts		28,470		28,588		(118	)	(.04	)%
NOW accounts		15,158		17,767		(2,609	)	(14.7	)%
Non-interest bearing accounts		7,199		99,109		(91,910	)	(92.7	)%

	$	209,131	$	324,247	$	(115,116	)	(35.5	)%

Advances and Other Liabilities

FHLB advances increased $2.0 million to $4.0 million at March 31, 2004.

Stockholders’ Equity

Stockholders’ equity increased $57.8 million to $94.5 million at March 31, 2004 due primarily to $64.5 million in net proceeds from the Conversion. Retained earnings decreased $559,000 to $32.1 million at March 31, 2004 due to the expense recognition of our contribution to the Jefferson Federal Charitable Foundation and the payment of dividends to shareholders. 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, 2004, the adjustment to stockholders’ equity was an unrealized gain of $567,000 compared to a net unrealized gain of $898,000 at June 30, 2003.

Liquidity and Capital Resources

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

We regularly adjust our investments in liquid assets based 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 interest-earning assets. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2004, cash and cash equivalents totaled $3.6 million and interest-earning deposits totaled $3.6 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $98.6 million at March 31, 2004. In addition, at March 31, 2004, we had arranged the ability to borrow a total of approximately $56.6 million from the Federal Home Loan Bank of Cincinnati. On that date, we had advances outstanding of $4.0 million.

At March 31, 2004, we had approximately $1.3 million in loan commitments, consisting of $47,000 in commitments to originate residential loans and $1.2 million to originate commercial loans. In addition to commitments to originate loans, we had $2.0 million in loans-in-process primarily to fund undisbursed proceeds of construction loans, $141,000 in unused standby letters of credit and approximately $6.9 million in unused lines of credit. We had $104.8 million in certificates of deposit due within one year and $65.0 million in other deposits without specific maturities at March 31, 2004. We believe, based on past experience, that a significant portion of those deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

Our primary investing activities are the origination of loans and the purchase of investment securities. During the nine-month period ended March 31, 2004, net cash used in investing activities totaled $33.7 million, primarily reflecting the purchase of investment securities in the amount of $74.5 million, offset by the redemption, prepayment, and sale of securities in the amount of $51.8 million. During the period, loan originations, net of principal collections were $5.4 million and funds used to purchase bank owned life insurance amounted to $5.0 million.

Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank advances. We experienced a net decrease in total deposits of $115.1 million during the nine-month period ended March 31, 2004. However, we experienced a decline of only $55.4 million in assets during that period, most of which related to the return of excess subscriptions in connection with the Company’s stock offering. Deposit flows are affected by the overall level of interest rates and products offered by us and our local competitors and other factors. Occasionally, we offer promotional rates on certain deposit products in order to attract deposits. In the nine-month period ended March 31, 2004, Federal Home Loan Bank advances increased $2.0 to $4.0 million.

At March 31, 2004, the average liquidity ratio was 37.04% compared to 26.23% at March 31, 2003. The capital from the Conversion has significantly increased our liquidity and capital resources. Over time, we expect the initial level of liquidity after the Conversion will be reduced as net proceeds from the stock offering are used for future lending and operational growth and expansion activities.

Capital Compliance

The following table presents our capital position relative to our regulatory capital requirements at March 31, 2004, and June 30, 2003:


	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, 2004:

Total Capital (To Risk Weighted Assets)	$	65,011	>	38.5	%	$	13,495	>	8.0	%	$	16,869	>	10.0	%

Core Capital (To Tangible Assets)		62,897	>	22.2	%		11,327	>	4.0	%		14,159	>	5.0	%

Tangible Capital (To Tangible Assets)		62,897	>	22.2	%		4,248	>	1.5	%		N/A

Tier 1 Capital (To Risk Weighted Assets)		62,897	>	37.3	%		N/A					10,122	>	6.0	%

At June 30, 2003:

Total Capital (To Risk Weighted Assets)		37,472	>	21.1	%		14,235	>	8.0	%		17,794	>	10.0	%

Core Capital (To Tangible Assets)		35,255	>	9.8	%		14,468	>	4.0	%		18,085	>	5.0	%

Tangible Capital (To Tangible Assets)		35,255	>	9.8	%		5,426	>	1.5	%		N/A

Tier 1 Capital (To Risk Weighted Assets)		35,255	>	19.8	%		N/A					10,676	>	6.0	%

Effect of Inflation and Changing Prices

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

Item 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, 2003. 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 are no material changes in the market risk of the Company’s asset and liability position since June 30, 2003. As a result of the funds raised in the Company’s stock offering and management’s strategy of investing the funds from the offering and excess funds from operations in short-term investments with minimal extension risk, the Company is now more asset sensitive and is likely to experience an increase in net interest income in a rising interest rate environment.

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, 2004 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II

Item 1. Legal Proceedings

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

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities


Period	( a ) Total Number of Shares (or Units) Purchased	( b ) Average Price Paid per Share (or Unit)		( c ) Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs	( d ) Maximum Number (or Approximate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs
Month #1 January 1, 2004 through January 31, 2004	—		—	—	—

Month #2 February 1, 2004 through February 29, 2004	25,500	$	14.00	25,500	254,000	(1)

Month #3 March 1, 2004 through March 31, 2004	225,500	$	14.06	225,500	28,500

Total	251,000	$	14.06	251,000	N/A

(1)	On February 10, 2004, the Company announced that it had funded a trust that would purchase up to 279,500 shares to be used to fund restricted stock awards under the Company’s 2004 Stock-Based Incentive Plan.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

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

32.1 Section 1350 certification

Reports on Form 8-K during the quarter ended March 31, 2004:

On February 2, 2004, the Company furnished a Form 8-K in which it reported under Item 12 the announcement of its results of operations for the quarter ended December 31, 2003.

On February 10, 2004, the Company furnished a Form 8-K in which it reported under Item 9 the announcement that the Company had funded a trust that would purchase up to 279,500 shares of the Company’s outstanding stock to be used to fund restricted stock awards under the 2004 Stock-Based Incentive Plan.

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 14, 2004		/s/ Anderson L. Smith
		Anderson L. Smith
		President and Chief Executive Officer

May 14, 2004		/s/ Jane P. Hutton
		Jane P. Hutton
		Chief Financial Officer, Treasurer and Secretary

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents