SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB
(MARK ONE)

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

For the fiscal year ended June 30, 2000
                                       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 No. 0-22287

                      CUMBERLAND MOUNTAIN BANCSHARES, INC.
--------------------------------------------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

      TENNESSEE                                                 31-1499488
-------------------------------                             --------------------
(State or other jurisdiction of                             (I.R.S. Employer
incorporation or organization)                              Identification No.)

1431 CUMBERLAND AVENUE, MIDDLESBORO, KENTUCKY                  40965
---------------------------------------------                ----------
  (Address of principal executive offices)                   (Zip Code)

          Issuer's telephone number, including area code (606) 248-4584
                                                         --------------

           Securities registered under Section 12(b) of the Act: NONE
                                                                 ----

                Securities registered under Section 12(g) of the Act:
                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                -----------------------------------------------------
                                (Title of Class)

     Check  whether  the issuer:  (l) filed all reports  required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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
    -----    -----

     Check if there is no disclosure  of  delinquent  filers in response to Item
405 of Regulation S-B in this form,  and no disclosure  will be contained to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

     State issuer's revenues for its most recent fiscal year: $10.6 million.

     The aggregate market value of the voting stock held by nonaffiliates of the
registrant  based on the last sale of which the  registrant was aware ($6.25 per
share), was approximately $2.2 million as of August 3, 2000. Solely for purposes
of this calculation,  the term "affiliate" refers to all directors and executive
officers of the registrant and all stockholders beneficially owning more than 5%
of the registrant's common stock.

     As of August 1, 2000,  there were issued and outstanding  680,159 shares of
the registrant's common stock.

     Transitional Small Business  Disclosure Format (check one): YES      NO X
                                                                    ----    ---

                       DOCUMENTS INCORPORATED BY REFERENCE

     1. Portions of Proxy  Statement for the 2000 Annual Meeting of Stockholders
(Part III)
<PAGE>

                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS
--------------------------------

     CUMBERLAND MOUNTAIN BANCSHARES,  INC. Cumberland Mountain Bancshares,  Inc.
(the  "Company") is the holding company for  Middlesboro  Federal Bank,  Federal
Savings Bank ("Middlesboro Federal" or the "Bank"). The Company was organized on
December 13, 1996 at the direction of the Board of Directors of the Bank for the
purpose of holding all of the capital stock of the Bank. On March 31, 1997,  the
Company  completed its initial public  offering.  A total of 439,731 shares were
sold in a subscription  offering in connection with the conversion of Cumberland
Mountain Bancshares,  M.H.C. (the "Mutual Holding Company") from mutual to stock
form  and  the  reorganization  of the  Bank  as a  subsidiary  of  the  Company
(collectively,  the  "Conversion  and  Reorganization").  An additional  239,069
shares were issued to the public  stockholders of the Bank in exchange for their
shares of the common  stock of the Bank.  Shares of the common stock of the Bank
that had been held by the Mutual Holding Company were canceled.  The Company has
no significant  assets other than all of the outstanding shares of the Bank, and
the portion of the net proceeds from the offering  retained by the Company,  and
the Company has no significant  liabilities  other than the debt incurred by the
Company's Employee Stock Ownership Plan.  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.

     The Company is a unitary  savings and loan  holding  company  which,  under
existing  laws,  would  generally  not be  restricted as to the type of business
activities  in which it may engage,  provided  that  continues to be a qualified
thrift  lender  ("QTL").  See  "Regulation  --  Regulation of the Company" for a
description of certain regulations applicable to the Company.

     The Company's  principal  executive office is located at the home office of
the  Bank  at 1431  Cumberland  Avenue,  Middlesboro,  Kentucky  40965,  and its
telephone number is (606) 248-4584.

     MIDDLESBORO  FEDERAL BANK, FEDERAL SAVINGS BANK.  Middlesboro  Federal is a
federally  chartered  stock  savings  bank  that  was  organized  in  1994  as a
subsidiary  of the Mutual  Holding  Company.  Prior to that  date,  the Bank had
operated  since 1915 in  Middlesboro,  Kentucky  and since  1976 in  Cumberland,
Kentucky.

     Middlesboro  Federal is primarily  engaged in attracting  deposits from the
general public through its offices and using those and other  available  sources
of funds to originate loans secured by single-family  residences  located in the
counties where its offices are located. Such loans amounted to $68.5 million, or
61.5%, of Middlesboro Federal's total loan portfolio (before net items). At June
30, 2000, Middlesboro Federal held $18.6 million in commercial real estate loans
at that date,  representing  16.7% of total loans (before net items).  The other
significant  areas of lending  activity by Middlesboro  Federal are multi-family
real estate loans,  construction  loans,  commercial business loans and consumer
loans which, as of June 30, 2000,  represented $879,000, or 0.79%, $3.5 million,
or 3.1%, $7.8 million, or 7.0%, and $12.2 million, or 10.91%,  respectively,  of
Middlesboro  Federal's  total loan  portfolio.  Middlesboro  Federal  also makes
substantial  investments  in  United  States  Treasury  and  federal  government
obligations  and  mortgage-backed   securities  which  are  insured  by  federal
agencies.  As of  June  30,  2000,  the  carrying  value  of U.S.  Treasury  and
government  agency  securities  was $2.7 million and the  carrying  value of its
mortgage-backed securities portfolio, was $2.6 million.

     Middlesboro  Federal is subject to  regulation  by the OTS,  as its primary
federal  regulator and by the Federal Deposit  Insurance  Corporation  ("FDIC"),
which, through the Savings Association  Insurance Fund ("SAIF")  administered by
it, insures Middlesboro Federal's deposits up to applicable limits.  Middlesboro
Federal is a member of the Federal Home Loan Bank ("FHLB") of Cincinnati,  which
is one of the 12 banks which comprise the FHLB System.

         Middlesboro  Federal's  principal  executive  offices are located  1431
Cumberland  Avenue,  Middlesboro,  Kentucky,  40965, and its telephone number is
(606) 248-4584.


                                       2
<PAGE>

FINANCIAL MODERNIZATION LEGISLATION

         On November 12, 1999,  President Clinton signed legislation which could
have  a   far-reaching   impact  on  the  financial   services   industry.   The
Gramm-Leach-Bliley   ("G-L-B")  Act  authorizes  affiliations  between  banking,
securities  and  insurance  firms and  authorizes  bank  holding  companies  and
national banks to engage in a variety of new financial activities. Among the new
activities  that will be permitted to bank holding  companies are securities and
insurance  brokerage,   securities  underwriting,   insurance  underwriting  and
merchant banking.  The Federal Reserve Board, in consultation with the Secretary
of the Treasury,  may approve additional  financial  activities.  The G-L-B Act,
however,  prohibits  future  acquisitions  of existing  unitary savings and loan
holding  companies,  like the Company,  by firms which are engaged in commercial
activities and limits the permissible  activities of unitary  holding  companies
formed after May 4, 1999.

         The G-L-B Act imposes new requirements on financial  institutions  with
respect to customer  privacy.  The G-L-B Act generally  prohibits  disclosure of
customer  information  to  non-affiliated  third parties unless the customer has
been given the  opportunity  to object and has not objected to such  disclosure.
Financial  institutions  are further required to disclose their privacy policies
to customers  annually.  Financial  institutions,  however,  will be required to
comply  with state law if it is more  protective  of customer  privacy  than the
G-L-B Act.  The G-L-B Act directs the federal  banking  agencies,  the  National
Credit Union Administration,  the Secretary of the Treasury,  the Securities and
Exchange  Commission and the Federal Trade Commission,  after  consultation with
the National Association of Insurance Commissioners,  to promulgate implementing
regulations  within six months of enactment.  The privacy provisions will become
effective in November 2000, with full compliance required by July 1, 2001.

         The G-L-B Act contains  significant  revisions to the FHLB System.  The
G-L-B Act imposes new capital  requirements  on the FHLBs and authorizes them to
issue  two  classes  of stock  with  differing  dividend  rates  and  redemption
requirements.  The G-L-B Act  deletes  the  current  requirement  that the FHLBs
annually   contribute  $300  million  to  pay  interest  on  certain  government
obligations in favor of a 20% of net earnings formula. The G-L-B Act expands the
permissible  uses of FHLB advances by community  financial  institutions  (under
$500  million in assets) to include  funding  loans to small  businesses,  small
farms and small  agri-businesses.  The  G-L-B Act makes  membership  in the FHLB
voluntary for federal savings associations.

         The G-L-B  Act  contains  a variety  of other  provisions  including  a
prohibition  against ATM surcharges  unless the customer has first been provided
notice of the  imposition  and  amount of the fee.  The  G-L-B Act  reduces  the
frequency of Community  Reinvestment Act  examinations for smaller  institutions
and imposes certain reporting requirements on depository  institutions that make
payments  to   non-governmental   entities  in  connection  with  the  Community
Reinvestment  Act.  The  G-L-B  Act  eliminates  the SAIF  special  reserve  and
authorizes a federal  savings  association  that converts to a national or state
bank charter to continue to use the term "federal" in its name and to retain any
interstate branches.

         The  Company  is unable to  predict  the impact of the G-L-B Act on its
operations  at this time.  Although the G-L-B Act reduces the range of companies
with which may acquire  control of the Company,  it may facilitate  affiliations
with companies in the financial services industry.

MARKET AREA

         The Bank  considers its primary market area for its lending and deposit
services to be Bell and Harlan Counties in southeastern Kentucky and Knox County
in east  Tennessee  where its  branches  are located and the nearby  counties of
Claiborne and Union in upper east  Tennessee and western Lee County in Virginia.
The Bank's  immediate  market areas of Bell and Harlan  Counties in Kentucky and
Claiborne  County in Tennessee are  predominately  rural and lightly  populated.
Bell  and  Harlan  Counties  were  severely  impacted  by  the  decline  of  the
coal-mining  industry  in the  1980s  which  was  formerly  the  area's  largest
employer. According to 1990 Census figures, 35.9% and 32.3% of the households in
Bell and Harlan  Counties,  respectively,  were below the federal  poverty line.
Between 1980 and 1990,  the  population of Bell County  declined by 8.2% and the
population of Harlan County declined by 12.7%.  The median  household  income in
Bell County was  estimated  to be $14,819 in 1996  ranking  the county  110th in
Kentucky in terms of household  income.  Harlan County,  with a median household
income of $16,137,  was ranked 102nd. The 1994 unemployment rate for Bell County
was  7.9%.  In terms of  employment,  the  largest  industry  in Bell  County is
currently  health  services.  The  largest  single  employer in Bell


                                       3
<PAGE>
County is a  pork-processing  plant. Coal mining remains the largest employer in
Harlan  County.  Knox and Union  Counties  in  Tennessee  have more  diversified
economies  and higher  income  levels  than the Bank's  immediate  market  area,
reflecting  those  counties'  proximity  to  Knoxville,  the nearest  population
center.

LENDING ACTIVITIES

         GENERAL.  The Bank's  primary  lending  activity is the  origination of
conventional  mortgage  loans for the  purpose of  constructing,  purchasing  or
refinancing  owner-occupied,  one- to four-family  residential properties in its
primary  market  area.  At June 30, 2000,  one- to  four-family  mortgage  loans
comprised  $68.5 million,  or 61.5%,  of the Bank's gross loan  portfolio.  To a
lesser extent, the Bank originates construction loans,  multi-family residential
and  commercial  real  estate  loans  and has  purchased  whole  loans  and loan
participations to supplement its originations.  The Bank also originates secured
and unsecured commercial and consumer loans.

         During  recent  years,  the Bank has  expanded  the loan  portfolio  by
emphasizing  originations  in its  primary  market  areas  of  Bell  and  Harlan
Counties,  Kentucky  and  Claiborne,  Knox  and  Union  counties  in  Tennessee.
Management  has also sought to diversify the loan  portfolio  through  increased
origination of commercial  mortgages and commercial loans. A significant portion
of the  Bank's  loan  growth  in recent  years has  involved  loans  secured  by
properties in Knox County, Tennessee. Middlesboro Federal estimates that at June
30, 2000 its portfolio included  approximately $22.2 million in loans secured by
properties in Knox County.

         Set forth below is selected  data  relating to the  composition  of the
Bank's loan portfolio by type of loan at the dates indicated.
<TABLE>
<CAPTION>
                                                                            AT JUNE 30,
                                                          ---------------------------------------------------
                                                                  2000                           1999
                                                          --------------------          ---------------------
                                                          AMOUNT          %             AMOUNT            %
                                                          ------       -------          ------          -----
                                                                       (DOLLARS IN THOUSANDS)
<S>                                                       <C>          <C>              <C>             <C>
Mortgage Loans:
   One- to four-family.................................   $  68,479    61.51%%          $   64,825      56.16%
   Multi-family........................................         879     0.79                 2,350       2.04
   Commercial..........................................      18,584    16.69                18,837      16.32
Construction:
   One- to four-family.................................       2,078     1.87                 4,639       4.02
   Multi-family and commercial.........................       1,397     1.26                 1,832       1.59
Commercial.............................................       7,752     6.96                10,536       9.13
Consumer loans:
   Savings account.....................................       1,996     1.79                 1,868       1.61
   Automobile..........................................       3,032     2.72                 4,482       3.88
   Credit card.........................................         650     0.58                   644       0.55
   Other ..............................................       6,490     5.83                 5,424       4.70
                                                          ---------   ------              --------     ------
        Total loans....................................     111,337   100.00%              115,437     100.00%
                                                                      ======                           ======
Less:
   Loans in process....................................        (694)                        (2,248)
   Discounts...........................................          (1)                            (1)
   Allowance for loan losses...........................      (1,032)                        (1,576)
                                                          ---------                       ---------
     Total.............................................   $ 109,610                       $ 111,612
                                                          =========                       =========
</TABLE>

                                       4
<PAGE>

         LOAN  MATURITY  SCHEDULE.   The  following  table  sets  forth  certain
information  at June 30, 2000  regarding the dollar amount of loans  maturing in
the Bank's  portfolio based on their  contractual  terms to maturity,  including
scheduled repayments of principal. Demand loans, loans having no stated schedule
of repayments and no stated maturity,  and overdrafts are reported as due in one
year or less.  The table does not include  any  estimate  of  prepayments  which
significantly  shorten the average life of all mortgage  loans and may cause the
Bank's repayment experience to differ from that shown below.
<TABLE>
<CAPTION>
                                                              DUE AFTER
                                       DUE DURING             1 THROUGH             DUE AFTER
                                     THE YEAR ENDING        5 YEARS AFTER         5 YEARS AFTER
                                      JUNE 30, 2000         JUNE 30, 2000         JUNE 30, 2000           TOTAL
                                      -------------         -------------         -------------         -------
                                                           (IN THOUSANDS)
<S>                                    <C>                    <C>                   <C>                <C>
Real estate mortgage loans.............$    3,305             $  28,713             $  56,692          $ 88,710
Construction...........................     2,861                   199                   335             3,395
Commercial.............................     2,517                 6,059                 1,129             9,705
Consumer loans.........................     4,462                 4,273                   792             9,527
                                       ----------             ---------             ---------          --------
     Total.............................$   13,145             $  39,244             $  58,948          $111,337
                                       ==========             =========             =========          ========
</TABLE>

         The next  table sets  forth at June 30,  2000 the dollar  amount of all
loans due one year or more after June 30, 2000 which have predetermined interest
rates and have floating or adjustable interest rates.
<TABLE>
<CAPTION>
                                                        PREDETERMINED                 FLOATING OR
                                                            RATES                 ADJUSTABLE RATES
                                                        -------------             ----------------
                                                                      (IN THOUSANDS)

<S>                                                     <C>                         <C>
Real estate mortgage loans...........................   $   18,489                  $   66,916
Construction:........................................           --                         534
Commercial...........................................        3,415                       3,773
Consumer loans.......................................        4,661                         404
                                                        ----------                  ----------
     Total...........................................   $   26,565                  $   71,627
                                                        ==========                  ==========
</TABLE>

         Scheduled  contractual principal repayments of loans do not necessarily
reflect the actual life of such assets.  The average life of long-term  loans is
substantially less than their contractual terms due to prepayments. In addition,
due-on-sale  clauses  in  mortgage  loans  generally  give the Bank the right to
declare a  conventional  loan due and payable in the event,  among other things,
that a borrower sells the real property  subject to the mortgage and the loan is
not repaid.  The average life of mortgage  loans tends to increase  when current
mortgage  loan  market  rates are  substantially  higher  than rates on existing
mortgage loans and tends to decrease when current mortgage loan market rates are
substantially lower than rates on existing mortgage loans.

         ONE- TO  FOUR-FAMILY  REAL ESTATE  LOANS.  The Bank's  primary  lending
activity consists of the origination of loans secured by owner-occupied, one- to
four-family  residential  properties located in its primary market area. At June
30, 2000,  $68.5 million,  or 61.5%,  of the Bank's loan portfolio  consisted of
loans  secured by one- to  four-family  residential  properties  of which  $66.9
million,  or  approximately  78.4% carried  adjustable  interest rates. The Bank
estimates that the average size of the  residential  mortgages that it currently
originates is $95,000.

         The Bank originates both fixed-rate  mortgage loans and adjustable-rate
mortgage loans ("ARMs").  Fixed-rate  mortgage loans are originated for terms of
up to 15 or 20 years.  ARMs are  originated  for  terms of up to 30  years.  The
Bank's one and  three-year  ARMs have  interest  rates that adjust every one and
three years,  respectively,  with a maximum  adjustment of two percentage points
for any adjustment  period and up to six percentage  points over the life of the
loan.  These loans are indexed to the weekly  average  rate on the  one-year and
three-year  U.S.  Treasury  securities,  respectively,  adjusted  to a  constant
maturity. The current margin is three percentage points. Substantially all loans
originated  by the Bank are retained in the Bank's loan  portfolio.  At June 30,
2000,  47% of the Bank's  loans had  remaining  terms to  maturity of 5 years or
less.

         The Bank's lending policies  generally limit the maximum  loan-to-value
ratio on  residential  mortgage  loans to a maximum  of 89% of the lesser of the
appraised  value of the  underlying  property or its purchase  price.  For loans
where the loan-to-value ratio exceeds 80%, the Bank charges an additional amount
equal to the incremental  cost of private  mortgage  insurance.  Such additional
amounts  are added to the  Bank's  loan loss  reserve.  Originated  loans in


                                       5
<PAGE>
the Bank's portfolio include due-on-sale clauses which provide the Bank with the
contractual right to deem the loan immediately due and payable in the event that
the borrower transfers ownership of the property without the Bank's consent.

         The retention of ARMs in portfolio  helps reduce the Bank's exposure to
increases in interest rates.  There are,  however,  unquantifiable  credit risks
resulting from potential  increased  costs to the borrower as a result of upward
repricing of ARMs. It is possible that during periods of rising  interest rates,
the risk of  default  on ARMs  may  increase  due to the  upward  adjustment  of
interest  costs to the  borrower.  The Bank does not  originate  ARM loans which
provide for negative amortization.  Although ARMs allow the Bank to increase the
sensitivity of its asset base to changes in interest  rates,  the extent of this
interest  sensitivity  is limited by the  periodic and  lifetime  interest  rate
ceilings contained in ARM contracts.  In addition,  since ARM interest rates can
be  adjusted  no more  frequently  than  annually,  the yield on the  Bank's ARM
portfolio  does not  adjust as rapidly as market  interest  rates.  Accordingly,
there  can  be  no  assurance  that  yields  on  the  Bank's  ARMs  will  adjust
sufficiently to compensate for increases in its cost of funds.

         SECOND  MORTGAGES  AND HOME  EQUITY  LINES  OF  CREDIT.  The Bank  also
originates second mortgage loans and home equity lines of credit exclusively for
its existing one- to  four-family  first mortgage  customers.  At June 30, 2000,
$503,628,  or 0.45%,  of the Bank's loan portfolio  consisted of second mortgage
loans and home  equity  lines of credit.  Second  mortgage  loans are  generally
underwritten  on a  fixed-rate  basis with terms of up to 15 years and are fully
amortizing over the term of the loan.  Second mortgages and home equity lines of
credit  are  generally  subject  to an 80%  combined  loan-to-value  limitation,
including all other outstanding mortgages or liens. Generally,  the minimum loan
amount for a second  mortgage  is $5,000.  Home  equity  lines of credit  permit
borrowers to borrow up to a  pre-established  limit during the five year term of
the line of credit.  Payments of interest only are required during the term with
a balloon  payment of all  outstanding  principal  due at maturity.  Home equity
lines of credit are  underwritten on a variable-rate  basis indexed to the prime
rate plus an increment.

         COMMERCIAL AND MULTI-FAMILY  RESIDENTIAL REAL ESTATE LOANS. At June 30,
2000, loans secured by commercial real estate and multi-family  residential real
estate  properties  totaled  $18.6  million  and  $879,000,   respectively,  and
represented  16.71%  and  0.79%,  respectively  of the  Bank's  loan  portfolio.
Commercial real estate loans are secured by churches,  motels, office buildings,
retail stores,  small shopping centers and other  non-residential  property.  At
June 30, 2000, the Bank's largest outstanding  commercial real estate loan was a
$1.0 million loan secured by hardware and building supply properties. The Bank's
multi-family  residential real estate loans are secured by residential  property
with up to 24 units. Substantially all of the Bank's commercial and multi-family
residential  and  commercial  real estate loans are secured by property  located
within the Bank's market area and were current and performing at June 30, 2000.

         Commercial and  multi-family  residential  real estate loans  generally
have  terms  of up to 15  years  and are  underwritten  on  either  a  fixed  or
adjustable-rate  basis.  Commercial and multi-family real estate loans are fully
amortizing   over  the  term  of  the  loan.   Adjustable-rate   commercial  and
multi-family  mortgages are indexed to the prime rate and adjust on a monthly or
annual basis.  Loan-to-value ratios may not exceed 75% of the appraised value of
the underlying  property.  Commercial real estate loans which are secured by raw
land are  limited  to a maximum  loan-to-value  ratio of 65%.  It is the  Bank's
policy to obtain personal  guarantees from all principals  obtaining  commercial
and  multi-family  real estate loans. In assessing the value of such guarantees,
the Bank reviews the individuals' personal financial statements, credit reports,
tax returns and other financial information.  Generally, the Bank also obtains a
security interest in any related personal  property and a standby  assignment of
rents and leases.

         Multi-family  and commercial  real estate lending  entails  significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related  borrowers.
The payment  experience on such loans  typically is dependent on the  successful
operation of the real estate project.  These risks can be significantly affected
by supply and demand  conditions in the market for office and retail space, and,
as such, may be subject to a greater extent to adverse conditions in the economy
generally.  To minimize  these  risks,  the Bank  generally  limits this type of
lending  to its  market  area and to  borrowers  with  which it has  substantial
experience or who are otherwise well known to management.

         With certain limited  exceptions,  the maximum amount that the Bank may
lend to any borrower (including certain related entities of the borrower) at any
one time  may not  exceed  15% of the  unimpaired  capital  and  surplus


                                       6
<PAGE>
of the institution, plus an additional 10% of unimpaired capital and surplus for
loans fully  secured by readily  marketable  collateral.  At June 30, 2000,  the
maximum amount that the Bank could have loaned to any one borrower without prior
OTS approval was $1.7 million.  Pursuant to OTS regulations,  an institution may
make  loans in excess of its  lending  limit up to an amount  not to exceed  the
lesser of $30.0  million,  or 30%,  of its  unimpaired  capital  and  surplus to
finance  the   development  of  residential   housing  units  provided   certain
requirements  are satisfied.  At June 30, 2000, the largest  aggregate amount of
loans  that the Bank had  outstanding  to any one  borrower  and  their  related
interests  was $1.2  million  and  consisted  of four loans  including  loans to
purchase a business. The largest single loan outstanding was a $1.0 million loan
secured by hardware and building supply properties.

         CONSTRUCTION LOANS. The Bank offers construction financing to qualified
borrowers for construction primarily of single-family residential properties and
to qualified developers for construction of small residential developments.  The
Bank also  provides  construction  financing  for  multi-family  and  commercial
properties.  Construction loans are limited to a maximum  loan-to-value ratio of
75% of the  appraised  value of the  property on an  "as-completed"  basis.  The
current  policy  of the Bank is to  charge  interest  rates  on its  residential
construction loans that convert to a permanent loan at the Bank at the same rate
as its  permanent  loans.  Loans to  finance  the  construction  of  residential
property  on a  speculative  basis  and loans to  finance  the  construction  of
commercial  properties are offered on a variable-rate  basis only, with the rate
indexed to the prime rate plus a negotiated increment. The Bank is currently not
originating  any  new   construction   loans  to  finance  the  construction  of
speculative properties and is limiting the origination of new construction loans
to borrowers with whom the Bank has had substantial  prior experience due to the
significant  time  and  other  requirements   associated  with  originating  and
monitoring construction loans.

         Loan proceeds are disbursed during the construction phase (a maximum of
180  days)  according  to a draw  schedule  based on the  stage  of  completion.
Construction  loans are  underwritten on the basis of the estimated value of the
property as completed and loan-to-value  ratios must conform to the requirements
for the permanent loan. At June 30, 2000, $2.1 million,  or 1.87%, of the Bank's
gross loan portfolio consisted of construction loans to fund the construction of
one- to four-family  properties.  Approximately  half of all construction  loans
originated  by the Bank  convert into  permanent  loans upon  completion  of the
construction phase.

         Construction  financing  generally  is  considered  to involve a higher
degree of risk of loss than  long-term  financing  on  improved,  occupied  real
estate.  Risk of loss on a  construction  loan is  dependent  largely  upon  the
accuracy  of the initial  estimate  of the  property's  value at  completion  of
construction  or  development  and the estimated  cost  (including  interest) of
construction. During the construction phase, a number of factors could result in
delays and cost  overruns.  If the  estimate of  construction  cost proves to be
inaccurate,  the Bank  may be  required  to  advance  funds  beyond  the  amount
originally committed to permit completion of the development. If the estimate of
the value proves to be inaccurate,  the Bank may be  confronted,  at or prior to
the maturity of the loan, with a project having a value which is insufficient to
assure full  repayment.  The ability of a developer  to sell  developed  lots or
completed  dwelling units will depend on, among other things,  demand,  pricing,
availability  of comparable  properties  and economic  conditions.  The Bank has
sought to  minimize  this risk by  limiting  construction  lending to  qualified
borrowers  in  the  Bank's  market  area,   limiting  the  aggregate  amount  of
outstanding  construction  loans and  imposing  a stricter  loan-to-value  ratio
requirement than required for one- to four-family mortgage loans.

         COMMERCIAL  LOANS.  At June 30,  2000,  the Bank  had $7.8  million  in
commercial  business  loans  which  represented  6.96% of the Bank's  gross loan
portfolio.  Under recent  amendments to the Home Owners' Loan Act ("HOLA"),  the
Bank is permitted to invest up to 20% of its assets in commercial loans provided
that amounts in excess of 10% are small business  loans.  The Bank's  commercial
business lending activities are directed towards small businesses located in its
market area.  Generally,  the Bank's  commercial  business  loans are secured by
assets such as  inventory,  equipment or other assets and are  guaranteed by the
principals of the  business.  On a very limited  basis,  the Bank has engaged in
dealer  floor-plan  lending with a limited number of dealerships  with which the
Bank has had substantial  experience.  Commercial business loans usually carry a
floating  rate  set at an  increment  over the  prime  rate  and  generally  are
underwritten for a maximum of 15 years. Such loans are structured as term loans.

         The Bank underwrites its commercial  business loans on the basis of the
borrower's  cash flow and ability to service the debt from earnings  rather than
on the basis of the  underlying  collateral  value,  and seeks to structure such
loans to have more than one source of  repayment.  The  borrower  is required to
provide  the Bank  with  sufficient


                                       7
<PAGE>
information  to  allow  the  Bank to make  its  lending  determination.  In most
instances,  this  information  consists  of at least  three  years of  financial
statements,  a statement of projected cash flows, current financial  information
on any guarantor and any additional information on the collateral.

         CONSUMER LOANS.  The Bank's  consumer loans consist  primarily of loans
secured by deposit  accounts,  automobile  loans,  unsecured  personal loans and
credit cards, which represented 1.79%,  2.72%, 5.83% and 0.58% of its total loan
portfolio,  respectively,  at June 30, 2000.  The Bank also makes boat loans and
home improvement loans pursuant to its consumer lending authority.  The Bank has
recently emphasized consumer lending because of the higher yields on such loans.

         The Bank  makes  deposit  account  loans  up to 80% of the  depositor's
account  balance.  The interest rate is normally 2.0% above the rate paid on the
account  and the  account  must be  pledged  as  collateral  to secure the loan.
Savings  account  loans are  secured by demand  notes and  interest  is due on a
semi-annual  basis. The Bank's  automobile  loans are generally  underwritten in
amount of up to 100% of the lesser of the purchase  price of the  automobile  or
the loan value as published by the National Automobile Dealers Association.  The
terms of such loans do not exceed 60 months and vary depending on the age of the
vehicle  securing  the loan.  The Bank  requires  the  borrower  to  insure  the
automobile under a policy listing the Bank as loss payee. Boat loans are made up
to a maximum of $60,000.  The maximum  term of a boat loan is 60 months and will
vary  depending  on the age of the  collateral.  The Bank also  makes  unsecured
personal  loans of up to  $25,000.  The  terms of such  loans do not  exceed  60
months. Beginning in November 1995, the Bank began to offer VISA(R),  MasterCard
(R) and VISA Gold (R) cards to  qualified  customers.  Processing  of the Bank's
credit  cards is done by an  unaffiliated  third party which  receives a fee for
such services. Equipment loans are made in amounts of up to 100% of the purchase
price  and  have a  maximum  term  of 60  months  depending  on  the  age of the
equipment.

         Consumer loans entail greater risk than do residential  mortgage loans,
particularly  in the case of consumer  loans which are  unsecured  or secured by
rapidly  depreciable assets such as automobiles.  In such cases, any repossessed
collateral for a defaulted  consumer loan may not provide an adequate  source of
repayment of the outstanding loan balance as a result of the greater  likelihood
of damage, loss or depreciation. The remaining deficiency often does not warrant
further  substantial  collection  efforts  against the  borrower.  In  addition,
consumer loan collections are dependent on the borrower's  continuing  financial
stability,  and thus are more  likely  to be  adversely  affected  by job  loss,
divorce, illness or personal bankruptcy. Furthermore, the application of various
federal and state laws,  including  federal and state  bankruptcy and insolvency
laws, may limit the amount which can be recovered on such loans.  Such loans may
also give rise to claims and  defenses by a consumer  loan  borrower  against an
assignee  of such loans such as the Bank,  and a borrower  may be able to assert
against such assignee claims and defenses which it has against the seller of the
underlying collateral.

         LOAN  SOLICITATION  AND  PROCESSING.  The  Bank's  mortgage  loans have
generally  been  originated  by its loan  officers,  branch  managers and senior
management  officials.  Loan originations are obtained from a number of sources,
including  existing  and past  customers,  members of the local  community,  and
referrals from  attorneys,  established  builders and realtors within the Bank's
market area. In addition, the Bank purchases  participations in loans originated
by other lenders and has  purchased  whole loans from an  unaffiliated  mortgage
banking firm. Upon receipt of a loan  application  from a prospective  borrower,
the Bank reviews the information provided and makes an initial  determination as
to whether certain basic underwriting  standards regarding the type of property,
debt-to-income  ratios and other credit concerns are satisfied.  A credit report
and employment and other  verifications  are obtained to verify certain specific
information  relating  to the loan  applicant's  employment,  income  and credit
standing. For real estate loans, an appraisal of the property intended to secure
the loan is undertaken by an independent  appraiser  approved by the Bank. It is
the Bank's policy to obtain appropriate  insurance protection on all real estate
first  mortgage  loans and to obtain a lawyer's  opinion of title which  insures
that the property is free of prior  encumbrances.  The borrower must also obtain
paid flood insurance when the property is located in a flood plain as designated
by the Department of Housing and Urban  Development.  It is the Bank's policy to
record a lien on the real estate  securing  the loan.  Borrowers  generally  are
required to advance  funds for certain  items such as real estate  taxes,  flood
insurance and private mortgage insurance, when applicable.

         Secured  loans  in  amounts  of up  to  $125,000  may  be  approved  by
individual  loan officers.  Secured loans between  $125,000 and $250,000 and all
unsecured  loans must be approved by a loan committee which consists of at


                                       8
<PAGE>
least three persons,  either  officers or directors.  The loan  committee  meets
weekly to review and  approve  loans.  All loans in excess of  $250,000  must be
approved by the Board of Directors.

         Loan  applicants  are  promptly  notified  in  writing  of  the  Bank's
decision. If the loan is approved, the notification will provide that the Bank's
commitment will generally terminate within 30 days of the approval.  It has been
the Bank's experience that substantially all approved loans are funded.

         LOAN  ORIGINATIONS,  PURCHASES AND SALES.  Most loans originated by the
Bank are intended to be held in the Bank's portfolio until maturity. The Bank is
not a qualified  seller/servicer  for the Federal National Mortgage  Association
("FNMA") or the Federal Home Loan Mortgage  Corporation  ("FHLMC") and generally
does not sell loans in the secondary  market.  Although the Bank uses FNMA/FHLMC
documentation  for its residential  mortgages,  the loans in its portfolio would
generally not qualify for sale to FNMA or FHLMC under standard  programs because
of the absence of title insurance and surveys.  The Bank, however, has purchased
whole loans and  participations  in loans originated by other lenders which meet
FNMA/FHLMC criteria.

         In  prior  years,  the Bank  regularly  purchased  loans to  supplement
lending  opportunities  in  its  immediate  market  area.  Loan  purchases  have
decreased in recent years due to the increased  emphasis on loan originations in
its primary market area. At June 30, 2000,  the Bank's loan  portfolio  included
approximately $100,000 in purchased mortgages. All of such loans are serviced by
the originating broker.

         Generally,  the purchase of participations and whole loans involves the
same  risks as would the  origination  of the same types of loans as well as the
additional  risks  related  to the  Bank's  lower  level  of  control  over  the
origination and subsequent  administration  of the loans. The Bank has sought to
minimize such risks by employing  more stringent  underwriting  standards in its
underwriting  of  purchased  loans than  required  by its loan  policy for loans
originated by the Bank. At June 30, 2000, all of the Bank's purchased loans were
performing in accordance with their terms.

         NONPERFORMING  LOANS AND OTHER PROBLEM  ASSETS.  The Bank  continuously
monitors its loan portfolio to detect signs of  deterioration  in credit quality
and to address potential and actual delinquencies. When a borrower fails to make
a payment on a loan,  the Bank  takes  immediate  steps to have the  delinquency
cured and the loan restored to current status.  When a loan is 10 days past due,
the borrower  receives a written  notification;  a late charge is imposed on the
16th day of delinquency.  If payment is not promptly  received,  the borrower is
contacted  again both by  telephone  and in  writing,  and  efforts  are made to
formulate an affirmative  plan to cure the  delinquency.  Loans that are 60 days
delinquent  are  generally  referred to an attorney who  contacts the  borrower.
Loans  generally are placed on  nonaccrual  status when they become 90 days past
due unless  they are well  secured and in the  process of  collection.  Interest
accrued and unpaid at the time a loan was placed on nonaccrual status is charged
against  interest  income.  The Bank  will  physically  inspect  all  properties
securing  nonaccrual loans.  Subsequent  payments would either be applied to the
outstanding  principal balance or recorded as interest income,  depending on the
assessment  of the  ultimate  collectibility  of the loan  based on a number  of
factors,  including the type of loan, the creditworthiness of the borrower,  the
quality of the security and prevailing market conditions. Generally, if the loan
continues  in a  delinquent  status for 90 days or more,  the Bank may  initiate
legal  proceedings.  Consumer loans are charged off and referred to a collection
agency after they are delinquent 120 days.

         Real estate  acquired by the Bank as a result of foreclosure or by deed
in lieu of  foreclosure is classified as real estate owned until such time as it
is sold.  When such property is acquired it is recorded at its fair market value
less costs to sell.  Any  write-down of the property is charged  directly to the
loan loss reserve.


                                       9
<PAGE>

         The following table sets forth  information  with respect to the Bank's
nonperforming assets at the dates indicated. At the dates shown, the Bank had no
restructured loans within the meaning of SFAS No. 114.
<TABLE>
<CAPTION>
                                                                      AT JUNE 30,
                                                              --------------------------
                                                                2000              1999
                                                              --------          --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>               <C>
Loans accounted for on a nonaccrual basis: (1)
  Real estate mortgage loans:
     Residential..............................................$     493         $    872
     Nonresidential...........................................       73               32
  Construction................................................       --               --
  Commercial..................................................      194              258
  Consumer....................................................       31              366
                                                              ---------         --------
        Total.................................................$     791         $  1,528
                                                              =========         ========
Accruing loans which are contractually
   past due 90 days or more:
  Real estate mortgage loans:
     Residential..............................................$      --         $     --
     Nonresidential...........................................       --               --
  Construction................................................       --               --
  Commercial..................................................       --               --
  Consumer....................................................       --               --
                                                              ---------         --------
        Total.................................................$      --         $     --
                                                              =========         ========
        Total nonperforming loans.............................$     791         $  1,528
                                                              =========         ========
Percentage of total loans.....................................     0.71%            1.32%
                                                              =========         ========
Other nonperforming assets....................................$      --         $     --
                                                              ====-====         ========
<FN>
__________
(1)      Nonaccrual status denotes loans on which, in the opinion of management,
         the collection of additional interest is unlikely. Payments received on
         a  nonaccrual  loan are  either  applied to the  outstanding  principal
         balance or recorded  as  interest  income,  depending  on  management's
         assessment of the collectibility of the loan.
</FN>
</TABLE>

         During the year ended June 30, 2000,  gross interest  income of $64,686
would have been  recorded on loans  accounted  for on a nonaccrual  basis if the
loans had been current throughout the respective periods. Interest on such loans
included in income during such period amounted to $7,295.

         At  June  30,  2000,  there  were no  loans  which  are  not  currently
classified  as  non-accrual,  90 days past due or  restructured  but where known
information  about possible  credit problems of borrowers  causes  management to
have serious  concerns as to the ability of the borrowers to comply with present
loan repayment  terms and may result in disclosure as  nonaccrual,  90 days past
due or restructured.

         ASSET CLASSIFICATION AND ALLOWANCE FOR LOAN LOSSES. Federal regulations
require  savings  associations  to review their assets on a regular basis and to
classify  them as  "substandard,"  "doubtful"  or  "loss" if  warranted.  Assets
classified  as  substandard  or doubtful  require the  institution  to establish
general allowances for loan losses. If an asset or portion thereof is classified
as loss, the insured  institution must either establish specific loss allowances
in the amount of 100% of the portion of the asset  classified  as loss or charge
off such amount.  An asset which does not currently warrant  classification  but
which possesses weaknesses or deficiencies deserving close attention is required
to be  designated  as "special  mention."  Currently,  general  loss  allowances
established to cover possible losses related to assets classified substandard or
doubtful may be included in determining  an  institution's  regulatory  capital,
while specific valuation allowances for loan losses do not qualify as regulatory
capital.  See  "Regulation  --  Regulation  of the  Bank --  Regulatory  Capital
Requirements."  OTS  examiners  may  disagree  with  the  insured  institution's
classifications  and amounts reserved.  If an institution does not agree with an
examiner's  classification of an asset, it may appeal this  determination to the
OTS.  Management of the Bank reviews assets on a quarterly basis, and at the end
of each quarter, prepares an asset classification listing in conformity with the
OTS regulations,  which is reviewed by the Board of Directors. At June 30, 2000,
the Bank had $3.1 million in assets classified as substandard. Substandard loans
consisted  of  21  single-family  and  nonresidential  mortgage  loans  with  an
aggregate

                                       10
<PAGE>
balance of $1.7  million at June 30, 2000,  53 consumer  loans with an aggregate
balance of $523,000,  12 commercial loans with an aggregate  balance of $889,000
and  repossessed  assets  totaling $1.5 million.  The Bank also had one mortgage
loan of $50,000, two commercial loans totaling $278,000 and one consumer loan of
$5,000 classified as doubtful.

         The  following  table sets forth an  analysis of activity in the Bank's
allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>

                                                                 YEAR ENDED JUNE 30,
                                                              --------------------------
                                                                2000              1999
                                                              --------          --------
                                                                      (IN THOUSANDS)

<S>                                                           <C>               <C>
Balance at beginning of period................................$   1,576         $    798
                                                              ---------         --------
Loans charged off:
  Real estate mortgage loans:
     Residential..............................................      272               19
     Commercial...............................................       --               --
  Construction................................................       --               --
  Commercial..................................................       --               --
  Consumer....................................................      859              892
                                                              ---------         --------
  Total charge-offs...........................................    1,131              911
                                                              ---------         --------
Recoveries:
  Real estate mortgage loans:
     Residential..............................................        2               --
     Commercial...............................................       --               --
  Construction................................................       --               --
  Commercial..................................................       --               --
  Consumer....................................................      379              165
                                                              ---------         --------
  Total recoveries............................................      381              165
                                                              ---------         --------
Net loans charged off.........................................      750              746
                                                              ---------         --------
Provision for loan losses.....................................      206            1,524
                                                              ---------         --------
Balance at end of period......................................$   1,032         $  1,576
                                                              =========         ========
Ratio of net charge-offs to average
   loans outstanding during the period........................    0.68%             0.67%
                                                              ========          ========
</TABLE>

         In originating loans, the Bank recognizes that credit losses will occur
and that the risk of loss will vary with,  among other things,  the type of loan
being made,  the  creditworthiness  of the  borrower  over the term of the loan,
general  economic  conditions and, in the case of a secured loan, the quality of
the  security  for the loan.  It is  management's  policy to  maintain a general
allowance  for loan losses  based on,  among other  things,  regular  reviews of
delinquencies and loan portfolio quality, character and size, the Bank's and the
industry's  historical and projected loss  experience and current and forecasted
economic  conditions.  The Bank  increases  its  allowance  for loan  losses  by
charging provisions for possible losses against the Bank's income.

         General allowances are made pursuant to management's assessment of risk
in the Bank's loan  portfolio as a whole.  Specific  allowances are provided for
individual  loans  when  ultimate  collection  is  considered   questionable  by
management  after reviewing the current status of loans which are  contractually
past due and considering the net realizable  value of the security for the loan.
Management also reviews  individual loans for which full  collectibility may not
be reasonably  assured and evaluates among other things the net realizable value
of the  underlying  collateral.  Management  continues  to actively  monitor the
Bank's  asset  quality and to charge off loans  against the  allowance  for loan
losses when  appropriate or provide  specific loan losses when necessary.  As of
June 30,  2000,  the Bank's  allowance  for loan  losses  included  $218,000  in
specific  loss  reserves.   Although   management  believes  it  uses  the  best
information  available to make  determinations with respect to the allowance for
loan losses,  future adjustments may be necessary if economic  conditions differ
substantially from the economic conditions in the assumptions used in making the
initial determinations.


                                       11
<PAGE>
         The following table  allocates the Bank's  allowance for loan losses by
loan category at the dates  indicated.  The  allocation of the allowance to each
category is not  necessarily  indicative  of future losses and does not restrict
the use of the allowance to absorb losses in any category.
<TABLE>
<CAPTION>

                                                                                JUNE 30,
                                                     --------------------------------------------------------
                                                            2000                             1999
                                                     --------------------------     -------------------------
                                                                   PERCENT OF                     PERCENT OF
                                                                    LOANS IN                       LOANS IN
                                                                   CATEGORY TO                    CATEGORY TO
                                                     AMOUNT        TOTAL LOANS      AMOUNT        TOTAL LOANS
                                                     ------        -----------      ------        -----------
                                                                      (DOLLARS IN THOUSANDS)
<S>                                                  <C>               <C>          <C>               <C>
Real estate mortgage loans.........................  $     802         77.71%       $   1,006         63.83%
Commercial loans...................................         --            --               --            --
Consumer loans.....................................        230         22.29              570         36.17
                                                     ---------        ------        ---------        ------
    Total allowance for loan losses................  $   1,032        100.00%       $   1,576        100.00%
                                                     =========        ======        =========        ======
</TABLE>
MORTGAGE-BACKED SECURITIES

         The  Bank   maintains  a  significant   portfolio  of   mortgage-backed
securities in the form of GNMA,  FNMA and FHLMC  participation  or  pass-through
certificates.  GNMA  certificates are guaranteed as to principal and interest by
the  full  faith  and  credit  of  the  United  States,  while  FNMA  and  FHLMC
certificates  are  guaranteed  by that agency only.  Mortgage-backed  securities
generally  entitle the Bank to receive a pro rata portion of the cash flows from
an identified pool of mortgages.  Although mortgage-backed  securities generally
yield  less  than  the  loans  for  which  they  are  exchanged,   they  present
substantially lower credit risk and are more liquid than the individual mortgage
loans and may be used to collateralize obligations of the Bank. Because the Bank
receives  regular  payments of principal and interest  from its  mortgage-backed
securities,   these   investments   provide  more  consistent  cash  flows  than
investments  in other debt  securities  which  generally  only pay  principal at
maturity.   Mortgage-backed   securities   also  help  the  Bank  meet   certain
definitional  tests for  favorable  treatment  under federal  banking laws.  See
"Regulation -- Regulation of the Bank -- Qualified Thrift Lender Test."

         Mortgage-backed  securities  typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest rates within a range and have similar  maturities.  The underlying pool
of mortgages can be composed of either fixed-rate or ARM loans. As a result, the
interest rate risk  characteristics  of the underlying pool of mortgages,  i.e.,
fixed-rate or adjustable-rate,  as well as prepayment risk, are passed on to the
certificate holder. The life of a mortgage-backed pass-through security is equal
to the life of the underlying mortgages.

         Mortgage-backed securities,  however, expose the Bank to certain unique
risks.  In a  declining  rate  environment,  accelerated  prepayments  of  loans
underlying these  securities  expose the Bank to the risk that it will be unable
to obtain comparable yields upon reinvestment of the proceeds.  In the event the
mortgage-backed security has been funded with an interest-bearing liability with
a maturity  comparable  to the original  estimated  life of the  mortgage-backed
security,   the  Bank's  interest  rate  spread  could  be  adversely  affected.
Conversely,  in a rising  interest rate  environment,  the Bank may experience a
lower than estimated rate of repayment on the underlying mortgages,  effectively
extending the estimated  life of the  mortgage-backed  security and exposing the
Bank to the risk  that it may be  required  to fund the asset  with a  liability
bearing a higher rate of interest.


                                       12
<PAGE>
         The  following   table  sets  forth  the   composition  of  the  Bank's
mortgage-backed  securities  portfolio at the dates indicated.  At June 30, 2000
and 1999,  all of the  Bank's  mortgage-backed  securities  were  designated  as
available-for-sale and carried on the Bank's books at their fair market value.
<TABLE>
<CAPTION>
                                                                            AT JUNE 30,
                                                          ----------------------------------------------------
                                                                  2000                           1999
                                                          --------------------          ----------------------
                                                          AMOUNT          %             AMOUNT            %
                                                          ------       -------          ------          ------
                                                                            (DOLLARS IN THOUSANDS)

    <S>                                                   <C>          <C>              <C>             <C>
    GNMA .............................................     $   351      13.36%         $    425         11.87%
    FNMA ..............................................      2,004      76.31             2,803         78.32
    FHLMC..............................................        271      10.33               351          9.81
                                                          --------     ------          --------        ------
                                                          $  2,626     100.00%         $  3,579        100.00%
                                                          ========     ======          ========        ======
</TABLE>

         The  following  table sets forth the  scheduled  maturities,  amortized
cost,  market values and weighted average yields for the Bank's  mortgage-backed
securities at June 30, 2000.  Expected  maturities will differ from  contractual
maturities due to scheduled  repayments and because borrowers may have the right
to  call or  prepay  obligations  with  or  without  prepayment  penalties.  The
following  table  does not take into  consideration  the  effects  of  scheduled
repayments on the effects of possible prepayments.
<TABLE>
<CAPTION>
                                                 AT JUNE 30, 2000
                     ---------------------------------------------------------------------------------------------
                       ONE TO FIVE YEARS       GREATER THAN FIVE YEARS                      TOTAL
                     ----------------------    ------------------------    ---------------------------------------
                                   WEIGHTED                   WEIGHTED                    APPROXIMATE     WEIGHTED
                     AMORTIZED     AVERAGE     AMORTIZED      AVERAGE      AMORTIZED         MARKET       AVERAGE
                       COST         YIELD        COST          YIELD         COST            VALUE         YIELD
                     ---------     --------    ---------      --------     ---------      -----------     --------
                                                             (DOLLARS IN THOUSANDS)

<S>                  <C>             <C>        <C>                <C>       <C>           <C>             <C>
GNMA..............   $     360       6.75%      $       --          --  %    $     360     $     351        6.75%
FNMA..............         634       5.88            1,393         6.24          2,027         2,004        6.06
FHLMC.............         273       5.43               --                         273           271        5.43
                     ---------                  ----------                   ---------     ---------
                     $   1,267                  $    1,393                   $   2,660     $   2,626
                     =========                  ==========                   =========     =========
</TABLE>

INVESTMENT ACTIVITIES

         The Bank is permitted  under  federal law to make certain  investments,
including investments in securities issued by various federal agencies and state
and municipal governments,  deposits at the FHLB of Cincinnati,  certificates of
deposit in federally insured institutions, certain bankers' acceptances, federal
funds and mutual  funds which only  invest in  securities  that are  permissible
investments  for the  Bank.  The  Bank  may  also  invest,  subject  to  certain
limitations,  in  commercial  paper  having  one of the two  highest  investment
ratings of a nationally recognized credit rating agency, and certain other types
of corporate debt securities and mutual funds.

         The Bank invests in  investment  securities  in order to diversify  its
assets, manage cash flow, obtain yield and maintain the minimum levels of liquid
assets required by regulatory  authorities.  Such investments  generally include
purchases of U.S. government and agency securities, mutual funds and deposits at
other  financial  institutions.  Investment  decisions are generally made by the
President in accordance with a formal  investment policy adopted by the Board of
Directors. The Board of Directors is informed of all investment purchases.

         Federal  regulations require the Bank to maintain an investment in FHLB
stock and a minimum  amount of liquid  assets  which may be invested in cash and
specified  securities.  From time to time,  the OTS  adjusts the  percentage  of
liquid assets which savings and loan associations are required to maintain.  See
"Regulation -- Regulation of the Bank -- Liquidity Requirements."

         The  general  objectives  of the Bank's  investment  policy are to: (i)
provide and maintain  liquidity;  (ii) make a strong and stable  contribution to
earnings  without  incurring  undue  interest  rate and credit  risk;  and (iii)
complement  the Bank's  lending  activities.  Currently,  the Bank's  investment
portfolio consists of cash, U.S.



                                       13
<PAGE>
government issues, federal agency issues, FHLB stock, mortgage-backed securities
and deposits in the FHLB of  Cincinnati.  The Bank also has an investment in the
Franklin U.S. Government  Securities Fund. Based on information  provided to the
Bank by such  fund,  approximately  98.1% of its  assets  are  invested  in GNMA
securities,  1.4% in U.S.  Treasury  Bills and .5% in cash. The present yield on
such fund is 6.13%.

         The  following  table  sets  forth  the  carrying  value of the  Bank's
investment securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                         AT JUNE 30,
                                                              --------------------------
                                                                2000              1999
                                                              --------          --------
                                                                      (IN THOUSANDS)
<S>                                                           <C>               <C>
Securities available for sale:
   U.S. government and agency securities......................$   2,737         $  2,421
   Franklin U.S. Government Securities Fund...................      871              881

Securities held to maturity:
   U.S. government and agency securities......................       --               --
   Certificates of deposit....................................       --               --
   Common stock and other.....................................      180              195
                                                              ---------         --------
      Total investment securities.............................    3,788            3,497
Cash and cash equivalents.....................................    1,581            1,317
FHLB stock....................................................      929            1,810
                                                              ---------         --------
      Total investments.......................................$   6,298         $  6,624
                                                              =========         ========
</TABLE>


                                       14
<PAGE>

         The  following  table sets  forth the  scheduled  maturities,  carrying
values,  market values and average yields for the Bank's investment portfolio at
June 30, 2000.
<TABLE>
<CAPTION>
                               ONE YEAR OR LESS       ONE TO FIVE YEARS     FIVE TO TEN YEARS       MORE THAN TEN YEARS
                               -----------------   --------------------     --------------------    --------------------
                               CARRYING  AVERAGE   CARRYING     AVERAGE     CARRYING     AVERAGE    CARRYING     AVERAGE
                                 VALUE    YIELD      VALUE       YIELD        VALUE       YIELD      VALUE       YIELD
                               --------  -------   --------     -------     --------     -------    --------     -------
                                                             (DOLLARS IN THOUSANDS)
<S>                           <C>          <C>      <C>           <C>       <C>              <C>   <C>            <C>
Securities available for sale:
   U.S. government and
     agency securities......  $     --     --  %    $   1,457     6.43%     $     983        6.43% $     297      6.43%
   Franklin U.S. Government
     Securities Fund........       871    6.13             --       --             --         --          --       --

Securities held to maturity:
  Common stock and other....       180    2.67             --       --             --         --          --       --
                              --------              ---------               ---------              ---------
      Total.................  $  1,051              $   1,457               $     983              $     297
                              ========              =========               =========              =========


<CAPTION>
                               TOTAL INVESTMENT PORTFOLIO
                               ----------------------------
                               CARRYING    MARKET    AVERAGE
                                 VALUE     VALUE      YIELD
                               --------    ------    -------
                                    (DOLLARS IN THOUSANDS)

<S>                           <C>          <C>       <C>
Securities available for sale:
   U.S. government and
     agency securities......  $  2,737     $ 2,737   6.43%
  Franklin U.S. Government
     Securities Fund........       871         871   6.13

Securities held to maturity:
  Common stock and other....       180         180   2.67
                              --------     -------
      Total.................  $  3,788     $ 3,788
                              ========     =======
</TABLE>
For further information regarding the Bank's investment  securities,  see Note 2
to Notes to Consolidated Financial Statements included elsewhere herein.


                                       15
<PAGE>

DEPOSIT ACTIVITIES AND OTHER SOURCES OF FUNDS

         GENERAL.  Deposits  are the  primary  source  of the  Bank's  funds for
lending and other investment purposes. In addition to deposits, the Bank derives
funds  from  loan  principal  repayments  and  interest  payments  and  maturing
investment  securities.  Loan repayments and interest  payments are a relatively
stable  source of funds,  while deposit  inflows and outflows are  significantly
influenced by general interest rates and money market conditions. Borrowings may
be used to supplement the Bank's  available funds and from time to time the Bank
has borrowed funds from the FHLB of Cincinnati.

         DEPOSITS.  The Bank attracts  deposits from its primary  market area of
Bell and Harlan Counties,  Kentucky, and, to a lesser extent,  Claiborne,  Union
and Knox Counties Tennessee and Lee County,  Virginia. A wide variety of deposit
accounts  are  offered,  including  interest-bearing  and  non  interest-bearing
checking  accounts,  money  market  accounts,  passbook  and  statement  savings
accounts, certificates of deposit and various retirement accounts. Account terms
vary as to minimum balance requirements, maturity and interest rate.

         The Bank's  policies are designed  primarily to attract  deposits  from
local residents  rather than to solicit  deposits from areas outside its primary
market. Account terms, including rates, are reviewed on a periodic basis and are
compared to the terms  offered for similar  accounts by the Bank's  competitors.
Determination of rates and other terms are based upon competitive concerns,  the
returns on the Bank's various investments and projected liquidity needs.

         Certificates  of deposit in amounts  of  $100,000  or more  constituted
26.25% of the Bank's total deposit  portfolio at June 30, 2000.  The majority of
these certificates of deposit represent  deposits by individuals.  The Bank does
not actively  solicit  these  accounts from  non-deposit  customers and does not
offer a premium rate for such accounts.

         Savings  deposits in the Bank at June 30, 2000 were  represented by the
various types of savings programs described below.
<TABLE>
<CAPTION>
INTEREST       MINIMUM                                                    MINIMUM      BALANCES IN  PERCENTAGE OF
 RATE *         TERM                CATEGORY                               AMOUNT      THOUSANDS    TOTAL DEPOSITS
--------       -------              --------                              -------      -----------  --------------

<S>            <C>                  <C>                                   <C>          <C>                  <C>
2.25%          None                 Passbook accounts                     $      --    $    7,654           7.22%
1.66           None                 NOW accounts                                100         9,494           8.95
3.11           None                 Money market deposit accounts             2,500           590           0.56
 --            None                 Noninterest-bearing checking accounts       100         2,306           2.17

                                    CERTIFICATES OF DEPOSIT
                                    -----------------------

3.88           12-month             Fixed-term, fixed-rate                    1,000         5,832           5.50
5.67           2-10 year            Fixed-term, fixed-rate                    1,000        80,202          75.60
                                                                                       ----------         ------
                                                                                       $  106,078         100.00%
                                                                                       ==========         ======
<FN>
_________
*  Weighted average rate.
</FN>
</TABLE>

         MATURITY OF JUMBO  CERTIFICATES.  The  following  table  indicates  the
amount  of the  Bank's  certificates  of  deposit  of  $100,000  or more by time
remaining until maturity as of June 30, 2000.

                                                                  CERTIFICATES
MATURITY PERIOD                                                   OF DEPOSITS
---------------                                                   -------------
                                                                 (IN THOUSANDS)

Three months or less .......................................       $ 3,780
Over three through six months ..............................         5,707
Over six through 12 months .................................         5,306
Over 12 months .............................................        13,057
                                                                   -------
      Total ................................................       $27,850
                                                                   =======

                                       16
<PAGE>

         BORROWINGS.  Savings deposits historically have been the primary source
of funds for the Bank's  lending and  investment  activities and for its general
business activities.  The Bank is authorized,  however, to use advances from the
FHLB of Cincinnati to supplement its supply of lendable funds or to meet deposit
withdrawal requirements.  As a member, the Bank is required to own capital stock
in the FHLB and is authorized to apply for advances secured by such stock and by
certain of the Bank's home mortgages and other assets  (principally,  securities
which are obligations of, or guaranteed by, the United States)  provided certain
standards  related  to  creditworthiness  have  been  met.  See  "Regulation  --
Regulation  of the Bank -- Federal  Home Loan Bank  System."  Advances  are made
pursuant to several different programs,  each of which has its own interest rate
and range of maturity.

         The following table sets forth certain information regarding the Bank's
FHLB advances (the Bank's only borrowings outstanding during the periods) at the
dates and for the periods indicated.
<TABLE>
<CAPTION>
                                                                         AT OR FOR THE
                                                                      YEAR ENDED JUNE 30,
                                                                -----------------------------
                                                                   2000                1999
                                                                ---------           ---------
                                                                   (DOLLARS IN THOUSANDS)
<S>                                                            <C>                  <C>
Advances from FHLB:
   Amounts outstanding at end of period........................$   10,500           $  12,000

   Weighted average rate paid on...............................      6.39%              5.66%

   Maximum amount of borrowings outstanding
      at any month end.........................................$   15,500           $  18,500

   Approximate average short-term borrowings
      outstanding..............................................$    4,958           $   2,388

   Approximate weighted average rate paid on...................      6.39%              5.66%
</TABLE>

         The Bank has a $15.8 million line of credit with the FHLB of Cincinnati
of which $5.0 million was  outstanding  at June 30, 2000. At June 30, 2000,  the
Bank had $5.5 million  outstanding in short-term  advances from the FHLB.  These
advances  carry a rate of 7.35% and mature  within the next year.  Further asset
growth may be funded through short-term  additional advances.  The Bank also had
$5.0 million outstanding that matures March, 2003 bearing a rate of 6.08%.

SUBSIDIARY ACTIVITIES

         The Company has a subsidiary,  Home Mortgage Loan Corporation ("Home").
From 1988 to June 30, 1992, Home  participated in joint ventures for the purpose
of acquiring,  developing,  constructing  and selling single family  residential
real  estate and held stock in the Bank's  data  processing  provider.  Home now
acquires  property  on its own  for  development.  Currently,  Home  also  makes
commercial and commercial  real estate loans.  At June 30, 2000,  Home had total
assets of $2.3 million, including loans of $354,000.

COMPETITION

         The Bank  experiences  substantial  competition  both in attracting and
retaining savings deposits and in the making of mortgage and other loans.  There
are approximately 10 commercial banks, three thrift  institutions and one credit
union in  Middlesboro  Federal's  market  area.  Although  certain of the Bank's
competitors   are   subsidiaries  of  state-wide  and  interstate  bank  holding
companies,  the Bank's primary competitors in the Middlesboro market are locally
owned and operated banks and thrifts.  Because  mortgage loans originated in the
Bank's primary market area are not generally  saleable in the secondary  market,
mortgage  brokers  and other  non-portfolio  lenders  have not been  significant
competitors  in the Bank's  immediate  market  area.  In  competing  for lending
opportunities in Knox and Union Counties,  the Bank encounters  competition from
larger institutions operating throughout the State of Tennessee.

                                       17
<PAGE>

         The primary  factors in competing  for loans are interest  rates,  loan
fees and other terms,  convenience and the range of services  offered by various
financial  institutions.  Management seeks to compete with other institutions in
its primary market area by offering  competitive interest rates, loan fees and a
wide variety of deposit products,  and by emphasizing  personal customer service
and  cultivating   relationships   with  local  businesses.   In  competing  for
residential   mortgage  loans,  the  Bank  particularly   emphasizes  its  quick
turn-around on  applications  which are processed  within ten business days. The
Bank offers a high level of personal  service to all of its loan  customers with
loan officers who are ready to meet with  customers at times and places that are
convenient to the customer.

PERSONNEL

         As of June 30,  2000,  the Bank had 43  full-time  employees  and seven
part-time  employees.   The  employees  are  not  represented  by  a  collective
bargaining  unit.  Management  believes that the Bank enjoys good relations with
its personnel.

PERFORMANCE RATIOS
<TABLE>
<CAPTION>

                                                                         AT OR FOR THE
                                                                       YEAR ENDED JUNE 30,
                                                                -----------------------------
                                                                   2000                1999
                                                                ---------           ---------
                                                                 (DOLLARS IN THOUSANDS)
<S>                                                                  <C>            <C>
Return on assets (net income divided by average total assets)..      0.35%          (0.26)%
Return on average equity (net income divided by
      average stockholders' equity)............................      5.04           (4.06)
Equity to assets ratio (average equity divided by
      average total assets)....................................      6.90            6.40

</TABLE>

                                   REGULATION
GENERAL

         As a federally  chartered savings  association,  the Bank is subject to
extensive regulation by the OTS. The lending activities and other investments of
the Bank must comply with such regulatory requirements, and the OTS periodically
examines the Bank for compliance with various regulatory requirements.  The FDIC
also has the  authority  to  conduct  special  examinations.  The Bank must file
reports with the OTS describing  its  activities and financial  condition and is
also subject to certain reserve requirements  promulgated by the Federal Reserve
Board. This supervision and regulation is intended  primarily for the protection
of depositors. Certain of these regulatory requirements are referred to below or
appear elsewhere herein.

REGULATION OF THE BANK

         REGULATORY CAPITAL REQUIREMENTS.  Under OTS capital standards,  savings
associations  must maintain  "tangible"  capital equal to 1.5% of adjusted total
assets,  "core" capital equal to 3.0% of adjusted total assets and a combination
of core and "supplementary"  capital equal to 8.0% of "risk-weighted" assets. In
addition,  the  OTS  has  recently  adopted  regulations  which  impose  certain
restrictions on savings  associations that have a total risk-based capital ratio
that is less than  8.0%,  a ratio of Tier 1 capital to  risk-weighted  assets of
less than 4.0% or a ratio of Tier 1 capital  to  adjusted  total  assets of less
than  4.0%  (or  3.0% if the  institution  is rated  Composite  1 under  the OTS
examination rating system).  See " -- Prompt Corrective  Regulatory Action." For
purposes  of this  regulation,  Tier 1 capital has the same  definition  as core
capital  which is defined as common  stockholders'  equity  (including  retained
earnings), noncumulative perpetual preferred stock and related surplus, minority
interests in the equity  accounts of fully  consolidated  subsidiaries,  certain
nonwithdrawable  accounts  and  pledged  deposits  and  "qualifying  supervisory
goodwill."  Core  capital is  generally  reduced  by the  amount of the  savings
association's  intangible assets for which no market exists.  Limited exceptions
to the  deduction  of  intangible  assets are provided  for  purchased  mortgage
servicing rights and qualifying supervisory goodwill.  Tangible capital is given
the same  definition  as core  capital  but does not  include an  exception  for
qualifying  supervisory goodwill and is reduced by the amount of all the savings
association's  intangible  assets with only a limited  exception  for  purchased
mortgage servicing rights and


                                       18
<PAGE>
purchased credit card  relationship.  Both core and tangible capital are further
reduced  by an  amount  equal to a the  savings  association's  debt and  equity
investments in  subsidiaries  engaged in activities not  permissible to national
banks other than  subsidiaries  engaged in  activities  undertaken  as agent for
customers  or  in  mortgage   banking   activities  and  subsidiary   depository
institutions or their holding companies.  At June 30, 2000, the Bank had no such
investments.

         Adjusted  total  assets  are a savings  association's  total  assets as
determined under generally accepted accounting principles,  adjusted for certain
goodwill  amounts  and  increased  by a pro  rated  portion  of  the  assets  of
subsidiaries  in which the savings  association  holds a minority  interest  and
which  are not  engaged  in  activities  for  which the  capital  rules  require
deduction of its debt and equity investments.  Adjusted total assets are reduced
by the amount of assets that have been deducted from capital, the portion of the
savings  association's  investments in subsidiaries  that must be netted against
capital  under  the  capital  rules  and,  for  purposes  of  the  core  capital
requirement, qualifying supervisory goodwill.

         In determining  compliance with the risk-based capital  requirement,  a
savings  association  is  allowed  to use both core  capital  and  supplementary
capital  provided the amount of  supplementary  capital used does not exceed the
savings association's core capital.  Supplementary capital is defined to include
certain  preferred stock issues,  nonwithdrawable  accounts and pledged deposits
that do not qualify as core capital, certain approved subordinated debt, certain
other capital  instruments  and a portion of the savings  association's  general
loss allowances.  Total core and supplementary capital are reduced by the amount
of  capital  instruments  held by  other  depository  institutions  pursuant  to
reciprocal  arrangements and the savings  association's high loan-to-value ratio
land loans and  non-residential  construction loans and equity investments other
than those deducted from core and tangible  capital.  At June 30, 2000, the Bank
had no high ratio land or  nonresidential  construction  loans and had no equity
investments for which OTS regulations require a deduction from total capital.

         The risk-based  capital  requirement is measured against  risk-weighted
assets  which  equal the sum of each asset and the  credit-equivalent  amount of
each  off-balance  sheet item after being multiplied by an assigned risk weight.
Under the OTS  risk-weighting  system,  one- to four-family  first mortgages not
more  than 90 days  past  due  with  loan-to-value  ratios  at  origination  not
exceeding  80% are assigned a risk weight of 50%.  Consumer  and  non-qualifying
single-family,  multi-family and residential  construction  loans are assigned a
risk weight of 100%.  Mortgage-backed  securities issued, or fully guaranteed as
to principal and interest, by the FHLMC or FNMA and the book value of FHLB stock
are assigned a 20% risk weight.  Cash and U.S.  Government  securities backed by
the full faith and credit of the U.S. Government are given a 0% risk weight.


                                       19
<PAGE>
         The table below  presents the Bank's capital  position  relative to its
various regulatory capital requirements at June 30, 2000.
<TABLE>
<CAPTION>
                                                                                PERCENT OF
                                                              AMOUNT            ASSETS  (1)
                                                              ------            -----------
                                                                 (DOLLARS IN THOUSANDS)

         <S>                                                  <C>                  <C>
         Tangible capital.....................................$   9,265            7.22%
         Tangible capital requirement.........................    1,925            1.50
                                                              ---------           -----
         Excess (deficit).....................................$   7,340            5.72%
                                                              =========           =====

         Core capital.........................................$   9,265            7.22%
         Core capital requirement.............................    5,132            4.00
                                                              ---------           -----
         Excess (deficit).....................................$   4,133            3.22%
                                                              =========           =====

         Risk-based capital...................................$  10,297           11.42%
         Risk-based capital requirement.......................    7,210            8.00
                                                              ---------           -----
         Excess (deficit).....................................$   3,087            3.42%
                                                              =========           =====
         <FN>
         ______________
         (1)      Based on adjusted  total  assets for  purposes of the tangible
                  capital and core capital requirements and risk-weighted assets
                  for purpose of the risk-based capital requirement.
         </FN>
         </TABLE>

         The OTS requires savings  institutions  with more than a "normal" level
of  interest  rate  risk  to  maintain   additional  total  capital.  A  savings
institution's  interest rate risk is measured in terms of the sensitivity of its
"net  portfolio  value" to changes in interest  rates.  Net  portfolio  value is
defined,  generally, as the present value of expected cash inflows from existing
assets and  off-balance  sheet contracts less the present value of expected cash
outflows from existing liabilities.  A savings institution will be considered to
have a "normal"  level of interest  rate risk exposure if the decline in its net
portfolio  value  after an  immediate  200 basis  point  increase or decrease in
market interest rates  (whichever  results in the greater  decline) is less than
two percent of the current  estimated  economic  value of its assets.  A savings
institution  with a greater than normal interest rate risk is required to deduct
from  total  capital,   for  purposes  of  calculating  its  risk-based  capital
requirement,  an amount (the "interest rate risk  component")  equal to one-half
the difference  between the  institution's  measured  interest rate risk and the
normal level of interest  rate risk,  multiplied  by the  economic  value of its
total assets.

         The OTS  calculates  the  sensitivity  of a savings  institution's  net
portfolio  value based on data submitted by the institution in a schedule to its
quarterly  Thrift  Financial Report and using the interest rate risk measurement
model  adopted by the OTS. The amount of the interest  rate risk  component,  if
any, to be deducted from a savings  institution's  total capital is based on the
institution's  Thrift  Financial  Report  filed two  quarters  earlier.  Savings
institutions  with less than $300  million  in assets and a  risk-based  capital
ratio above 12% are generally exempt from filing the interest rate risk schedule
with their Thrift Financial  Reports.  However,  the OTS will require any exempt
savings  institution  that it determines  may have a high level of interest rate
risk exposure to file such schedule on a quarterly  basis. The Bank has not been
advised that it is deemed to have more than normal level of interest rate risk.

         In addition to requiring  generally  applicable  capital  standards for
savings  institutions,  the OTS is  authorized to establish the minimum level of
capital  for  a  savings  institution  at  such  amount  or  at  such  ratio  of
capital-to-assets  as the OTS determines to be necessary or appropriate for such
institution in light of the particular circumstances of the institution. The OTS
may treat the failure of any savings institution to maintain capital at or above
such level as an unsafe or unsound practice and may issue a directive  requiring
any savings  institution which fails to maintain capital at or above the minimum
level required by the OTS to submit and adhere to a plan for increasing capital.
Such an order may be enforced in the same manner as an order issued by the FDIC.

         PROMPT CORRECTIVE  REGULATORY ACTION. Under FDICIA, the federal banking
regulators  are  required  to  take  prompt  corrective  action  if  an  insured
depository  institution  fails to satisfy certain minimum capital


                                       20
<PAGE>
requirements,  including a leverage limit, a risk-based capital requirement, and
any other measure  deemed  appropriate  by the federal  banking  regulators  for
measuring  the  capital  adequacy  of an  insured  depository  institution.  All
institutions, regardless of their capital levels, are restricted from making any
capital  distribution  or paying any management  fees if the  institution  would
thereafter   fail  to  satisfy  the  minimum  levels  for  any  of  its  capital
requirements.  An  institution  that  fails to meet the  minimum  level  for any
relevant capital measure (an "undercapitalized institution") may be: (i) subject
to increased  monitoring by the  appropriate  federal  banking  regulator;  (ii)
required to submit an acceptable capital  restoration plan within 45 days; (iii)
subject to asset growth  limits;  and (iv)  required to obtain prior  regulatory
approval for  acquisitions,  branching and new lines of businesses.  The capital
restoration plan must include a guarantee by the  institution's  holding company
that the  institution  will  comply  with the plan until it has been  adequately
capitalized on average for four  consecutive  quarters,  under which the holding
company would be liable up to the lesser of 5% of the institution's total assets
or the amount necessary to bring the institution  into capital  compliance as of
the date it failed to comply with its capital restoration plan. A "significantly
undercapitalized"  institution, as well as any undercapitalized institution that
does not  submit an  acceptable  capital  restoration  plan,  may be  subject to
regulatory demands for recapitalization,  broader application of restrictions on
transactions  with  affiliates,  limitations on interest rates paid on deposits,
asset  growth  and other  activities,  possible  replacement  of  directors  and
officers,  and restrictions on capital distributions by any bank holding company
controlling the institution. Any company controlling the institution may also be
required  to divest the  institution  or the  institution  could be  required to
divest   subsidiaries.   The  senior  executive   officers  of  a  significantly
undercapitalized   institution   may  not  receive   bonuses  or   increases  in
compensation  without prior  approval and the  institution  is  prohibited  from
making  payments of principal  or interest on its  subordinated  debt.  In their
discretion,  the  federal  banking  regulators  may also  impose  the  foregoing
sanctions on an  undercapitalized  institution if the regulators  determine that
such actions are  necessary  to carry out the purposes of the prompt  corrective
provisions.  If an institution's ratio of tangible capital to total assets falls
below the  "critical  capital  level"  established  by the  appropriate  federal
banking  regulator,  the  institution  will be  subject  to  conservatorship  or
receivership within specified time periods.

         Under the  implementing  regulations,  the federal banking  regulators,
including the OTS,  generally  measure an institution's  capital adequacy on the
basis of its total  risk-based  capital ratio (the ratio of its total capital to
risk-weighted  assets),  Tier 1 risk-based  capital ratio (the ratio of its core
capital  to  risk-weighted  assets)  and  leverage  ratio (the ratio of its core
capital to adjusted total assets).  The following table shows the capital ratios
required for the various prompt corrective action categories.
<TABLE>
<CAPTION>
                                                     ADEQUATELY                                     SIGNIFICANTLY
                           WELL CAPITALIZED          CAPITALIZED         UNDERCAPITALIZED        UNDERCAPITALIZED
                           ----------------          -----------         ----------------        ----------------
<S>                        <C>                       <C>                 <C>                     <C>
Total risk-based
    capital ratio          10.0% or more             8.0% or more        Less than 8.0%          Less than 6.0%
Tier 1 risk-based
    capital ratio           6.0% or more             4.0% or more        Less than 4.0%          Less than 3.0%
Leverage ratio              5.0% or more             4.0% or more *      Less than 4.0% *        Less than 3.0%
<FN>
-----------
*  3.0% if institution has a composite 1 CAMELS rating.
</FN>
</TABLE>
A "critically undercapitalized" savings institution is defined as an institution
that  has a ratio of  "tangible  equity"  to total  assets  of less  than  2.0%.
Tangible equity is defined as core capital plus cumulative  perpetual  preferred
stock  (and  related  surplus)  less  all  intangibles   other  than  qualifying
supervisory  goodwill and certain purchased  mortgage  servicing rights. The OTS
may reclassify a well capitalized savings institution as adequately  capitalized
and may require an adequately  capitalized  or  undercapitalized  institution to
comply with the supervisory actions applicable to institutions in the next lower
capital  category  (but  may not  reclassify  a  significantly  undercapitalized
institution as critically  undercapitalized) if the OTS determines, after notice
and an opportunity for a hearing,  that the savings  institution is in an unsafe
or unsound  condition or that the  institution  has received and not corrected a
less-than-satisfactory rating for any CAMELS rating category.

         QUALIFIED THRIFT LENDER TEST. A savings  institution that does not meet
the  Qualified  Thrift  Lender test ("QTL  Test") must either  convert to a bank
charter or comply with the following  restrictions  on its  operations:  (i) the
institution  may not  engage  in any new  activity  or make any new  investment,
directly or indirectly,  unless such


                                       21
<PAGE>
activity or investment is permissible  for a national  bank;  (ii) the branching
powers  of the  institution  shall be  restricted  to those of a  national  bank
located; (iii) the institution shall not be eligible to obtain any advances from
its FHLB; and (iv) payment of dividends by the  institution  shall be subject to
the rules regarding payment of dividends by a national bank. Upon the expiration
of three years from the date the  institution  ceases to be a  Qualified  Thrift
Lender,  it  must  cease  any  activity,  and  not  retain  any  investment  not
permissible  for a national  bank and  immediately  repay any  outstanding  FHLB
advances (subject to safety and soundness considerations).

         To qualify as a QTL, a savings  institution  must  either  qualify as a
"domestic  building and loan  association"  under the  Internal  Revenue Code or
maintain at least 65% of its "portfolio" assets in Qualified Thrift Investments.
Portfolio assets are defined as total assets less intangibles,  property used by
a savings institution in its business and liquidity investments in an amount not
exceeding 20% of assets.  Qualified Thrift  Investments  include  investments in
residential  mortgages,  home equity loans, loans made for educational purposes,
small business loans, credit card loans and mortgage-backed securities.

         A savings  institution  must  maintain its status as a QTL on a monthly
basis in nine out of  every 12  months.  A  savings  institution  that  fails to
maintain Qualified Thrift Lender status will be permitted to requalify once, and
if it fails the QTL Test a second time,  it will become  immediately  subject to
all penalties as if all time limits on such  penalties had expired.  At June 30,
2000,  approximately  72.66% of the Bank's  assets were  invested  in  Qualified
Thrift Investments.

         DIVIDEND LIMITATIONS.  Under OTS regulations, the Bank is not permitted
to pay dividends on its capital stock if its regulatory capital would thereby be
reduced below the amount then required for the liquidation  account  established
for the benefit of certain  depositors of the Bank at the time of the Conversion
and Reorganization. In addition, savings institution subsidiaries of savings and
loan holding companies are required to give the OTS 30 days' prior notice of any
proposed declaration of dividends to the holding company.

         OTS regulations require that savings  institutions submit notice to the
OTS  prior  to  making  a  capital   distribution  if  (a)  they  would  not  be
well-capitalized  after the distribution,  (b) the distribution  would result in
the  retirement of any of the  institution's  common or preferred  stock or debt
counted as its regulatory  capital,  or (c) the institution is a subsidiary of a
holding company. A savings institution must make application to the OTS to pay a
capital distribution if (x) the institution would not be adequately  capitalized
following the distribution,  (y) the institution's  total  distributions for the
calendar year exceeds the institution's net income for the calendar year to date
plus its net income (less distributions) for the preceding two years, or (z) the
distribution  would  otherwise  violate  applicable  law  or  regulation  or  an
agreement  with  or  condition  imposed  by the  OTS.  If  neither  the  savings
institution  nor the proposed  capital  distribution  meet any of the  foregoing
criteria,  then no notice or  application  is  required to be filed with the OTS
before making a capital  distribution.  The OTS may disapprove or deny a capital
distribution  if in  the  view  of  the  OTS,  the  capital  distribution  would
constitute an unsafe or unsound practice.

         Under the OTS' prompt corrective action  regulations,  the Bank is also
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%. The OTS,  after  consultation  with the FDIC,
however,  may  permit  an  otherwise  prohibited  stock  repurchase  if  made in
connection  with the issuance of additional  shares in an equivalent  amount and
the repurchase will reduce the institution's  financial obligations or otherwise
improve the institution's financial condition.

         In addition to the foregoing,  earnings of the Bank appropriated to bad
debt reserves and deducted for Federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then  current  tax rate by the Bank on the  amount  of  earnings
removed from the reserves for such distributions. See "Taxation."

         SAFETY AND SOUNDNESS STANDARDS.  Under FDICIA, as amended by the Riegle
Community  Development and Regulatory  Improvement Act of 1994 (the "CDRI Act"),
each  Federal  banking  agency is required  to  establish  safety and  soundness
standards for institutions  under its authority.  The guidelines  adopted by the
OTS, along with the other federal banking agencies, require savings institutions
to maintain internal controls and information systems and internal audit systems
that are  appropriate  for the  size,  nature  and  scope  of the  institution's
business.  The  guidelines  also  establish  certain  basic  standards  for loan
documentation,  credit  underwriting,  interest  rate risk


                                       22
<PAGE>

exposure,  and  asset  growth.  The  guidelines  further  provide  that  savings
institutions  should maintain safeguards to prevent the payment of compensation,
fees and benefits  that are  excessive or that could lead to material  financial
loss,  and should take into  account  factors  such as  comparable  compensation
practices  at  comparable  institutions.  If the OTS  determines  that a savings
institution is not in compliance  with the safety and soundness  guidelines,  it
may require the institution to submit an acceptable  plan to achieve  compliance
with the guidelines.  A savings institution must submit an acceptable compliance
plan to the OTS within 30 days of receipt of a request for such a plan.  Failure
to  submit or  implement  a  compliance  plan may  subject  the  institution  to
regulatory   sanctions.   Management   believes  that  the  Bank  already  meets
substantially  all the  standards  adopted in the  interagency  guidelines,  and
therefore does not believe that  implementation  of these  regulatory  standards
will materially affect the Bank's operations.

         Additionally,  under  FDICIA,  as amended by the CDRI Act,  the Federal
banking  agencies  are  required to  establish  standards  relating to the asset
quality and earnings that the agencies determine to be appropriate.  On July 10,
1995,  the  federal  banking  agencies,   including  the  OTS,  issued  proposed
guidelines   relating  to  asset  quality  and  earnings.   Under  the  proposed
guidelines, a savings institution should maintain systems, commensurate with its
size and the nature and scope of its operations,  to identify problem assets and
prevent  deterioration  in  those  assets  as well as to  evaluate  and  monitor
earnings and ensure that earnings are  sufficient to maintain  adequate  capital
and reserves. Management believes that the asset quality and earnings standards,
in the form proposed by the banking  agencies,  would not have a material effect
on the Bank's operations.

         DEPOSIT  INSURANCE.  The Bank is required to pay assessments based on a
percentage of its insured  deposits to the FDIC for insurance of its deposits by
the FDIC through the SAIF. Under the Federal Deposit  Insurance Act, the FDIC is
required to set semi-annual assessments for SAIF-insured institutions at a level
necessary  to  maintain  the  designated  reserve  ratio of the SAIF at 1.25% of
estimated  insured  deposits  or at a higher  percentage  of  estimated  insured
deposits that the FDIC determines to be justified for that year by circumstances
indicating a significant risk of substantial future losses to the SAIF.

         Under the FDIC's risk-based  deposit insurance  assessment  system, the
assessment rate for an insured depository  institution depends on the assessment
risk classification assigned to the institution by the FDIC, which is determined
by the  institution's  capital level and supervisory  evaluations.  Based on the
data reported to regulators  for the date closest to the last day of the seventh
month preceding the semi-annual assessment period,  institutions are assigned to
one of three  capital  groups -- well  capitalized,  adequately  capitalized  or
undercapitalized  -- using the same  percentage  criteria  as under  the  prompt
corrective action  regulations.  See " -- Prompt Corrective  Regulatory Action."
Within each capital group,  institutions  are assigned to one of three subgroups
on the basis of supervisory evaluations by the institution's primary supervisory
authority and such other  information  as the FDIC  determines to be relevant to
the  institution's  financial  condition  and  the  risk  posed  to the  deposit
insurance fund.  Subgroup A consists of financially sound institutions with only
a few minor  weaknesses.  Subgroup B consists of institutions  that  demonstrate
weaknesses which, if not corrected, could result in significant deterioration of
the  institution  and  increased  risk of loss to the  deposit  insurance  fund.
Subgroup C consists of institutions that pose a substantial  probability of loss
to the deposit insurance fund unless effective corrective action is taken.

         The FDIC has adopted an assessment  schedule for SAIF deposit insurance
pursuant to which the assessment rate for well-capitalized institutions with the
highest  supervisory  ratings  is  zero  and  institutions  in  the  worst  risk
assessment classification are assessed at the rate of 0.27% of insured deposits.
Until December 31, 1999, however,  SAIF-insured  institutions,  were required to
pay  assessments  to the  FDIC at the  rate of 6.5  basis  points  to help  fund
interest payments on certain bonds issued by the Financing  Corporation ("FICO")
an  agency  of the  federal  government  established  to  finance  takeovers  of
insolvent thrifts.  During this period, Bank Insurance Fund ("BIF") members were
assessed for these  obligations at the rate of 1.3 basis points.  Since December
31,  1999,  both BIF and SAIF  members  are  assessed  at the same rate for FICO
payments.

         TRANSACTIONS WITH AFFILIATES. Transactions between savings institutions
and any  affiliate  are governed by Sections 23A and 23B of the Federal  Reserve
Act.  An  affiliate  of a savings  institution  is any  company or entity  which
controls,  is  controlled  by  or is  under  common  control  with  the  savings
institution.  In a holding  company  context,  the parent  holding  company of a
savings institution (such as the Company) and any companies which are controlled
by such parent  holding  company  are  affiliates  of the  savings  institution.
Generally,  Sections  23A and 23B (i)  limit the  extent  to which  the  savings
institution or its  subsidiaries may engage in "covered  transactions"  with


                                       23
<PAGE>
any one affiliate to an amount equal to 10% of such institution's  capital stock
and surplus,  and contain an aggregate limit on all such  transactions  with all
affiliates to an amount equal to 20% of such capital stock and surplus, and (ii)
require that all such  transactions  be on terms  substantially  the same, or at
least as favorable,  to the  institution  or  subsidiary as those  provided to a
non-affiliate.  The term  "covered  transaction"  includes  the making of loans,
purchase  of  assets,  issuance  of a  guarantee  and  similar  other  types  of
transactions.  In addition to the restrictions  imposed by Sections 23A and 23B,
no savings  institution may (i) loan or otherwise extend credit to an affiliate,
except for any affiliate which engages only in activities  which are permissible
for bank holding  companies,  or (ii)  purchase or invest in any stocks,  bonds,
debentures, notes or similar obligations of any affiliate, except for affiliates
which are subsidiaries of the savings institution. Section 106 of the BHCA which
also applies to the Bank prohibits the Bank from extending credit to or offering
any other services, or fixing or varying the consideration for such extension of
credit or service,  on the condition  that the customer  obtain some  additional
service from the institution or certain of its affiliates or not obtain services
of a competitor of the institution, subject to certain exceptions.

         LOANS TO  DIRECTORS,  EXECUTIVE  OFFICERS AND  PRINCIPAL  STOCKHOLDERS.
Savings  institutions are also subject to the restrictions  contained in Section
22(h) of the Federal Reserve Act on loans to executive  officers,  directors and
principal  stockholders.  Under Section 22(h), loans to an executive officer and
to a  greater  than  10%  stockholder  of a  savings  institution,  and  certain
affiliated  entities  of  either,  may  not  exceed,  together  with  all  other
outstanding loans to such person and affiliated  entities the institution's loan
to one borrower limit  (generally equal to 15% of the  institution's  unimpaired
capital and surplus and an additional  10% of such capital and surplus for loans
fully  secured by certain  readily  marketable  collateral).  Section 22(h) also
prohibits  loans,  above amounts  prescribed by the appropriate  federal banking
agency, to directors,  executive officers and greater than 10% stockholders of a
savings  institution,  and  their  respective  affiliates,  unless  such loan is
approved in advance by a majority of the board of directors  of the  institution
with any  "interested"  director not  participating  in the voting.  The Federal
Reserve  Board  has  prescribed  the  loan  amount  (which  includes  all  other
outstanding  loans to such  person),  as to which such prior  board of  director
approval  is  required,  as being the  greater of  $25,000 or 5% of capital  and
surplus (up to $500,000). Further, the Federal Reserve Board pursuant to Section
22(h)  requires  that  loans to  directors,  executive  officers  and  principal
stockholders  be made on terms  substantially  the same as offered in comparable
transactions  to  other  persons.  Section  22(h)  also  generally  prohibits  a
depository  institution  from  paying  the  overdrafts  of any of its  executive
officers or directors.  Section  22(g) of the Federal  Reserve Act requires that
loans to executive officers of depository institutions not be made on terms more
favorable than those  afforded to other  borrowers,  requires  approval for such
extensions of credit by the board of directors of the  institution,  and imposes
reporting  requirements for and additional  restrictions on the type, amount and
terms  of  credits  to such  officers.  In  addition,  Section  106 of the  BHCA
prohibits  extensions of credit to executive  officers,  directors,  and greater
than 10% stockholders of a depository institution by any other institution which
has a  correspondent  banking  relationship  with the  institution,  unless such
extension of credit is on  substantially  the same terms as those  prevailing at
the time for  comparable  transactions  with other  persons and does not involve
more than the normal risk of repayment or present other unfavorable features.

         LIQUIDITY REQUIREMENTS.  The Bank is required to maintain average daily
balances of liquid assets  (cash,  deposits  maintained  pursuant to the Federal
Reserve Board requirements,  time and savings deposits in certain  institutions,
obligations of states and political subdivisions thereof, shares in mutual funds
with certain  restricted  investment  policies,  highly rated corporate debt and
mortgage  loans  and  mortgage-related  securities  with  less  than one year to
maturity or subject to purchase within one year) in each calendar quarter of not
less than a specified percentage  (currently 4%) of its net withdrawable savings
deposits  plus the average daily  balance of  short-term  borrowings  during the
preceding  calendar  quarter.  Monetary  penalties may be imposed for failure to
meet liquidity requirements.  The average regulatory liquidity ratio of the Bank
for the month of June 2000 was 6.79%.

         FEDERAL HOME LOAN BANK SYSTEM.  The Bank is a member of the FHLB, which
consists of 12 Federal Home Loan Banks subject to supervision  and regulation by
the Federal Housing  Finance Board ("FHFB").  The FHFBs provide a central credit
facility  primarily  for  member  institutions.  As a  member  of  the  FHLB  of
Cincinnati,  the Bank is required to acquire and hold shares of capital stock in
the FHLB of Cincinnati in an amount at least equal to 1% of the aggregate unpaid
principal of its home  mortgage  loans,  home  purchase  contracts,  and similar
obligations at the beginning of each year, or 1/20 of its advances from the FHLB
of  Cincinnati,  whichever  is  greater.  The Bank was in  compliance  with this
requirement  with  investment in FHLB of  Cincinnati  stock at June 30, 2000, of
$929,000.  The FHLB of Cincinnati is funded primarily from proceeds derived from
the sale of  consolidated  obligations of the FHLB System.  It makes advances to
members in accordance  with policies and procedures


                                       24
<PAGE>
established by the FHFB and the Board of Directors of the FHLB of Cincinnati. As
of June 30, 2000,  the Bank had $10.5  million in advances and other  borrowings
from the FHLB of Cincinnati. See "Business of the Bank -- Deposit Activities and
Other Sources of Funds -- Borrowings."

         FEDERAL RESERVE SYSTEM.  Pursuant to regulations of the Federal Reserve
Board, a thrift  institution must maintain average daily reserves equal to 3% on
transaction accounts of up to $44.3 million of transaction accounts, plus 10% on
the remainder.  This  percentage is subject to adjustment by the Federal Reserve
Board. Because required reserves must be maintained in the form of vault cash or
in a non-interest  bearing  account at a Federal Reserve Bank, the effect of the
reserve   requirement   is  to   reduce   the   amount   of  the   institution's
interest-earning  assets.  As of  June  30,  2000,  the  Bank  met  its  reserve
requirements.

REGULATION OF THE COMPANY

         GENERAL.  The Company is a savings and loan holding  company within the
meaning of the HOLA. As such, the Company is registered with the OTS and subject
to OTS regulations,  examinations,  supervision and reporting requirements. As a
subsidiary of a savings and loan holding company, the Bank is subject to certain
restrictions  in its  dealings  with the Company  and  affiliates  thereof.  The
Company is required to file certain reports with, and otherwise  comply with the
rules and regulations of the SEC under the federal securities laws.

         ACTIVITIES  RESTRICTIONS.   The  Board  of  Directors  of  the  Company
presently  intends to operate the Company as a unitary  savings and loan holding
company.  There are  generally no  restrictions  on the  activities of a unitary
savings and loan holding  company.  However,  if the Director of OTS  determines
that there is reasonable cause to believe that the continuation by a savings and
loan holding company of an activity  constitutes a serious risk to the financial
safety,  soundness,  or stability of its  subsidiary  savings  association,  the
Director of OTS may impose such restrictions as deemed necessary to address such
risk including  limiting:  (i) payment of dividends by the savings  institution,
(ii) transactions between the savings institution and its affiliates;  and (iii)
any activities of the savings  institution that might create a serious risk that
the  liabilities of the holding company and its affiliates may be imposed on the
savings institution.  Notwithstanding the above rules as to permissible business
activities  of  unitary  savings  and loan  holding  companies,  if the  savings
institution  subsidiary  of such a holding  company  fails to meet the QTL Test,
then such unitary  holding  company shall also  presently  become subject to the
activities  restrictions applicable to multiple holding companies and unless the
savings  association  requalifies as a QTL within one year thereafter,  register
as, and  become  subject  to,  the  restrictions  applicable  to a bank  holding
company. See " -- Regulation of the Bank -- Qualified Thrift Lender Test."

         If the Company were to acquire control of another savings  association,
other than  through  merger or other  business  combination  with the Bank,  the
Company  would  thereupon  become a multiple  savings and loan holding  company.
Except where such acquisition is pursuant to the authority to approve  emergency
thrift  acquisitions and where each subsidiary savings institution meets the QTL
Test, the activities of the Company and any of its subsidiaries  (other than the
Bank or other subsidiary  savings  institutions)  would thereafter be subject to
further  restrictions.  Among other things, no multiple savings and loan holding
company or subsidiary thereof which is not a savings institution may commence or
continue for a limited period of time after becoming a multiple savings and loan
holding company or subsidiary thereof, any business activity,  upon prior notice
to, and no  objection  by the OTS,  other than:  (i)  furnishing  or  performing
management  services for a subsidiary  savings  institution;  (ii) conducting an
insurance agency or escrow  business;  (iii) holding,  managing,  or liquidating
assets owned by or acquired from a subsidiary savings institution;  (iv) holding
or managing properties used or occupied by a subsidiary savings institution; (v)
acting  as  trustee  under  deeds of trust;  (vi)  those  activities  previously
directly  authorized  by  regulation  as of March 5,  1987 to be  engaged  in by
multiple holding companies;  or (vii) those activities authorized by the Federal
Reserve Board as permissible for bank holding companies,  unless the Director of
OTS by  regulation  prohibits  or limits  such  activities  for savings and loan
holding  companies.  Those  activities  described  in (vii)  above  must also be
approved by the Director of OTS prior to being engaged in by a multiple  holding
company.

         RESTRICTIONS ON ACQUISITIONS.  The HOLA generally prohibits savings and
loan holding companies from acquiring, without prior approval of the Director of
OTS, (i) control of any other  savings  institution  or savings and loan holding
company or  substantially  all the assets  thereof,  or (ii) more than 5% of the
voting shares of a savings institution or holding company thereof which is not a
subsidiary.  Except with the prior  approval of the Director of OTS, no director
or officer of a savings and loan holding company or person owning or controlling
by proxy or


                                       25
<PAGE>

otherwise more than 25% of such company's stock, may also acquire control of any
savings  institution,  other than a subsidiary  savings  institution,  or of any
other savings and loan holding company.

         The  Director of OTS may only  approve  acquisitions  resulting  in the
formation of a multiple  savings and loan holding company which controls savings
institutions  in more than one  state  if:  (i) the  multiple  savings  and loan
holding company involved controls a savings institution which operated a home or
branch  office in the state of the  institution  to be  acquired  as of March 5,
1987;  (ii) the  acquiror  is  authorized  to  acquire  control  of the  savings
institution  pursuant to the  emergency  acquisition  provisions  of the Federal
Deposit  Insurance  Act;  or (iii)  the  statutes  of the  state  in  which  the
institution to be acquired is located  specifically  permit  institutions  to be
acquired by  state-chartered  institutions or savings and loan holding companies
located in the state  where the  acquiring  entity is  located  (or by a holding
company that controls such state-chartered savings institutions).

         The OTS regulations permit federal  associations to branch in any state
or states of the United States and its territories.  Except in supervisory cases
or when  interstate  branching  is  otherwise  permitted  by state  law or other
statutory  provision,  a federal  association  may not establish an out-of-state
branch unless (i) the federal  association  qualifies as a QTL or as a "domestic
building and loan  association"  under  ss.7701(a)(19) of the Code and the total
assets  attributable  to all  branches  of the  association  in the state  would
qualify such  branches  taken as a whole as a QTL or for treatment as a domestic
building  and loan  association  and (ii) such  branch  would not  result in (a)
formation of a prohibited  multi-state multiple savings and loan holding company
or (b) a violation  of certain  statutory  restrictions  on branching by savings
association  subsidiaries of banking  holding  companies.  Federal  associations
generally may not establish new branches unless the association meets or exceeds
minimum  regulatory  capital  requirements.  The  OTS  will  also  consider  the
association's  record of compliance with the Community  Reinvestment Act of 1977
in connection with any branch application.

         Under the BHCA, bank holding  companies are specifically  authorized to
acquire control of any savings association. Pursuant to rules promulgated by the
Federal Reserve Board, owning, controlling or operating a savings institution is
a permissible  activity for bank holding companies,  if the savings  institution
engages only in deposit-taking  activities and lending and other activities that
are permissible for bank holding companies. A bank holding company that controls
a savings institution may merge or consolidate the assets and liabilities of the
savings  institution with, or transfer assets and liabilities to, any subsidiary
bank which is a member of the BIF with the approval of the  appropriate  federal
banking  agency  and the  Federal  Reserve  Board.  The  resulting  bank will be
required to continue to pay assessments to the SAIF at the rates  prescribed for
SAIF members on the deposits attributable to the merged savings institution plus
an annual growth  increment.  In addition,  the transaction must comply with the
restrictions on interstate acquisitions of commercial banks under the BHCA.


                                    TAXATION

FEDERAL TAXATION

         The Company and the Bank file consolidated federal income tax returns.

         Thrift  institutions  are subject to the  provisions of the Code in the
same  general  manner  as  other  corporations.  Prior  to  recent  legislation,
institutions such as Middlesboro  Federal which met certain  definitional  tests
and other  conditions  prescribed by the Code benefitted from certain  favorable
provisions  regarding their  deductions from taxable income for annual additions
to their bad debt reserve. For purposes of the bad debt reserve deduction, loans
were separated into  "qualifying real property loans," which generally are loans
secured by interests in certain real property,  and nonqualifying  loans,  which
are  all  other  loans.   The  bad  debt  reserve   deduction  with  respect  to
nonqualifying loans was based on actual loss experience,  however, the amount of
the bad debt reserve  deduction  with respect to qualifying  real property loans
could be based upon  actual  loss  experience  (the  "experience  method")  or a
percentage of taxable  income  determined  without regard to such deduction (the
"percentage of taxable income method").  Recently enacted  legislation  repealed
the  percentage of taxable  income method of  calculating  the bad debt reserve.
Middlesboro Federal historically has elected to use the experience method.

                                       26
<PAGE>

         Earnings  appropriated to an institution's bad debt reserve and claimed
as a tax deduction  are not  available for the payment of cash  dividends or for
distribution to  shareholders  (including  distributions  made on dissolution or
liquidation),  unless such amount is included in taxable income,  along with the
amount deemed necessary to pay the resulting federal income tax.

         Beginning  with the first  taxable year  beginning  after  December 31,
1995,  savings  institutions,  such as the  Bank,  will be  treated  the same as
commercial banks.  Institutions with $500 million or more in assets will only be
able to take a tax deduction when a loan is actually  charged off.  Institutions
with less than $500 million in assets will still be permitted to make deductible
bad debt additions to reserves, but only using the experience method.

         Neither the  Company's  nor  Middlesboro  Federal's  federal  corporate
income tax returns have been audited in the last five years.

STATE INCOME TAXATION

         The  Commonwealth  of  Kentucky  imposes  an  annual  franchise  tax on
financial  institutions  regularly  engaged in  business in Kentucky at any time
during the calendar year. This tax is 1.1% of Middlesboro Federal's net capital.
For purposes of this tax, net capital is defined as the  aggregate of the Bank's
capital stock,  paid-in capital,  retained  earnings and net unrealized gains or
losses on securities  designated as  available-for-sale  less an amount equal to
the five year average of the percentage that the book value of any United States
obligations held by the Bank bears to the book value of the Bank's total assets.
Financial institutions which are subject to tax both within and without Kentucky
must apportion  their net capital.  For the year ended June 30, 2000, the amount
of such expense for Middlesboro Federal was $114,671.

ITEM 2.  DESCRIPTION OF PROPERTY
--------------------------------

         The  following  table sets forth the  location  and certain  additional
information regarding the Bank's offices and other material property.
<TABLE>
<CAPTION>
                                                              BOOK VALUE AT                        DEPOSITS AT
                            YEAR          OWNED OR              JUNE 30,         APPROXIMATE        JUNE 30,
                           OPENED          LEASED                 2000         SQUARE FOOTAGE         2000
                           ------          ------                 -----        --------------         ----

<S>                         <C>            <C>               <C>                    <C>          <C>
MAIN OFFICE:

1431 Cumberland Avenue
Middlesboro, Kentucky       1915            Owned            $1,033,913             11,906       $56,364,456

BRANCH OFFICES:

1501 E. Main Street
Cumberland, Kentucky        1976           Leased                86,236              1,700        28,288,341

134 Pine Street
Pineville, Kentucky         1997           Leased                68,642                750         6,002,738

5320 N. Broadway
Fountain City, Tennessee    1998            Owned             1,443,910              8,000        15,601,175

</TABLE>


         The Bank recently  expanded its main office by constructing an addition
which  increased  its square  footage by 6,000  square  feet.  The  addition was
completed  in  January  1997  and is used to  house  the  Bank's  administrative
offices.


                                       27
<PAGE>


ITEM 3. LEGAL PROCEEDINGS.
-------------------------

         Although  the Bank,  from time to time,  is involved  in various  legal
proceedings  in the  normal  course of  business,  there are no  material  legal
proceedings  to which the Company,  the Bank or its  subsidiary is a party or to
which their property is subject.

ITEM 4.  SUBMISSION OF MATTERS TO VOTE OF SECURITY-HOLDERS.
----------------------------------------------------------

         No matters  were  submitted  to a vote of security  holders  during the
fourth quarter of the fiscal year ended June 30, 2000.

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-----------------------------------------------------------------

         The  Company's  common  stock,  par value $.01 per share  (the  "Common
Stock"),  is traded on the  over-the-counter  market with  quotations  available
through the OTC  "Electronic  Bulletin  Board" under the symbol "CMBN."  Trading
commenced  in April  1997.  The high and low stock  price by quarter  for fiscal
years 1999 and 2000 were as follows:
<TABLE>
<CAPTION>

      QUARTER ENDED                       HIGH              LOW
      -------------                       ----              ----
      <S>                                 <C>               <C>
      September 30, 1998                  17.75             15.00
      December 31, 1998                   15.00             10.75
      March 31, 1999                      12.00             10.75
      June 30, 1999                       12.00              8.50
      September 30, 1999                   8.50              8.50
      December 31, 1999                   10.25              7.50
      March 31, 2000                       9.25              6.75
      June 30, 2000                        7.00              5.50
</TABLE>



         No dividends  have been  declared  during this  period.  As of June 30,
2000, there were 160 recordholders of the Common Stock.

         Payment of  dividends  by the Company is subject to  determination  and
declaration by the Board of Directors in accordance  with  applicable  statutory
requirements. Payment of dividends by the Company also depends on the receipt of
dividends  from the Bank,  which is subject to  regulatory  restrictions  on the
payment of dividends.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
------------------------------------------------------------------

GENERAL

         The Company's principal business is that of the Bank.  Therefore,  this
discussion relates primarily to the Bank.

         Middlesboro  Federal is primarily  engaged in attracting  deposits from
the  general  public  and using  those and other  available  sources of funds to
originate  loans  secured by properties  located in Bell and Harlan  Counties in
southeastern  Kentucky,  Claiborne,  Knox  and  Union  Counties  in  upper  east
Tennessee and western Lee County in Virginia.  To a lesser  extent,  Middlesboro
Federal also originates  construction  loans,  multi-family  and commercial real
estate  loans,  commercial  business  loans and  consumer  loans.  It also has a
significant  amount of  investments  in  mortgage-backed  securities  and United
States Government and federal agency obligations.

                                       28
<PAGE>

         The  profitability of Middlesboro  Federal depends primarily on its net
interest income, which is the difference between interest and dividend income on
its interest-earning assets,  principally loans,  mortgage-backed securities and
investment securities, and interest expense on its interest-bearing deposits and
borrowings.  Middlesboro Federal's net earnings also are dependent,  to a lesser
extent,  on the level of its noninterest  income  (including  servicing fees and
other fees) and its noninterest  expenses,  such as  compensation  and benefits,
occupancy and equipment,  insurance premiums,  and miscellaneous other expenses,
as well as federal income tax expense.

ASSET AND LIABILITY MANAGEMENT

         The ability to maximize net interest  income is largely  dependent upon
the achievement of a positive  interest rate spread that can be sustained during
fluctuations  in  prevailing  interest  rates.  Interest  rate-sensitivity  is a
measure  of the  difference  between  amounts  of  interest-earning  assets  and
interest-bearing  liabilities  which  either  reprice  or mature  within a given
period of time. The difference,  or the interest rate repricing  "gap," provides
an indication of the extent to which an institution's  interest rate spread will
be affected by changes in interest rates. A gap is considered  positive when the
amount  of  interest  rate-sensitive  assets  exceeds  the  amount  of  interest
rate-sensitive  liabilities,  and is  considered  negative  when the  amount  of
interest   rate-sensitive   liabilities   exceeds   the   amount   of   interest
rate-sensitive  assets.  Generally,  during a period of rising interest rates, a
negative  gap within  shorter  maturities  would  adversely  affect net interest
income,  while a  positive  gap within  shorter  maturities  would  result in an
increase in net interest income,  and during a period of falling interest rates,
a negative  gap within  shorter  maturities  would  result in an increase in net
interest  income while a positive gap within shorter  maturities  would have the
opposite effect.

         NET  PORTFOLIO  VALUE.  In  recent  years,  the Bank has  measured  its
interest  rate  sensitivity  by  computing  the "gap"  between  the  assets  and
liabilities  which were expected to mature or reprice  within  certain  periods,
based on assumptions  regarding loan prepayment and deposit decay rates formerly
provided by the OTS. However, the OTS now requires the computation of amounts by
which  the net  present  value  of an  institution's  cash  flows  from  assets,
liabilities and off balance sheet items (the  institution's net portfolio value,
or "NPV")  would  change in the event of a range of  assumed  changes  in market
interest rates.  The OTS also requires the  computation of estimated  changes in
net interest income over a four-quarter period. These computations  estimate the
effect of an  institution's  NPV and net interest  income of  instantaneous  and
permanent 1% to 3% increases and decreases in market interest rates.

         The  following  table sets forth the interest rate  sensitivity  of the
Bank's net portfolio  value as of March 31, 2000 (the most recent date for which
information  is  available)  in the  event of 1%,  2% and 3%  instantaneous  and
permanent increases and decreases in market interest rates, respectively.  These
changes are set forth below as basis  points,  where 100 basis points equals one
percentage point.
<TABLE>
<CAPTION>

                                   NET PORTFOLIO VALUE                         NPV AS % OF PORTFOLIO VALUE OF ASSETS
      CHANGE             ---------------------------------------               ------------------------------------
      IN RATES           $ AMOUNT        $ CHANGE       % CHANGE                NPV RATIO      BASIS  POINT CHANGE
      --------           --------        --------       --------                ---------      --------------------
                                         (DOLLARS IN THOUSANDS)

      <S>                <C>             <C>                <C>                    <C>          <C>
      + 300 bp           $8,678          $  (3,634)         (30)%                  6.97%        (244) bp
      + 200 bp           10,051             (2,260)         (18)%                  7.93%        (148) bp
      + 100 bp           11,293             (1,018)          (8)%                  8.76%         (65) bp
          0 bp           12,310                 --           --                    9.41%          --
     -  100 bp           12,959                649            5%                   9.78%          38  bp
     -  200 bp           13,282                971            8%                   9.93%          52  bp
     -  300 bp           13,669              1,359           11%                  10.12%          71  bp
</TABLE>

                                       29
<PAGE>

         The following table sets forth the interest rate risk capital component
for the Bank at March 31, 2000 given a hypothetical  200 basis point rate change
in market interest rates.
                                                                       AT
                                                                 MARCH 31, 2000
                                                                 --------------

Pre-shock NPV Ratio: NPV as % of Portfolio Value of Assets .......... 9.41%
Exposure Measure: Post-Shock NPV Ratio .............................. 7.93%
Sensitivity Measure: Change in NPV Ratio ............................ 148 bp

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates, loan prepayments and deposit run-offs,  and should not be relied
upon  as  indicative  of  actual  results.  Further,  the  computations  do  not
contemplate  any  actions  the Bank may  undertake  in  response  to  changes in
interest rates.

         Certain  shortcomings are inherent in the method of analysis  presented
in both the  computation  of NPV and in the  analysis  presented in prior tables
setting  forth  the  maturing  and  repricing  of  interest-earning  assets  and
interest-bearing   liabilities.   For  example,   although  certain  assets  and
liabilities may have similar maturities or periods to repricing,  they may react
in differing  degrees to changes in market interest rates. The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market  interest  rates,  while  interest  rates on other  types may lag  behind
changes in market rates.  Additionally,  certain assets, such as adjustable-rate
loans,  which  represent the Bank's  primary loan product,  have features  which
restrict  changes in interest  rates on a short-term  basis and over the life of
the asset. In addition,  the proportion of  adjustable-rate  loans in the Bank's
portfolios  could decrease in future periods if market  interest rates remain at
or decrease  below current  levels due to refinance  activity.  Further,  in the
event of a change in interest  rates,  prepayment  and early  withdrawal  levels
would likely deviate  significantly  from those assumed in the tables.  Finally,
the ability of many borrowers to service their adjustable-rate debt may decrease
in the event of an interest rate increase.

         The  lending  activities  of  savings  institutions  have  historically
emphasized long-term,  fixed-rate loans secured by single-family residences, and
the primary source of funds of such institutions has been deposits.  The deposit
accounts of savings  associations  generally  bear  interest  rates that reflect
market  rates and  largely  mature or are  subject to  repricing  within a short
period of time.  This factor,  in combination  with  substantial  investments in
long-term,  fixed-rate  loans,  has  historically  caused the  income  earned by
savings  associations  on their loan portfolios to adjust more slowly to changes
in interest rates than their cost of funds.

         Middlesboro   Federal   originates  both  fixed-  and   adjustable-rate
residential real estate loans as market conditions dictate.  Prior to the 1980s,
Middlesboro Federal,  like virtually all savings  associations,  originated only
fixed-rate  loans and held them in portfolio until maturity.  As a result of the
problems   caused  by  holding   fixed-rate   loans  in  a  rapidly   increasing
interest-rate  environment,  changes in regulations  to allow for  variable-rate
loans and consumer  demand for such loans during periods of high interest rates,
Middlesboro  Federal  began to transform  its  portfolio  into loan products the
interest rates of which adjust periodically.  As a result, 64.33% of Middlesboro
Federal's  loan  portfolio,  as of June 30,  2000  consisted  of  adjustable  or
floating rate loans.

         Notwithstanding the foregoing,  however,  because Middlesboro Federal's
interest-bearing  liabilities  which  mature or  reprice  within  short  periods
substantially exceed its earning assets with similar  characteristics,  material
and prolonged  increases in interest rates generally would adversely  affect net
interest  income,  while  material and  prolonged  decreases  in interest  rates
generally,  but to a lesser  extent  because of their  historically  low levels,
would have the opposite effect.

                                       30
<PAGE>

AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

         The  following  table sets forth  certain  information  relating to the
Company's  average  balance  sheet and reflects the average  yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing  income or expense by the average  monthly balance of assets
or liabilities,  respectively,  for the periods presented.  Average balances for
loans include  nonaccrual  loans.  Average  balances are derived from  month-end
balances. Management does not believe that the use of month-end balances instead
of  daily  balances  has  caused  any  material  difference  in the  information
presented.


<TABLE>
<CAPTION>

                                                                       YEAR ENDED JUNE 30,
                                               ---------------------------------------------------------------------------
                                                             2000                                     1999
                                               ---------------------------------       -----------------------------------
                                               AVERAGE                   AVERAGE       AVERAGE                     AVERAGE
                                               BALANCE      INTEREST      RATE         BALANCE       INTEREST        RATE
                                               -------      --------     -------       -------       --------      -------
                                                                             (DOLLARS IN THOUSANDS)
<S>                                            <C>          <C>          <C>           <C>           <C>             <C>
INTEREST INCOME
  Loans
    Consumer................................   $ 13,901     $   1,390    10.00%        $  19,897     $ 2,060         10.35%
    Other...................................      9,874           796     8.06             5,345         466          8.72
    Mortgage................................     85,977         7,090     8.25            85,701       7,433          8.67
                                               --------     ---------                  ---------     -------
     Total loans............................    109,752         9,276     8.45           110,943       9,959          8.98
                                               --------     ---------                  ---------     -------
  Mortgage-backed securities................      3,028           183     6.04             4,504         260          5.77
  Investment securities.....................      3,966           247     6.23             3,283         227          6.91
  FHLB stock................................      1,369           119     8.69             1,731         122          7.04
                                               --------     ---------                  ---------     -------
  Total interest-earning assets.............    118,115         9,825     8.32           120,461      10,568          8.77
                                                            ---------                                -------
  Non-interest-earning assets...............     11,015                                   16,039
                                               --------                                ---------
     Total assets...........................   $129,130                                $ 136,500
                                               ========                                =========

INTEREST EXPENSE
  Savings deposits..........................   $  8,117     $     179     2.21         $   8,586     $   208          2.42%
  Certificates of deposit...................     85,742         4,620     5.39            83,531       4,722          5.65
  Demand, NOW and money market..............     13,174           235     1.78            12,363         225          1.82
                                               --------     ---------                  ---------     -------
       Total deposits.......................    107,033         5,034     4.70           104,480       5,155          4.93
  Funds borrowed............................     12,911           825     6.39            20,583       1,165          5.66
                                               --------     ---------                  ---------     -------
Total interest-bearing liabilities..........    119,944         5,859     4.88           125,063       6,320          5.05
                                                            ---------                                -------
Other non-interest-bearing liabilities......        275                                    2,703
Total stockholders' equity..................      8,911                                    8,734
                                               --------                                ---------
     Total liabilities and stockholders'
       equity...............................   $ 129,130                                $136,500
                                               =========                                ========

Net interest income.........................                $   3,966                                $ 4,248
                                                            =========                                =======
Interest rate spread........................                              3.44%                                       3.72%
                                                                         =====                                        ====
Net yield on interest-earning assets........                              3.36%                                       3.53%
                                                                         =====                                        ====
Ratio of average interest-earning assets to
  average interest-bearing liabilities......      98.48%                                    96.32%
                                               ========                                ==========
</TABLE>

                                       31
<PAGE>
RATE/VOLUME ANALYSIS

         The table below sets forth  certain  information  regarding  changes in
interest income and interest  expense of the Company for the periods  indicated.
For each  category of  interest-earning  asset and  interest-bearing  liability,
information  is  provided  on changes  attributable  to:  (i)  changes in volume
(changes in volume  multiplied by old rate); and (ii) changes in rate (change in
rate  multiplied  by old  volume).  Changes  in  rate-volume  (changes  in  rate
multiplied by the changes in volume) have been allocated proportionately between
changes  in rate and  changes in volume at the basis of the  absolute  values of
changes in rate and changes in volume.
<TABLE>
<CAPTION>
                                                              YEAR ENDED JUNE 30,
                                         -----------------------------------------------------------------
                                           2000      VS.        1999         1999         VS.       1998
                                         -----------------------------      ------------------------------
                                            INCREASE (DECREASE)                   INCREASE (DECREASE)
                                                   DUE TO                               DUE TO
                                         -----------------------------      -------------------------------
                                         RATE        VOLUME      TOTAL      RATE        VOLUME      TOTAL
                                         ----        ------      -----      ----        ------      ------
                                                                    (IN THOUSANDS)
<S>                                     <C>         <C>        <C>          <C>         <C>         <C>
Interest income:
  Loans:
    Consumer..........................  $    (49)   $   (621)  $   (670)    $     59    $     45    $    104
    Other.............................       (65)        395        330          (62)       (347)       (409)
    Mortgage..........................      (367)         24       (343)         602        (410)        192
  Mortgage-backed securities..........         8         (85)       (77)         (21)        (74)        (95)
  Investment securities...............       (27)         47         20           19          (7)         12
  FHLB stock..........................        22         (25)        (3)           9           5          14
                                        --------    --------   --------     --------    --------    --------
      Total interest income...........      (478)       (265)      (743)         606        (788)       (182)
                                        --------    --------   --------     --------    --------    --------
Interest expense:
  Savings deposits....................       (18)        (11)       (29)         (19)        (17)        (36)
  Certificates of deposit.............      (227)        125       (102)         189         327         516
  Demand, NOW and money market........        (5)         15         10          (27)         25          (2
  Funds borrowed......................        94        (434)      (340)        (381)        (65)       (446)
                                        --------    --------   --------     --------    --------    --------
      Total interest expense..........      (156)       (305)      (461)        (238)        270          32
                                        --------    --------   --------     --------    --------    --------
Change in net interest income.........  $   (322)   $     40   $   (282)    $    844    $ (1,058)   $   (214)
                                        ========-   ========   ========     ========    ========    ========

</TABLE>

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 2000 AND 1999

         The Company's total assets  decreased by $1.9 million,  or 1.48%,  from
$130 million at June 30, 1999 to $128.2  million at June 30, 2000.  The decrease
in assets was principally due to a decrease in the overall loan portfolio. Gross
loans at June 30, 2000 totaled  $111.3  million as compared to $115.4 million at
June 30, 1999, with the $4.1 million or 3.55% decrease primarily attributable to
decreases in the Bank's commercial and construction loans, partially offset by a
$3.7 million  increase in  one-to-four  family  mortgage  loans.  These  changes
reflect  the  Bank's  change  in  emphasis  in its loan  originations  away from
commercial and consumer loans with an increased  emphasis on one- to four-family
lending.  Mortgage-backed  securities,  designated as available  for sale,  also
declined  by  $953,000  or 26.64%  from $3.6  million  at June 30,  1999 to $2.6
million  at June  30,  2000.  The  decline  in the  balance  of  mortgage-backed
securities  classified as  available-for-sale  reflects principal  repayments on
these securities.  These changes were partially offset by increases of $784,000,
or 106.02%, in other real estate owned, $433,000, or 35.06% in property held for
investment  and  $305,000,  or 9.24%,  in  investment  securities  designated as
available-for-sale. The increase in other real estate owned reflects an increase
in loan  collection  efforts.  The increase in investment  securities was due to
reinvestment of matured mortgage-backed securities.

         Total  liabilities  amounted to $119.1  million at June 30, 2000,  down
from $121.3 million at June 30, 1999. The $2.2 million decrease was attributable
to repayments of advances from the FHLB.  Total deposits were comparable year to
year,  decreasing by only  $827,000,  or 0.77%,  from $106.9 million at June 30,
1999 to $106.1 million at June 30, 2000.

                                       32
<PAGE>

         Total  stockholders'  equity increased by $407,000 from $8.7 million at
June 30, 1999 to $9.1 million at June 30, 2000.  This increase was due primarily
to net income for the year.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 2000 AND 1999

         NET INCOME.  For the year ended June 30, 2000, the Company's net income
amounted to  $449,000 as compared to a net loss of $355,000  for the fiscal year
ended June 30, 1999. This represented an increase of $804,000.  The increase was
due to the  combined  effects of a $1.3  million,  or 86.49%,  reduction  in the
provision for loan losses and a $224,000,  or 5.47%,  reduction in  non-interest
expense,  partially  offset by a $283,000,  or 6.66%  decrease  in net  interest
income and a $60,000, or 6.79%, decrease in non interest income.

         NET INTEREST  INCOME.  Net interest  income  decreased by $283,000 from
$4.2 million for the year ended June 30, 1999 to $4.0 million for the year ended
June 30,  2000.  The  decrease was  attributable  to the  combined  effects of a
decrease  in  interest  income as a result  of the  decreased  level of  average
interest-earning  assets in fiscal year 2000 as compared to fiscal year 1999 and
a decrease in the average yield on interest earning  expenses,  partially offset
by declines in both the average  balance of  interest-bearing  liabilities and a
decrease  in  the  average  cost  associated  with  such  liabilities.   Average
interest-earning  assets  amounted  to $118.1  million  for fiscal  year 2000 as
compared to $120.5  million for fiscal year 1999 for a decrease of $2.3 million.
This decrease was  attributable  to reductions in both the Bank's loan portfolio
and its  mortgage-backed  securities  portfolio.  During  fiscal year 2000,  the
Bank's loan growth slowed substantially as compared to prior years primarily due
to management's  efforts to strengthen the portfolio by tightening  underwriting
standards and collection efforts as well as increased competition from secondary
market originators.

         INTEREST  INCOME.  Interest  income  totaled  $9.8 million for the year
ended June 30, 2000, a decrease of $744,000,  or 7.04%,  from fiscal year 1999's
level of $10.6 million.  The decrease resulted primarily from a reduction in the
average balance of other loans,  primarily  unsecured  consumer loans from $19.9
million in fiscal year 1999 to $13.9 million in fiscal year 1999 as well as a 35
basis point decrease in the average yield on this portfolio. Due to the combined
effects of these changes, interest income from unsecured consumer and commercial
loans  decreased by $340,000.  Interest income from mortgage loans also declined
by $343,000  from $7.4  million for the year ended June 30, 1999 to $7.1 million
for the year ended June 30, 2000,  as an increase in the average  balance of the
mortgage loan portfolio was more than offset by a 42 basis point decrease in the
average  rate  received  on such  loans.  Also  contributing  to the  decline in
interest income was a $77,000 reduction in interest income from  mortgage-backed
securities  reflecting a $1.5 million  reduction in the average balance of these
securities  during  fiscal year 2000 as compared to fiscal year 1999,  partially
offset by a 27 basis point increase in the average rate received year-to year.

         INTEREST EXPENSE. Total interest expense for fiscal year 2000 decreased
by  $461,000 or 7.29% to $5.9  million as compared to $6.3  million in the prior
fiscal  year,   increased  interest  expense  on  certificates  of  deposit  was
substantially  offset  by a  reduction  in  interest  expense  from  short  term
borrowings. Interest expense on deposits amounted to $5.0 million in fiscal year
2000,  down from $5.2  million in fiscal year 1999 with the  decrease  primarily
attributable  to decreased  interest  expense on  certificates  of deposit as an
increase  in the  average  balance of such  deposits  outstanding  was more than
offset by a decrease in the average rate paid. In fiscal year 2000,  the average
balance of certificates  of deposit  outstanding  amounted to $85.7 million,  up
from $83.5 million in fiscal year 1999 while the average rate paid on the Bank's
certificates  of deposit  decreased  from 5.65% in fiscal  year 1999 to 5.39% in
fiscal year 2000. The increase in the average balance of certificates of deposit
was due to the  additional  certificates  opened in the new Fountain City branch
while the decrease in the average rate paid reflects the Bank's  decision not to
offer any premium deposit rates in fiscal year 2000.  Interest  expense on short
term  borrowings  declined by $340,000  from $1.2 million in fiscal year 1999 to
$865,000 in fiscal year 2000.  This  decrease was  primarily  attributable  to a
reduction  in the  average  balance of such  borrowings  from $20.6  million for
fiscal year 1999 to $12.9 million for fiscal year 2000.

         PROVISION  FOR LOAN LOSSES.  Provisions  for loan losses are charged to
earnings to bring the total  allowance  for loans  losses to a level  considered
adequate  by  management  to  provide  for  loan  losses  based  on  prior  loss
experience, volume and type of lending conducted by the Bank, industry standards
and past due loans in the  Bank's  loan  portfolio.  Management  also  considers
general economic  conditions and other factors related to the  collectibility of
the Bank's loan  portfolio.  The  provision  for loan losses  decreased  by $1.3
million,  or 86.56%  from


                                       33
<PAGE>

$1.5  million for the year ended June 30,  1999 to  $206,000  for the year ended
June 30, 2000. The decreased  provision was deemed  necessary by the Bank due to
additional chargeoffs in 2000 resulting in a reduction of substandard loans. The
allowance for loan losses as a percentage of gross loans at fiscal year end 2000
was 0.93% as compared to1.32% at fiscal year end 1999.

         NONINTEREST  INCOME.  Noninterest  income totaled $824,000 for the year
ended June 30, 2000, a decrease of $60,000, or 6.79%, from $884,000 for the year
ended June 30, 1999 due to the decreased level of loan  originations  during the
2000 period,  a net loss on the sale of repossessed  assets as well as a decline
in gains from the sale of investment  securities.  During fiscal year 1999,  the
Bank  realized a net gain of $18,000 from the sale of  investment  securities as
compared  to a net loss of $313 from the sale of  investment  securities  during
fiscal year 2000. In addition,  due to the decreased level of loan  originations
during the period,  loan fees and other service charges declined by $10,000,  or
1.16%,  to a total of  $778,000  for the year ended June 30, 2000 as compared to
$789,000 for the year ended June 30, 1999.

         NONINTEREST  EXPENSE.  Noninterest  expense  decreased  by  $224,000 or
5.47%,  from $4.1  million for the year ended June 30, 1999 to $3.9  million for
the year ended June 30, 2000. Salaries and employee benefit expenses declined by
$37,000,  or 2.13%,  from $1.8  million for fiscal year 1999 to $1.7 million for
fiscal year 2000. The decrease was primarily  attributable  to a decline in ESOP
expense and cost control  efforts.  For the fiscal year ended June 30, 2000, the
Company  recognized  a $75,000  expense as a result of the release of shares for
allocation to  participants  under the Company's  ESOP as compared to a $208,000
expense in fiscal year 1999. The Company makes annual  contributions to the ESOP
equal to the ESOP's debt  service.  As the debt is repaid,  shares are  released
from  collateral  and allocated to active  employees  based on the proportion of
debt service paid during the year. As shares are released from  collateral,  the
Company  reports  compensation  expense  equal to the  current  market  value of
shares. Occupancy and equipment expense rose by $61,000, or 10.84% during fiscal
year 2000 from  $562,000  during  fiscal year 1999 to $623,000 with the increase
due to an increase due to the additional  expenses associated with the operation
of the new branch in Fountain City, Tennessee.

         INCOME TAX EXPENSE. Income tax expense increased by $395,000 from a net
benefit of $124,000  for fiscal  year 1999 to an expense of $271,000  for fiscal
year 2000.  The increase in income tax expense is due directly to the  increased
level of earnings  during  fiscal year 2000.  The effective tax rates for fiscal
years  2000 and  1999  were 34% and 34%,  respectively.  The  variations  in the
effective tax rate are  attributable  to the composition of the income base, the
amount of tax  exempt  income  and timing  differences  related to the  deferred
compensation arrangements.

COMPARISON OF RESULTS OF OPERATIONS FOR THE YEARS ENDED JUNE 30, 1999 AND 1998

         NET INCOME.  For the year ended June 30, 1999,  the Company  incurred a
net loss of $355,000  as compared to net income of $751,000  for the fiscal year
ended June 30, 1998. This represented a decrease of $1.1 million or 147.2%.  The
decrease was due to the combined  effects of a $738,000  increase in noninterest
expense,  a $416,000  increase  in the  provision  for loan  losses,  a $233,000
reduction in noninterest income and a $214,000 reduction in net interest income.

         NET INTEREST  INCOME.  Net interest  income  decreased by $214,000 from
$4.5 million for the year ended June 30, 1998 to $4.2 million for the year ended
June 30, 1999. The decrease was primarily attributable to a decrease in interest
income as a result of the decreased level of average  interest-earning assets in
fiscal  year 1999 as  compared  to fiscal  year 1998 as total  interest  expense
remained relatively  unchanged  year-to-year.  Average  interest-earning  assets
amounted to $120.4  million  for fiscal year 1999 as compared to $129.9  million
for fiscal year 1998 for a decrease of $9.5 million. This decrease was primarily
attributable  to a reduction in the Bank's loan  portfolio.  During  fiscal year
1999,  the Bank's loan growth  slowed  substantially  as compared to prior years
primarily due to management's  efforts to strengthen the portfolio by tightening
underwriting  standards and collection efforts as well as increased  competition
from secondary  market  originators.  The decreased  volume of  interest-earning
assets was partially  offset by an improved yield on the  portfolio.  On average
during fiscal year 1999, the Bank's  interest-earning assets yielded a return of
8.77% as compared to 8.27% for fiscal year 1998.

         INTEREST  INCOME.  Interest  income  totaled $10.6 million for the year
ended June 30, 1999, a decrease of $181,000,  or 1.69%,  from fiscal year 1998's
level of $10.7 million.  The decrease resulted primarily from a reduction in the
average  balance of other loans,  primarily  unsecured  consumer loans from $8.9
million in fiscal year


                                       34
<PAGE>

1998 to $5.3  million in fiscal year 1998 as well as a 115 basis point  decrease
in the average  yield on this  portfolio.  Due to the combined  effects of these
changes,  interest income from unsecured consumer and commercial loans decreased
by $409,000.  Also  contributing to the decline in interest income was a $95,000
reduction in interest  income from  mortgage-backed  securities  reflecting  the
combined  effects of a $1.2 million  reduction  in the average  balance of these
securities  during fiscal year 1999 as compared to fiscal year 1998 as well as a
47 basis point decline in the average rate received year-to year. These declines
were  partially  offset by increased  levels of interest  income from the Bank's
mortgage  and  consumer  loan  portfolios.  For the year  ended  June 30,  1999,
interest  income from mortgage  loans  amounted to $7.4 million,  an increase of
$192,000,  or 2.65%,  from fiscal year 1998's level of $7.2 million as a decline
in the average  balance of the mortgage loan portfolio was more than offset by a
70 basis point  increase in the average  rate  received on such loans.  Interest
income from  consumer  loans rose by $104,000  from $2.0  million in fiscal year
1998 to $2.1  million  in fiscal  year  1998 due to the  combined  effects  of a
$443,000  increase  in the  average  balance of such loans and a 30 basis  point
increase in the average yield.

         INTEREST  EXPENSE.  Total  interest  expense  for fiscal  year 1999 was
comparable to the prior fiscal year,  increasing  by only  $32,000,  or 0.51% as
increased  interest expense on certificates of deposit was substantially  offset
by a reduction in interest expense from short term borrowings.  Interest expense
on deposits  amounted to $5.2 million in fiscal year 1999,  up from $4.7 million
in fiscal year 1998 with the increase  all  attributable  to increased  interest
expense  on  certificates  of deposit  due to both an  increase  in the  average
balance of such deposits  outstanding as well as an increase in the average rate
paid.  In fiscal  year 1999,  the  average  balance of  certificates  of deposit
outstanding amounted to $83.5 million, up from $77.5 million in fiscal year 1998
while the average rate paid on the Bank's  certificates of deposit from 5.43% in
fiscal  year 1998 to 5.65% in fiscal  year 1999.  The  increase  in the  average
balance of certificates of deposit was due to the additional certificates opened
in the new  Fountain  City  branch.  Interest  expense on short term  borrowings
declined by $446,000  from $1.6  million in fiscal year 1998 to $1.2  million in
fiscal year 1999. This decrease was primarily attributable to a reduction in the
average rate paid on FHLB advances from 7.51% to 5.66%.

         PROVISION  FOR LOAN LOSSES.  Provisions  for loan losses are charged to
earnings to bring the total  allowance  for loans  losses to a level  considered
adequate  by  management  to  provide  for  loan  losses  based  on  prior  loss
experience, volume and type of lending conducted by the Bank, industry standards
and past due loans in the  Bank's  loan  portfolio.  Management  also  considers
general economic  conditions and other factors related to the  collectibility of
the Bank's loan portfolio.  The provision for loan losses increased by $416,000,
or 37.57% from $1.1 million for the year ended June 30, 1998 to $1.5 million for
the year ended June 30, 1999.  The increased  provision was deemed  necessary by
the Bank due to the growth in the Bank's loan portfolio,  the increased level of
nonperforming assets and the increased risk profile of the loan portfolio due to
the growth in consumer and  commercial  real estate  lending  during fiscal year
1999.  The  allowance  for loan losses as a percentage  of gross loans at fiscal
year end 1999 was 1.32% as compared to 0.92% at fiscal year end 1998.

         NONINTEREST  INCOME.  Noninterest  income totaled $884,000 for the year
ended June 30, 1999, a decrease of  $233,000,  or 20.85%,  from $1.1 million for
the year ended June 30,  1998 due to the  decreased  level of loan  originations
during the 1999 period as well as a decline in gains from the sale of investment
securities.  During  fiscal year 1998,  the Bank realized a net gain of $113,000
from the sale of investment securities as compared to a net gain of only $18,000
from the sale of investment securities during fiscal year 1998. In addition, due
to the decreased  level of loan  originations  during the period,  loan fees and
other service charges declined by $81,000,  or 9.34%, to a total of $789,000 for
the year ended June 30, 1999 as compared to $870,000 for the year ended June 30,
1998.

         NONINTEREST EXPENSE.  Noninterest expense increased $738,000 or 22.03%,
from $3.3  million for the year ended June 30, 1998 to $4.1 million for the year
ended June 30, 1999. Salaries and employee benefit expenses rose by $403,000, or
29.70%,  from $1.4  million for fiscal year 1998 to $1.8 million for fiscal year
1999. The increase was primarily attributable to normal salary increases coupled
with an  increase  in the  Bank's  staffing  levels  as  well as the  additional
expenses  associated  with the  implementation  of various  stock  benefit plans
during  the  period.  For the  fiscal  year ended  June 30,  1999,  the  Company
recognized  a  $208,000  expense  as a  result  of the  release  of  shares  for
allocation  to  participants  under the  Company's  ESOP.  No such  expense  was
recognized in the prior fiscal year. The Company makes annual  contributions  to
the ESOP equal to the ESOP's  debt  service.  As the debt is repaid,  shares are
released  from  collateral  and  allocated  to  active  employees  based  on the
proportion  of debt  service paid during the year.  As shares are released  from
collateral, the Company reports compensation expense equal to the current market
value of shares.  Occupancy and equipment expense rose by $172,000 during fiscal
year 1999 from


                                       35
<PAGE>

$390,000  during  fiscal  year 1998 to  $562,000  with the  increase  due to the
additional  expenses  associated  with the  opening of a new branch in  Fountain
City,  Tennessee.  Advertising  expense  also  increased  as a result of the new
branch from $171,000 for fiscal year 1998 to $241,000 for fiscal year 1999.

         INCOME TAX  EXPENSE.  Income tax expense  decreased  by  $494,000  from
$370,000 for fiscal year 1998 to a net benefit of $124,000 for fiscal year 1999.
The  decrease in income tax expense is due  directly to the  decreased  level of
earnings  during fiscal year 1999. The effective tax rates for fiscal years 1999
and 1998 were 25.9% and 33.0%, respectively. The variations in the effective tax
rate are  attributable  to the composition of the income base, the amount of tax
exempt  income  and timing  differences  related  to the  deferred  compensation
arrangements.

LIQUIDITY AND CAPITAL RESOURCES

         The Company  currently has no business other than that of the Bank. The
Company's assets consist almost entirely of its investments in the Bank. To fund
any future  dividend  payments by the Company or to provide funds for activities
at the Company  level,  the Company would be dependent  upon  dividends from the
Bank. The Bank is subject to certain regulatory  limitations with respect to the
payment  of  dividends  to  the  Company.   At  June  30,  2000,  the  Bank  had
approximately  $845,000  year to date net income  available  for the  payment of
dividends by the Bank to the Company under these regulations.

         The Bank is required by OTS  regulations to maintain  minimum levels of
specified  liquid  assets  which are  currently  equal to 4.0% of  deposits  and
short-term borrowings.  The Bank's average liquidity ratio was 6.79% at June 30,
2000.

         The Bank's  principal  sources of funds for  investments and operations
are net income,  deposits from its primary  market area,  principal and interest
payments on loans and  mortgage-backed  securities  and proceeds  from  maturing
investment securities. Its principal funding commitments are for the origination
or  purchase  of loans  and the  payment  of  maturing  deposits.  Deposits  are
considered  a  primary  source  of  funds  supporting  the  Bank's  lending  and
investment  activities.  Deposits were $106.1 million and $106.9 million at June
30, 2000 and 1999, respectively.

         The Bank's most liquid assets are cash and cash equivalents,  which are
cash on hand,  amounts  due from  financial  institutions,  federal  funds sold,
certificates of deposit with other financial  institutions that have an original
maturity of three months or less and money market  mutual  funds.  The levels of
such assets are  dependent on the Bank's  operating,  financing  and  investment
activities at any given time. The Bank's cash and cash equivalents  totaled $1.6
and $1.3  million at June 30, 2000 and 1999,  respectively.  The  variations  in
levels  of cash and  cash  equivalents  are  influenced  by  deposit  flows  and
anticipated future deposit flows.

         At June 30, 2000,  Middlesboro  Federal had $499,000 in  commitments to
originate loans. At June 30, 2000, the Bank had $59.8 million in certificates of
deposit which were  scheduled to mature in one year or less.  It is  anticipated
that the majority of these  certificates will be renewed in the normal course of
operations.

         Middlesboro  Federal is not aware of any trends or  uncertainties  that
will have or are  reasonably  expected  to have a material  effect on the Bank's
liquidity  or  capital  resources.  The Bank has no current  plans for  material
capital improvements or other capital expenditures that would require more funds
than are currently on hand.

ACCOUNTING PRONOUNCEMENTS

         ACCOUNTING  FOR  TRANSFERS  AND  SERVICING  OF  FINANCIAL   ASSETS  AND
EXTINGUISHMENT OF LIABILITIES. The FASB has issued SFAS No. 125, "Accounting for
Transfers and Servicing of Financial Assets and  Extinguishment of Liabilities",
which is effective for the Company's  fiscal year beginning  July 1, 1997.  SFAS
125 provides standards for distinguishing transfers of financial assets that are
sales from transfers that are secured borrowings.  The impact of the adoption of
SFAS 125 upon the results of operations of the Company was not material.

         ACCOUNTING  FOR  IMPAIRMENT  OF LOANS.  The  Company's  measurement  of
impaired  loans  includes  those loans  which are  performing  according  to all
contractual  terms of the loan agreement but may have substantive  indication of
potential  credit  weakness.  As of  June  30,  2000,  $791,955  of  loans  were
considered  impaired by the


                                       36
<PAGE>

Company and  carried on a  non-accrual  basis.  These  loans were  measured  for
impairment  using the fair value of collateral or using the present value of the
expected  future cash flows  discounted  at the loan's  effective  rate. If as a
result of these measurements, any loans required valuation allowances, they were
included  within  the  overall  allowance  for loan  losses  at June  30,  2000.
Residential  mortgages and consumer  loans and leases  outside the scope of SFAS
114 are collectively evaluated for impairment.

         ACCOUNTING  FOR IMPAIRMENT OF LONG-LIVED  ASSETS.  The FASB issued SFAS
No. 121,  "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," which was  effective  for the  Company's  fiscal year
beginning July 1, 1996. SFAS No. 121 requires that long-lived assets and certain
identifiable intangibles to be held and used be reviewed for impairment whenever
events or changes in circumstances  indicate the carrying amount of an asset may
not be recoverable. If the sum of the expected future cash flows from the use of
the asset and its eventual  disposition is less than the carrying  amount of the
asset, an impairment loss is recognized. SFAS No. 121 also requires that certain
assets to be disposed of be measured at the lower of carrying  amount or the net
realizable value. The impact of adopting SFAS 121 upon the results of operations
of the Company was not material.

IMPACT OF INFLATION AND CHANGING PRICES

         The financial  statements and related data  presented  herein have been
prepared in accordance  with  generally  accepted  accounting  principles  which
require the measurement of financial  position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.

         Unlike  most  companies,  the assets  and  liabilities  of a  financial
institution are primarily monetary in nature. As a result, interest rates have a
more  significant  impact  on a  financial  institution's  performance  than the
effects of general levels of inflation.  Interest rates do not necessarily  move
in the  same  direction  or in the same  magnitude  as the  price  of goods  and
services,  since such prices are affected by inflation.  In the current interest
rate environment,  liquidity and the maturity  structure of the Company's assets
and  liabilities  are  critical to the  maintenance  of  acceptable  performance
levels.


                                       37
<PAGE>

ITEM 7.  FINANCIAL STATEMENTS
-----------------------------

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                                                                           Page
                                                                           ----

         Independent Auditor's Opinion......................................39

         Consolidated Statements of Financial Condition
         as of June 30, 2000, 1999 and 1998.................................40

         Consolidated Statements of Income
         for the Years Ended June 30, 2000, 1999 and 1998...................42

         Consolidated Statements of Stockholders' Equity
         for the Years Ended June 30, 2000, 1999 and 1998...................44

         Consolidated Statements of Cash Flows
         for the Years Ended June 30, 2000, 1999 and 1998...................46

         Notes to the Consolidated Financial Statements.....................48



                                       38

<PAGE>


                   [LETTERHEAD OF MARR, MILLER & MYERS, PSC]







                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------

July 20, 2000



To the Board of Directors and Stockholders
Cumberland Mountain Bancshares, Inc. and Subsidiaries
Middlesboro, Kentucky


We have audited the accompanying  consolidated statements of financial condition
of Cumberland  Mountain  Bancshares,  Inc. and Subsidiaries as of June 30, 2000,
1999 and 1998,  and the related  consolidated  statements of income,  changes in
stockholders'  equity and cash flows for the years then ended.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion,  the financial  statements  referred to above present fairly, in
all material respects, the financial position of Cumberland Mountain Bancshares,
Inc. and  Subsidiaries  as of June 30, 2000,  1999 and 1998,  and the results of
their  operations  and their cash  flows for the years then ended in  conformity
with generally accepted accounting principles.


/s/ Marr, Miller & Myers, PSC

Certified Public Accountants



                                       39
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                                    June 30,

<TABLE>
<CAPTION>

                                     ASSETS
                                     ------
                                                                 2000           1999           1998
                                                                 ----           ----           ----

<S>                                                          <C>            <C>            <C>
Cash and cash equivalents                                    $  1,580,568   $  1,316,809   $  1,664,459
Investment securities, held to maturity (market value
  $6,976 at June 30, 1998)                                             --             --          6,976
Other investments, at market value                                180,000        195,000        303,340
Investment securities, available for sale, at market value      3,607,385      3,302,281      3,397,560
Mortgage-backed securities, available for sale, at market
 value                                                          2,625,643      3,579,133      5,577,842
Loans, net of allowance for loan losses of $1,031,805,
 $1,575,761 and $798,069 at June 30, 2000, 1999 and
 1998,  respectively                                          109,610,362    111,612,055    118,060,639
Accrued interest receivable                                       809,289        934,094        985,245
Federal Home Loan Bank (FHLB) stock                               928,600      1,810,300      1,688,100
Other real estate owned                                         1,523,168        739,342        100,460
Premises and equipment, net                                     4,263,097      4,586,533      3,214,695
Property held for investment                                    1,668,697      1,235,497        619,616
Other assets                                                    1,372,210        780,331        287,147
                                                             ------------   ------------   ------------


                              TOTAL ASSETS                   $128,169,019   $130,091,375   $135,906,079
                                                             ============   ============   ============
</TABLE>


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






                                       40
<PAGE>

<TABLE>
<CAPTION>

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

                                                            2000              1999             1998
                                                            ----              ----             ----
<S>                                                      <C>              <C>              <C>
LIABILITIES
    Deposits                                             $ 106,077,913    $ 106,905,137    $  97,719,318
    Advances from FHLB                                      10,500,000       12,000,000       26,000,000
    Notes payable                                            1,484,491        1,674,233        1,747,719
    Accrued interest payable                                   192,357          136,689          283,461
    Other liabilities                                          799,096          667,245        1,394,746
                                                         -------------    -------------    -------------
        Total liabilities                                  119,053,857      121,383,304      127,145,244
                                                         -------------    -------------    -------------

OFF-BALANCE SHEET RISK, COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' EQUITY
    Common stock, .01 par value, 8,000,000 shares
      authorized, 678,800 shares issued and
      outstanding                                                6,788            6,788            6,788
    Treasury stock, 5,200 shares and 16,800
      shares outstanding at June 30, 1999 and 1998,
      respectively, at cost                                         --          (87,750)        (258,551)
    Unearned MRP shares                                        (90,156)              --              --
    Unearned stock options                                    (328,668)        (240,918)        (240,918)
    Unearned ESOP shares                                      (822,113)        (897,135)      (1,053,328)
    Preferred stock, 2,000,000 shares authorized, none
      issued and outstanding                                        --               --               --
    Paid-in capital                                          5,560,396        5,560,396        5,541,930
    Retained earnings                                        4,938,993        4,490,020        4,844,981
    Net unrealized gain (loss) on available for sale
      securities, net of tax effect                           (150,078)        (123,330)         (80,067)
                                                         -------------    -------------    -------------
        Total stockholders' equity                           9,115,162        8,708,071        8,760,835
                                                         -------------    -------------    -------------

                        TOTAL LIABILITIES AND
                        STOCKHOLDERS' EQUITY             $ 128,169,019    $ 130,091,375    $ 135,906,079
                                                         =============    =============    =============
</TABLE>

                                       41
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                        CONSOLIDATED STATEMENTS OF INCOME
                              Years Ended June 30,

<TABLE>
<CAPTION>

                                                                2000            1999          1998
                                                                ----            ----          ----
<S>                                                           <C>            <C>           <C>
INTEREST INCOME
    Loans                                                     $ 9,276,425    $ 9,959,048   $10,071,996
    Mortgage-backed securities                                    183,016        260,314       354,822
    Investment securities and other interest-earning assets       246,529        226,441       215,131
    FHLB stock                                                    118,536        122,420       107,557
                                                              -----------    -----------   -----------
        Total interest income                                   9,824,506     10,568,223    10,749,506

INTEREST EXPENSE                                                5,859,433      6,320,392     6,288,017
                                                              -----------    -----------   -----------

NET INTEREST INCOME                                             3,965,073      4,247,831     4,461,489

PROVISION FOR LOAN LOSSES                                         205,940      1,524,416     1,108,099
                                                              -----------    -----------   -----------

NET INTEREST INCOME AFTER PROVISION FOR LOAN
  LOSSES                                                        3,759,133      2,723,415     3,353,390
                                                              -----------    -----------   -----------

NONINTEREST INCOME
    Loan fees and service charges                                 778,456        788,696       869,972
    Net gain (loss) on sales of investment securities                (313)        18,338       112,544
    Net gain (loss) on sales of property                           61,325         34,633            --
    Net gain (loss) on sales of repossessed assets                (61,169)        19,001       115,578
    Other                                                          46,039         23,727        19,204
                                                              -----------    -----------   -----------
        Total noninterest income                                  824,338        884,395     1,117,298
                                                              -----------    -----------   -----------

NET INTEREST AND OTHER INCOME                                   4,583,471      3,607,810     4,470,688
                                                              -----------    -----------   -----------
NONINTEREST EXPENSE
    Salaries and employee benefits                              1,695,917      1,759,388     1,356,409
    Data processing                                               233,024        204,288       303,863
    SAIF deposit insurance premium                                 74,700         90,083        68,299
    Occupancy and equipment                                       623,312        562,354       390,248
    Franchise and other taxes                                     118,239        169,144       119,757
    Advertising                                                   152,602        240,569       171,003
    Other                                                         965,333      1,060,873       939,412
                                                              -----------    -----------   -----------
        Total noninterest expense                               3,863,127      4,086,699     3,348,991
                                                              -----------    -----------   -----------
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                       42
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                  CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
                              Years Ended June 30,

<TABLE>
<CAPTION>

                                                                 2000         1999          1998
                                                                 ----         ----          ----
<S>                                                              <C>          <C>          <C>
INCOME (LOSS) BEFORE PROVISION FOR INCOME
  TAXES                                                          720,344      (478,889)    1,121,697

PROVISION FOR INCOME TAXES (BENEFIT)                             271,371      (123,928)      370,336
                                                              ----------    ----------    ----------

NET INCOME (LOSS)                                             $  448,973    $ (354,961)   $  751,361
                                                              ==========    ==========    ==========

COMPREHENSIVE INCOME (LOSS)
    Net income (loss)                                         $  448,973    $ (354,961)   $  751,361
    Unrealized gain (loss) on securities, net of tax effect      (26,748)      (43,263)       61,761
                                                              ----------    ----------    ----------
        TOTAL COMPREHENSIVE INCOME (LOSS)                     $  422,225    $ (398,224)   $  813,122
                                                              ==========    ==========    ==========

PER SHARE DATA
    Basic earnings (loss) per share                           $    .7868    $   (.6241)   $   1.3206
                                                              ==========    ==========    ==========

    Diluted earnings (loss) per share                         $    .7138    $   (.5696)   $   1.3206
                                                              ==========    ==========    ==========

    Weighted average common and common equivalent
      shares outstanding                                         570,586       568,713       568,963
                                                              ==========    ==========    ==========

</TABLE>

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

                                       43
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                              Years Ended June 30,
<TABLE>
<CAPTION>
                                                     Common                                           Unearned
                                                      Stock              Treasury Stock              MRP Shares
                                              --------------------    --------------------        -----------------
                                              Shares        Amount    Shares         Amount      Shares       Amount
                                              ------        ------    ------         ------      ------       ------

<S>                                           <C>        <C>          <C>           <C>          <C>          <C>
Balance, June 30, 1997                        678,800    $   6,788          --       $   --           --       $   --

For the year ended June 30, 1998:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                            --           --          --           --           --           --
    Net income (loss)                              --           --          --           --           --           --
    ESOP shares acquired                           --           --          --           --           --           --
    Stock option shares acquired                   --           --          --           --           --           --
    Treasury stock acquired                        --           --      16,800     (258,551)          --           --
                                            ---------    ---------    --------    ---------    ---------     --------

Balance, June 30, 1998                        678,800        6,788      16,800     (258,551)          --           --

For the year ended June 30, 1999:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                            --           --          --           --           --           --
    Net income (loss)                              --           --          --           --           --           --
    ESOP shares earned, net of tax effect          --           --          --           --           --           --
    Treasury stock sold                            --           --     (11,600)     170,801           --           --
                                            ---------    ---------    --------    ---------    ---------     --------

Balance, June 30, 1999                        678,800        6,788       5,200      (87,750)          --           --

For the year ended June 30, 2000:
    Net unrealized gain (loss) on
      available for sale securities,
      net of tax effect                            --           --          --           --           --           --
    Net income (loss)                              --           --          --           --           --           --
    ESOP shares earned, net of tax effect          --           --          --           --           --           --
    Treasury stock reserved for stock
      options                                      --           --      (5,200)      87,750           --           --
    Stock acquired reserved for MRP plan           --           --          --           --        7,367      (90,156)
                                            ---------    ---------    --------    ---------    ---------     --------
Balance, June 30, 2000                        678,800    $   6,788    $     --    $      --        7,367     $(90,156)
                                            =========    =========    =========   =========    =========     ========
</TABLE>

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

                                       44
<PAGE>

<TABLE>
<CAPTION>

                                                                                                          Net
                                                                                                       Unrealized
         Unearned Stock                Unearned ESOP                                                 Gain (Loss) On
            Options                       Shares                                                       Available
   ----------------------        ----------------------             Paid-In           Retained          For Sale
   Shares          Amount        Shares          Amount             Capital           Earnings         Securities        Total
   ------          ------        ------          ------             -------           --------         ----------        -----
   <S>          <C>             <C>             <C>                <C>                <C>               <C>            <C>
        --      $      --       83,256          $(986,423)         $ 5,541,930        $ 4,093,620       $(141,828)     $ 8,514,087




        --             --           --                 --                   --                 --          61,761           61,761
        --             --           --                 --                   --            751,361              --          751,361
        --             --        4,600            (66,905)                  --                 --              --          (66,905)
    15,031       (240,918)          --                 --                   --                 --              --         (240,918)
        --             --           --                 --                   --                 --              --         (258,551)
----------      ---------       ------          ---------          -----------        -----------       ---------      -----------
    15,031       (240,918)      87,856         (1,053,328)           5,541,930          4,844,981         (80,067)       8,760,835




        --             --           --                 --                   --                 --         (43,263)         (43,263)
        --             --           --                 --                   --           (354,961)             --         (354,961)
        --             --      (13,027)           156,193                   --                 --              --          156,193
        --             --           --                 --               18,466                 --              --          189,267
----------      ---------       ------          ---------          -----------        -----------       ---------      -----------
    15,031       (240,918)      74,829           (897,135)           5,560,396          4,490,020        (123,330)       8,708,071




        --             --           --                 --                  --                  --         (26,748)         (26,748)
        --             --           --                 --                  --             448,973              --          448,973
        --             --       (6,257)            75,022                  --                  --              --           75,022

     5,200        (87,750)          --                 --                  --                  --              --               --
        --             --           --                 --                  --                  --              --          (90,156)
----------      ---------       ------          ---------          -----------        -----------       ---------      -----------
    20,231      $(328,668)      68,572          $(822,113)         $ 5,560,396        $ 4,938,993       $(150,078)     $ 9,115,162
==========      =========       ======          =========          ===========        ===========       =========      ===========

</TABLE>

                                       45
<PAGE>



              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                              Years Ended June 30,
<TABLE>
<CAPTION>


                                                                   2000             1999            1998
                                                                   ----             ----            ----
<S>                                                            <C>             <C>             <C>
CASH FLOW FROM OPERATING ACTIVITIES
    Net income (loss)                                          $    448,973    $   (354,961)   $    751,361
    Adjustments to reconcile net income (loss) to net
      cash provided by operating activities:
        Depreciation                                                426,527         344,156         158,446
        Amortization and accretion                                    8,647           8,925          18,559
        FHLB stock dividend                                        (118,536)       (122,200)       (107,400)
        Provision for loan losses                                   205,940       1,524,416       1,108,099
        (Gain) loss on sales of investment securities                   313         (18,338)       (112,544)
        (Gain) loss on sales of property held for investment        (61,325)        (34,633)             --
        (Gain) loss on sales of repossessed assets                   61,169         (23,727)        (19,204)
        Deferred income tax                                         134,524        (288,589)        (49,970)
        Changes in assets and liabilities:
           Accrued interest receivable                              124,805          51,151        (246,839)
           Other assets                                            (712,624)          4,370         (93,822)
           Accrued interest payable                                  55,668        (146,772)         42,738
           Other liabilities                                        131,851        (866,524)        864,938
                                                               ------------    ------------    ------------
               Net cash provided by (used in) operating
                activities                                          705,932          77,274       2,314,362
                                                               ------------    ------------    ------------

CASH FLOW FROM INVESTING ACTIVITIES
    Proceeds from redemption of capital stock-FHLB                1,000,236              --         202,400
    Purchase of FHLB stock                                               --              --      (1,058,700)
    Proceeds on maturities of investment securities                      --       1,510,305       1,003,040
    Purchase of other securities                                         --              --      (3,821,557)
    Principal collected on mortgage-backed securities               950,897       1,969,315       1,319,332
    Proceeds on sales of other securities                           514,688         126,678       3,732,462
    Principal collected on investment securities called             148,002       1,546,668         817,779
    Purchase of investment securities                              (999,688)     (3,000,000)       (998,750)
    Purchase of mortgage-backed securities                               --              --        (509,591)
    Net (increase) decrease  in loans                               950,758       4,261,559     (19,613,791)
    Construction in progress                                             --              --        (806,507)
    Purchases of equipment and improvements                         (84,682)     (1,715,994)       (542,573)

</TABLE>

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

                                       46
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                              Years Ended June 30,

<TABLE>
<CAPTION>
                                                                              2000           1999             1998
                                                                              ----           ----             ----

    <S>                                                                  <C>             <C>             <C>
    Proceeds from sales of property held for investment                       227,774         538,732              --
    Purchase of property held for investment                                 (618,058)     (1,119,980)       (619,616)
                                                                         ------------    ------------    ------------
        Net cash provided by (used in) investing activities                 2,089,927       4,117,283     (20,896,072)
                                                                         ------------    ------------    ------------

CASH FLOW FROM FINANCING ACTIVITIES
    Borrowings from FHLB                                                   24,000,000      16,000,000      41,000,000
    Repayments to FHLB                                                    (25,500,000)    (30,000,000)    (28,000,000)
    Proceeds from other borrowings                                                 --       1,166,777       1,012,029
    Payments on other notes                                                  (189,742)     (1,240,263)        (21,097)
    Net increase (decrease) in deposits                                      (827,224)      9,185,819       6,122,870
    Proceeds from sale of treasury stock                                           --         170,801              --
    Purchase of shares for stock option plan                                       --              --        (240,918)
    Purchase of treasury stock                                                     --              --        (258,551)
    ESOP shares earned, net of tax                                             75,022         174,659              --
    Purchase of unearned ESOP shares                                               --              --         (66,905)
    Purchase of unearned MRP shares                                           (90,156)             --              --
                                                                         ------------    ------------    ------------
        Net cash provided by (used in) financing activities                (2,532,100)     (4,542,207)     19,547,428
                                                                         ------------    ------------    ------------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                                 263,759        (347,650)        965,718

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                                1,316,809       1,664,459         698,741
                                                                         ------------    ------------    ------------
CASH AND CASH EQUIVALENTS, END OF YEAR                                   $  1,580,568    $  1,316,809    $  1,664,459
                                                                         ============    ============    ============

SUPPLEMENTAL DISCLOSURES OF CASH FLOW
  INFORMATION
    Cash payments for:
        Interest                                                         $  5,803,765    $  6,467,164    $  6,245,279
                                                                         ============    ============    ============

        Income taxes                                                     $         --    $    200,000    $    656,368
                                                                         ============    ============    ============

Loans transferred to foreclosed real estate during the year              $  1,622,548    $    950,871    $    460,075
                                                                         ============    ============    ============
Proceeds from sales of foreclosed real estate financed
  through loans                                                          $    777,553    $    288,262    $    391,597
                                                                         ============    ============    ============
Total increase (decrease) in unrealized gain (loss) on
  available for sale securities                                          $     26,748    $     43,263    $    (61,761)
                                                                         ============    ============    ============
</TABLE>

The  accompanying  notes are an integral  part of these  consolidated  financial
statements.
                                       47
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
         ------------------------------------------

    The  accounting  policies  that  affect  the  significant  elements  of  the
financial statements are summarized below:

    BASIS  OF  PRESENTATION  AND   ORGANIZATION:   The  consolidated   financial
    -------------------------------------------
        statements of Cumberland Mountain Bancshares, Inc. and Subsidiaries (the
        Company) include the accounts of the Company,  Middlesboro Federal Bank,
        F.S.B.  (the "Bank") and the  Company's  wholly-owned  subsidiary,  Home
        Mortgage Loan  Corporation.  All significant  intercompany  accounts and
        transactions  have been eliminated.  On December 12, 1996, the Boards of
        Directors of the Bank and the Mutual Holding  Company  adopted a Plan of
        Conversion  and  Reorganization  (the "Plan") and in December,  1996 the
        Bank  organized the Company under  Tennessee law as a first-tier  wholly
        owned  subsidiary.  Pursuant to the Plan: (i) the Mutual Holding Company
        converted to an interim  federal stock  savings bank and  simultaneously
        merged with and into the Bank; (ii) the Mutual Holding Company ceased to
        exist and the 330,000  shares or 64.71% of the  outstanding  Bank Common
        Stock held by the Mutual  Holding  Company  was  cancelled;  and (iii) a
        second interim savings association ("Interim") was formed by the Company
        solely for the purpose of the merger with and into the Bank. As a result
        of the  merger  of  Interim  with and into the Bank,  the Bank  became a
        wholly  owned  subsidiary  of  the  Company  operating  under  the  name
        "Middlesboro  Federal Bank,  Federal  Savings Bank" and the  outstanding
        Public Bank Shares,  which  amounted to 180,000  shares or 35.29% of the
        outstanding  Bank Common Stock at September 30, 1996, was converted into
        the Exchange  Shares pursuant to a ratio (the "Exchange  Ratio"),  which
        resulted  in the  holders of such  shares  (the  "Public  Stockholders")
        owning in the aggregate  approximately the same percentage of the Common
        Stock   outstanding   upon  the   completion  of  the   Conversion   and
        Reorganization  (i.e.,  the Conversion Stock and the Exchange Shares) as
        the  percentage  of Bank  Common  Stock  Owned by them in the  aggregate
        immediately prior to consummation of the Conversion and  Reorganization,
        before  giving  effect to: (i) the  exercise  of  dissenters'  rights of
        appraisal  by the holders of any shares of Bank Common  Stock;  (ii) the
        payment of cash in lieu of issuing fractional Exchange Shares; and (iii)
        any shares of Conversion  Stock purchased by the Bank's  stockholders in
        the Offerings or the ESOP  thereafter.  All necessary  governmental  and
        shareholder   approvals  for  the  Conversion  and  Reorganization  were
        received.  The  Company's  primary  source of income is from its banking
        subsidiary, which operates in Middlesboro,  Kentucky with three branches
        located  in  Pineville  and  Cumberland,  Kentucky  and  Fountain  City,
        Tennessee.  The Bank's  primary  source of  revenue is derived  from net
        interest income on loans and investments.

    USE OF ESTIMATES: The preparation of financial statements in conformity with
    ----------------
        generally accepted  accounting  principles  requires  management to make
        estimates and assumptions that affect the reported amounts of assets and
        liabilities  and disclosure of contingent  assets and liabilities at the
        date of the financial  statements  and the reported  amounts of revenues
        and expenses  during the reporting  period.  Actual results could differ
        from those estimates.

                                       48
<PAGE>
              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -----------------------------------------------------

        Material  estimates  that are  particularly  susceptible  to significant
        change relate to the  determination of the allowance for losses on loans
        and  the  valuation  of  real  estate   acquired  in   connection   with
        foreclosures  or in  satisfaction  of  loans.  In  connection  with  the
        determination  of the allowances for losses on loans and foreclosed real
        estate,   management  obtains  independent  appraisals  for  significant
        properties.

        While management uses available information to recognize losses on loans
        and foreclosed  real estate,  future  additions to the allowances may be
        necessary  based on changes in local economic  conditions.  In addition,
        regulatory  agencies,  as an integral part of their examination process,
        periodically  review the  Company's  allowances  for losses on loans and
        foreclosed  real  estate.  Such  agencies  may  require  the  Company to
        recognize  additions to the allowances  based on their  judgements about
        information available to them at the time of their examination.  Because
        of these  factors,  it is reasonably  possible that the  allowances  for
        losses on loans and foreclosed real estate may change  materially in the
        near term.

    CASH AND CASH  EQUIVALENTS: For purposes of reporting  cash flows,  cash and
    -------------------------
        cash  equivalents  include  cash and due from  banks,  interest  bearing
        deposits  having  maturities  of 90 days or less  with  other  financial
        institutions, federal funds sold and money market mutual funds.

    INVESTMENT  SECURITIES:  Investment  securities that are held for short-term
    ----------------------
        resale are  classified as trading  securities and carried at fair value.
        Debt  securities  that  management has the ability and intent to hold to
        maturity  are  classified  as held to  maturity  and  carried  at  cost,
        adjusted for  amortization  of premiums and accretion of discounts using
        the interest  method.  Other  marketable  securities  are  classified as
        available  for  sale  and  are  carried  at  fair  value.  Realized  and
        unrealized  gains and losses on trading  securities  are included in net
        income. Unrealized gains and losses on securities available for sale are
        recognized  as direct  increases or decreases in  stockholders'  equity.
        Cost of securities sold is recognized using the specific  identification
        method.

    MORTGAGE-BACKED    SECURITIES:    Mortgage-backed    securities    represent
    -----------------------------
        participating  interests  in pools of  long-term  first  mortgage  loans
        originated  and serviced by issuers of the  securities.  Mortgage-backed
        securities  are  carried  at unpaid  principal  balances,  adjusted  for
        unamortized premiums and unearned discounts.  Premiums and discounts are
        amortized  using  the  interest  method  over the  remaining  period  to
        contractual maturity,  adjusted for anticipated prepayments.  Management
        intends and has the ability to hold such securities to maturity.  Should
        any be sold,  cost of securities  sold is determined  using the specific
        identification method.

    LOANS: Loans are stated at unpaid principal balances, less the allowance for
    -----
        loan losses and net of deferred loan fees and unearned discounts.

                                       49
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -----------------------------------------------------

          Unearned  discounts on installment loans are recognized as income over
          the term of the loans using the interest method.

          Loan  origination  and  commitment  fees,  as well as  certain  direct
          origination  costs,  are deferred and amortized as a yield  adjustment
          over  the  lives of the  related  loans  using  the  interest  method.
          Amortization  of  deferred  loan fees is  discontinued  when a loan is
          placed on nonaccrual status.

          Loans are placed on nonaccrual when a loan is specifically  determined
          to be impaired or when principal or interest is delinquent for 90 days
          or more.  Any unpaid  interest  previously  accrued on those  loans is
          reversed from income.  Interest income  generally is not recognized on
          specific  impaired  loans  unless the  likelihood  of further  loss is
          remote.  Interest  payments  received  on such loans are  applied as a
          reduction  of the loan  principal  balance.  Interest  income on other
          nonaccrual loans is recognized only to the extent of interest payments
          received.

    ALLOWANCE FOR LOAN LOSSES:  The allowance for loan losses is maintained at a
    -------------------------
          level which, in management's  judgement,  is adequate to absorb credit
          losses inherent in the loan portfolio.  The amount of the allowance is
          based on  management's  evaluation of the  collectibility  of the loan
          portfolio,   including   the   nature   of   the   portfolio,   credit
          concentrations,   trends  in  historical  loss  experience,   specific
          impaired loans and economic conditions.  Allowances for impaired loans
          are generally  determined  based on  collateral  values or the present
          value of  estimated  cash  flows.  The  allowance  is  increased  by a
          provision for loan losses, which is charged to expense, and reduced by
          charge-offs, net of recoveries.

   ACCOUNTING FOR TRANSFERS AND SERVICING OF FINANCIAL ASSETS AND EXTINGUISHMENT
   -----------------------------------------------------------------------------
      OF LIABILITIES: The FASB issued SFAS No.125, "Accounting for Transfers and
      --------------
          Servicing  of Financial  Assets and  Extinguishment  of  Liabilities",
          which was effective for the Company's  fiscal year  beginning  July 1,
          1997. SFAS No. 125 provides standards for distinguishing  transfers of
          financial  assets  that are  sales  from  transfers  that are  secured
          borrowings.  The  impact  of the  adoption  of SFAS  No.  125 upon the
          results of operations of the Company was not material.

   ACCOUNTING FOR IMPAIRMENT  OF LOANS:  The Company's  measurement of  impaired
   -----------------------------------
          loans  includes  those loans  which are  performing  according  to all
          contractual  terms of the  loan  agreement  but may  have  substantive
          indication of potential credit weakness. As of June 30, 2000, $791,955
          of loans were  considered  impaired  by the  Company  and carried on a
          non-accrual  basis. These loans were measured for impairment using the
          fair value of  collateral  or using the present  value of the expected
          future cash flows  discounted at the loan's  effective  rate. If, as a
          result of these measurements, any loans required valuation allowances,
          they were  included  within the overall  allowance  for loan losses at
          June 30, 2000.  Residential  mortgages  and consumer  loans and leases
          outside  the  scope of SFAS No.  114 are  collectively  evaluated  for
          impairment.

                                       50
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
        -----------------------------------------------------

    PREMISES AND  EQUIPMENT:  Premises and  equipment  are stated at cost,  less
    -----------------------
        accumulated depreciation and amortization. Depreciation and amortization
        are computed using the  straight-line  method over the estimated  useful
        lives of the related assets, except for leasehold improvements for which
        the lesser of the estimated  useful life of the asset or the term of the
        lease is used.  The useful  lives  used in  computing  depreciation  and
        amortization are as follows:

                                                              Years
                                                              -----
           Office buildings and improvements                    39
           Furniture, fixtures and equipment                     7
           Leasehold improvements                             5-15

        Gains and  losses on  routine  dispositions  are  reflected  in  current
        operations.  Maintenance,  repairs and minor improvements are charged to
        operating   expenses,   and  major  replacements  and  improvements  are
        capitalized.

    OTHER REAL  ESTATE  OWNED:  Other  real  estate  owned  ("OREO")  represents
    -------------------------
        property acquired through foreclosure proceedings held for sale and real
        estate held for investment.  OREO is carried at its fair value, net of a
        valuation allowance established to reduce cost to fair value. Losses are
        charged to the valuation  allowance and  recoveries  are credited to the
        allowance. Declines in market value and gains and losses on disposal are
        reflected  in current  operations  in OREO  expense.  Recoverable  costs
        relating to the  development  and  improvement  of OREO are  capitalized
        whereas routine holding costs are charged to expense. The sales of these
        properties are dependent upon various market  conditions.  Management is
        of the  opinion  that such sales will  result in net  proceeds  at least
        equal to present carrying values.

    ACCOUNTING FOR  IMPAIRMENT  OF LONG-LIVED  ASSETS:  The FASB issued SFAS No.
    -------------------------------------------------
        121,  "Accounting  for  the  Impairment  of  Long-Lived  Assets  and for
        Long-Lived  Assets  to be  Disposed  Of,"  which was  effective  for the
        Company's fiscal year beginning July 1, 1996. SFAS No. 121 requires that
        long-lived  assets and certain  identifiable  intangibles to be held and
        used  be  reviewed  for  impairment   whenever   events  or  changes  in
        circumstances  indicate  the  carrying  amount  of an  asset  may not be
        recoverable.  If the sum of the expected  future cash flows from the use
        of the  asset and its  eventual  disposition  is less than the  carrying
        amount of the asset, an impairment loss is recognized. SFAS No. 121 also
        requires that certain  assets to be disposed of be measured at the lower
        of carrying amount or the net realizable  value.  The impact of adopting
        SFAS No.  121 upon the  results of  operations  of the  Company  was not
        material.

                                       51
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
         -----------------------------------------------------

     INCOME TAXES:  The Company follows the liability  method which  establishes
     ------------
          deferred  tax assets and  liabilities  for the  temporary  differences
          between  the  financial  reporting  bases  and  the tax  bases  of the
          Company's  assets and  liabilities at enacted tax rates expected to be
          in effect when such amounts are realized or settled.  Net deferred tax
          assets,  whose  realization is dependent on taxable earnings of future
          years,  are recognized when a  more-likely-than-not  criterion is met,
          that is, unless a greater than fifty percent  probability  exists that
          the tax benefits will not actually be realized sometime in the future.

          Effective April 1, 1995, federal regulations  restricted the amount of
          deferred  tax  assets  that  can be used to  meet  regulatory  capital
          requirements  to an amount  that the  institution  expects  to realize
          within one year, or ten percent of Tier 1 capital, whichever is less.

          The Company and its  subsidiaries  file  consolidated tax returns with
          the  federal and state  taxing  authorities.  A tax sharing  agreement
          exists between the Company and the Bank whereby taxes for the Bank are
          computed as if the Bank were a separate entity.  Amounts to be paid or
          credited  with respect to current  taxes are paid to or received  from
          the Company.

     BASIC AND DILUTED EARNINGS  PER SHARE:  Basic  earnings per share of common
     -------------------------------------
          stock is  computed  by  dividing  net  income  (loss) by the  weighted
          average number of shares of common stock and common stock  equivalents
          outstanding  during the period.  Diluted  earnings per share of common
          stock is  computed  by  dividing  net  income  (loss) by the  weighted
          average number of shares of common stock,  management recognition plan
          shares and stock options outstanding and awarded during the period.

     ACCRUED COMPENSATED  ABSENCES:  The Company requires all earned vacation to
     -----------------------------
          be taken by their  employees.  There is no liability  for  compensated
          absences reflected in the accompanying financial statements due to the
          immateriality of the accrual.

     STOCK-BASED COMPENSATION PLANS:  Effective in 1996, the Company adopted the
     ------------------------------
          disclosure  option  of  SFAS  No.  123,  "Accounting  for  Stock-Based
          Compensation".  The fair value of each option  granted is valued at an
          amount equal to the market price of the company's stock on the date of
          the grant.

NOTE 2 - INVESTMENT SECURITIES
         ---------------------

   The carrying value,  unrealized  gains (losses) and estimated market value of
investment  securities held to maturity and other  investments are summarized as
follows:

                                       52
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
         --------------------------------
<TABLE>
<CAPTION>
                                                                                         Gross            Gross           Estimated
                                                                     Amortized        Unrealized        Unrealized          Market
                                                                        Cost             Gains            Losses            Value
                                                                        ----             -----            ------            -----
<S>                                                               <C>               <C>              <C>               <C>
    June 30, 2000
    -------------
        Powell Valley National Bank, Inc.                         $    180,000      $            --  $            --   $    180,000
                                                                  ============      ================ ===============   ============

    June 30, 1999
    -------------
        Powell Valley National Bank, Inc.                         $    180,000      $            --  $            --   $    180,000
        Intrieve Corporation                                            15,000                   --               --         15,000
                                                                  ------------      ---------------  ---------------   ------------
                                                                  $    195,000      $            --  $            --   $    195,000
                                                                  ============      ===============  ===============   ============

    June 30, 1998
    -------------
        Municipal bond                                            $      6,976      $            --  $            --   $      6,976
                                                                  ============      ===============  ===============   ============

        Powell Valley National Bank, Inc.                         $    180,000      $            --  $            --   $    180,000
        Intrieve Corporation                                            15,000                   --               --         15,000
        CBES Bancorp, Inc.                                             109,957                   --           (1,617)       108,340
                                                                  ------------      ---------------  ---------------   ------------
                                                                  $    304,957      $            --   $       (1,617)  $    303,340
                                                                  ============      ===============  ===============   ============
</TABLE>

   The Company has the intent and ability to hold these securities to maturity.

   The carrying value,  unrealized  gains (losses) and estimated market value of
investment securities available for sale are summarized as follows:
<TABLE>
<CAPTION>

                                                                                         Gross            Gross          Estimated
                                                                   Amortized          Unrealized        Unrealized         Market
                                                                      Cost               Gains            Losses           Value
                                                                      ----               -----            ------           -----
<S>                                                               <C>               <C>                <C>              <C>
June 30, 2000
-------------
        U.S. Treasury and government agencies                     $ 2,801,023       $         --       $  (64,361)      $ 2,736,662
        Franklin U.S. Government Securities Fund                    1,000,000                 --         (129,277)          870,723
                                                                  ------------      ------------       ----------       -----------
                                                                  $ 3,801,023       $         --       $ (193,638)      $ 3,607,385
                                                                  ===========       ============       ==========       ===========
</TABLE>

                                       53
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
         --------------------------------
<TABLE>
<CAPTION>

                                                                                         Gross         Gross           Estimated
                                                                     Amortized        Unrealized     Unrealized          Market
                                                                        Cost             Gains         Losses            Value
                                                                        ----             -----         ------            -----
<S>                                                               <C>               <C>              <C>               <C>
    June 30, 1999
    -------------
        U.S. Treasury and government agencies                     $ 2,451,474       $           687   $  (31,270)     $ 2,420,891
        Franklin U.S. Government Securities Fund                    1,000,000                   --      (118,610)         881,390
                                                                  ------------      ---------------   ----------      -----------
                                                                  $ 3,451,474       $           687    $(149,880)     $ 3,302,281
                                                                  ===========       ===============    =========      ===========
    June 30, 1998
    -------------
        U.S. Treasury and government agencies                     $ 2,492,872       $            --   $  (15,371)     $ 2,477,501
        Franklin U.S. Government Securities Fund                     1,000,000                   --      (79,941)         920,059
                                                                  ------------      ---------------   ----------      -----------
                                                                  $ 3,492,872       $            --   $  (95,312)     $ 3,397,560
                                                                  ===========       ===============   ==========      ===========
</TABLE>

    The gross realized gains,  losses and proceeds on sales of other  securities
and investment securities are as follows:
<TABLE>
<CAPTION>

                                2000            1999           1998
                                ----            ----           ----

<S>                        <C>             <C>              <C>
Proceeds                   $   514,688     $   126,678      $3,732,462
                           ===========     ===========      ==========

Gross realized gains       $        --     $    18,338      $  112,544
                           ===========     ===========      ==========

Gross realized losses      $       313     $        --      $       --
                           ===========     ===========      ==========
</TABLE>

    The amortized cost and estimated market value of investment  securities,  by
contractual maturity, are as follows:
<TABLE>
<CAPTION>

                                         June 30, 2000                      June 30, 1999                      June 30, 1998
                                         -------------                      -------------                      -------------
                                                    Estimated                          Estimated                          Estimated
                                  Amortized          Market          Amortized          Market          Amortized           Market
                                     Cost             Value             Cost             Value             Cost             Value
                                     ----             -----             ----             -----             ----             -----

<S>                            <C>               <C>              <C>               <C>              <C>               <C>
Due in one year
  or less                      $         --      $         --     $    500,125      $    500,812     $ 1,003,330       $ 1,001,309
Due after one year
  through five years              1,500,000         1,457,420        1,500,000         1,476,736         504,052           502,152
Due after five years
  through ten years                 999,714           983,160               --                --         498,254           495,395
Due after ten years                 301,309           296,082          451,349           443,343         494,212           485,621
                               ------------      ------------     ------------      ------------     -----------       -----------
                               $  2,801,023         2,736,662        2,451,474         2,420,891       2,499,848         2,484,477
</TABLE>

                                       54
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 2 - INVESTMENT SECURITIES (CONTINUED)
         --------------------------------
<TABLE>
<CAPTION>

                                         June 30, 2000                      June 30, 1999                      June 30, 1998
                                         -------------                      -------------                      -------------
                                                    Estimated                          Estimated                          Estimated
                                  Amortized          Market          Amortized          Market          Amortized           Market
                                     Cost             Value             Cost             Value             Cost             Value
                                     ----             -----             ----             -----             ----             -----
<S>                               <C>                  <C>           <C>                  <C>           <C>                  <C>
Franklin U.S.
  Government
  Securities Fund                 1,000,000            870,723       1,000,000          881,390         1,000,000          920,059
Other investments                   180,000            180,000         195,000          195,000           304,957          303,340
                                -----------        -----------     -----------      -----------       -----------      ------------

Total investment
  securities                    $ 3,981,023        $ 3,787,385     $ 3,646,474      $ 3,497,281       $ 3,804,805      $ 3,707,876
                                ===========        ===========     ===========      ===========       ===========      ===========

</TABLE>

   There were no issues held at June 30, 2000,  1999 and 1998, that exceeded 10%
of stockholders' equity.

NOTE 3 - MORTGAGE-BACKED SECURITIES
         --------------------------

    Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
                                           Gross          Gross       Estimated
                          Amortized      Unrealized     Unrealized      Market
                            Cost           Gains         Losses         Value
                            ----           -----         ------         -----
<S>                      <C>           <C>            <C>            <C>
June 30, 2000
-------------
    GNMA                 $   359,712   $        --    $    (8,513)   $   351,199
    FNMA                   2,026,860            --        (23,242)     2,003,618
    FHLMC                    272,824            --         (1,998)       270,826
                         -----------   -----------    -----------    -----------
       Total             $ 2,659,396   $        --    $   (33,753)   $ 2,625,643
                         ===========   ===========    ===========    ===========

June 30, 1999
-------------
    GNMA                 $   428,563   $        --    $    (3,358)   $   425,205
    FNMA                   2,833,649         3,452        (34,619)     2,802,482
    FHLMC                    354,592            --         (3,146)       351,446
                         -----------    ----------     ----------    -----------
       Total             $ 3,616,804   $     3,452    $   (41,123)   $ 3,579,133
                         ===========   ===========    ===========    ===========

June 30, 1998
-------------
    GNMA                 $   515,486   $        --    $    (1,892)   $   513,594
    FNMA                   4,605,380        10,985        (31,200)     4,585,165
    FHLMC                    479,499            --           (416)       479,083
                         -----------    ----------     ----------    -----------
       Total             $ 5,600,365   $    10,985    $   (33,508)   $ 5,577,842
                         ===========   ===========    ===========    ===========
</TABLE>
                                       55
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 3 - MORTGAGE-BACKED SECURITIES (CONTINUED)
         -------------------------------------

    Mortgage-backed  certificates represent  participating interests in pools of
long-term  first mortgage loans.  Expected  maturities  differ from  contractual
maturities  because  borrowers  have the  right to  prepay  obligations  without
prepayment penalties.

    The proceeds,  gross realized  gains and losses on sales of  mortgage-backed
securities are as follows:
<TABLE>
<CAPTION>

                                                   2000              1999             1998
                                                   ----              ----             ----

        <S>                                    <C>              <C>               <C>
        Proceeds                               $        --      $        --       $        --
                                               ===========      ===========       ===========

        Gross realized gains                   $        --      $        --       $        --
                                               ===========      ===========       ===========

        Gross realized losses                  $        --      $        --       $        --
                                               ===========      ===========       ===========

</TABLE>

    At June 30,  2000,  mortgage-backed  securities  with an  amortized  cost of
$2,209,130  and  estimated  market  value of  $2,179,839  were pledged to secure
deposits.

NOTE 4 - LOANS
         -----

    Major  classifications  of loans  are  summarized  as  follows  (dollars  in
thousands):
<TABLE>
<CAPTION>

                                     2000        1999         1998
                                     ----        ----         ----
<S>                              <C>          <C>          <C>
Mortgage loans:
   One-to-four family            $  68,479    $  64,825    $  68,328
   Multi-family                        879        2,350        2,421
   Commercial                       18,584       18,837       19,442
Construction:
   One-to-four family                2,078        4,639        1,393
   Multi-family and commercial       1,397        1,832          884
Commercial                           7,752       10,536       10,682
Consumer                            12,168       12,418       16,647
                                 ---------    ---------    ---------
       Total loans                 111,337      115,437      119,797

Less:
   Unearned discounts                   (1)          (1)         (25)
   Allowance for loan losses        (1,032)      (1,576)        (798)
   Loans in process                   (694)      (2,248)        (913)
                                 ---------    ---------    ---------
       Net loans                 $ 109,610    $ 111,612    $ 118,061
                                 =========    =========    =========
</TABLE>
                                       56
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 4 - LOANS (CONTINUED)
         ----------------

    Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>

                                 2000           1999           1998
                                 ----           ----           ----

<S>                          <C>            <C>            <C>
Balance, beginning of year   $ 1,575,761    $   798,069    $   305,819
Provision for loan losses        205,940      1,524,416      1,108,099
Charge-offs                   (1,131,142)      (911,209)      (726,657)
Recoveries                       381,246        164,485        110,808
                             -----------    -----------    -----------
Balance, end of year         $ 1,031,805    $ 1,575,761    $   798,069
                             ===========    ===========    ===========
</TABLE>

    Non-accrual loans and their impact on interest income are as follows:
<TABLE>
<CAPTION>


                                                             2000        1999         1998
                                                             ----        ----         ----

<S>                                                      <C>          <C>          <C>
Non-accrual loans                                        $  791,955   $1,528,226   $1,729,290
                                                         ==========   ==========   ==========

Impact on interest income:
   Interest income that would have been recorded on
   non-accrual loans in accordance with original terms   $   64,686   $  139,307   $   31,306
                                                         ==========   ==========   ==========

Interest income actually received and recorded during
 the period                                              $    7,295   $   41,349   $   86,465
                                                         ==========   ==========   ==========
</TABLE>

   The  maturities  of all loans at June 30,  2000 which have  predetermined  or
floating or adjustable rates follows (amounts in thousands):

        Predetermined Rate:
           1 month - 1 year                                    $   6,428
           1 year - 5 years                                       13,527
           Over 5 years                                           13,038
                                                               ---------
               Total                                           $  32,993
                                                               =========

        Floating or Adjustable Rates:
           1 month - 1 year                                    $   6,023
           1 year - 5 years                                       25,717
           Over 5 years                                           45,910
                                                               ---------
               Total                                           $  77,650
                                                               =========

   The adjustable rate loans have interest rate adjustment  limitations  tied to
various  indexes.  Future  market  factors  may  affect the  correlation  of the
interest rate adjustment with the rates the Company pays on short-term  deposits
which have primarily been utilized to fund these loans.

                                       57
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 4 - LOANS (CONTINUED)
         ----------------

   The Company is engaged  principally  in providing  first  mortgage  loans and
accepting  deposits.  Substantially all of the Company's mortgage loan portfolio
at June 30, 2000, 1999 and 1998,  represents  loans to borrowers in Southeastern
Kentucky and  Northeastern  Tennessee.  The Company's policy is to make mortgage
loans that generally do not exceed 80% of the appraised  value of the underlying
property. The Company's loans on nonresidential properties are collateralized by
churches, hospitals and other business properties.

   The Company has a blanket pledge to the Federal Home Loan Bank of $15,750,000
of their first  mortgages  on  one-to-four  family  residences  to secure  their
borrowings.

   Loans made to officers and  directors of the Company and their  interests are
presented below.
<TABLE>
<CAPTION>

                                                              Balance,                                                    Balance,
                                                         Beginning of Year         New Loans         Repayments         End of Year
                                                         -----------------         ---------         ----------         -----------

                            <S>                             <C>                    <C>               <C>                <C>
                            2000                            $ 1,090,172            $ 411,600         $ 303,383          $ 1,198,389
                                                            ===========            =========         =========          ===========
</TABLE>

NOTE 5 - ACCRUED INTEREST RECEIVABLE
         ---------------------------

    Accrued interest receivable is comprised of the following:
<TABLE>
<CAPTION>
                                                                                    2000                1999                1998
                                                                                    ----                ----                ----
        <S>                                                                  <C>                 <C>                 <C>
        Investment securities                                                $      41,783       $      44,007       $      23,859
        Mortgage-backed securities                                                  14,179              18,388              34,467
        Loans                                                                      753,327             871,699             926,919
                                                                             -------------       -------------       -------------
           Total                                                             $     809,289       $     934,094       $     985,245
                                                                             =============       =============       =============
</TABLE>

NOTE 6 - OTHER REAL ESTATE OWNED
         -----------------------

    Federal  banking  regulations  require  the  Company  to dispose of all OREO
acquired  through   foreclosure  within  five  years  of  acquisition,   with  a
possibility  for  additional  extensions,  each of up to five years.  Failure to
receive additional extensions could result in losses on OREO.

    Loans converted to OREO through foreclosure  proceedings totaled $1,622,548,
$950,871  and  $460,075  for the  years  ended  June 30,  2000,  1999 and  1998,
respectively.  Sales of OREO that were financed by the Company totaled $777,553,
$288,262  and  $391,597  for the  years  ended  June 30,  2000,  1999 and  1998,
respectively.

                                       58
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 7 - PREMISES AND EQUIPMENT
         ----------------------

    Premises and equipment is comprised of the following:
<TABLE>
<CAPTION>

                                        2000         1999        1998
                                        ----         ----        ----

<S>                                 <C>          <C>          <C>
Land                                $  297,870   $  297,870   $  155,000
Office buildings and improvements    3,224,609    3,221,754    1,695,155
Furniture, fixtures and equipment    2,337,936    2,256,109    1,403,077
Construction in progress                    --           --      806,507
                                    ----------   ----------   ----------
   Total premises and equipment      5,860,415    5,775,733    4,059,739
Less accumulated depreciation        1,597,318    1,189,200      845,044
                                    ----------   ----------   ----------
   Net premises and equipment       $4,263,097   $4,586,533   $3,214,695
                                    ==========   ==========   ==========

</TABLE>

NOTE 8 - PROPERTY HELD FOR INVESTMENT
         ----------------------------

    Home Mortgage Loan Corporation,  an operating subsidiary of the Company, has
acquired  various  pieces of property to be used for future  development  and/or
resale.  The value of these  properties  at June 30,  2000 and 1999 and 1998 was
$1,668,697, $1,235,497 and $619,616, respectively.

NOTE 9 - DEPOSITS
         --------

    Deposits are summarized as follows:
<TABLE>
<CAPTION>

                                                                           Weighted
                                                                           Average
                                                                             Rate           Amount            Percent
                                                                             ----           ------            -------
        <S>                                                                 <C>        <C>                     <C>
        June 30, 2000
        -------------
          Balance by interest rate:
               Transaction accounts:
                  Demand and NOW checking (including
                    non-interest bearing deposits of $2,306,445)            1.66%      $   11,800,344           11.12
                  Savings                                                   2.25%           7,653,993            7.22
                  Money market                                              3.11%             589,779             .69
                                                                                       --------------          ------
                      Total transaction accounts                                           20,044,116           19.03
                                                                                       --------------          ------

               Certificates of deposit accounts:
                  1.00% - 3.00%                                                               155,375             .00
                  3.01% - 5.00%                                                             5,676,249            5.35
                  5.01% - 7.00%                                                            80,202,173           75.62
                                                                                       --------------          ------
                      Total certificates of deposit accounts                               86,033,797           80.97
                                                                                       --------------          ------
                      Total                                                            $  106,077,913          100.00
                                                                                       ==============          ======

               Weighted average annual interest rate on total deposits                                           3.19
                                                                                                               ======
</TABLE>
                                       59
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 9 - DEPOSITS (CONTINUED)
         -------------------
<TABLE>
<CAPTION>

                                                                      Weighted
                                                                      Average
                                                                        Rate          Amount            Percent
                                                                        ----          ------            -------
        <S>                                                            <C>        <C>                     <C>
        June 30, 1999
        -------------
          Balance by interest rate:
               Transaction accounts:
                  Demand and NOW checking (including
                    non-interest bearing deposits of $2,301,668)       1.64%      $   11,246,158          10.52
                  Savings                                              2.22%           8,838,394           8.27
                  Money market                                         3.73%           1,173,133           1.09
                                                                                  --------------         ------
                      Total transaction accounts                                      21,257,685          19.88
                                                                                  --------------         ------

               Certificates of deposit accounts:
                  3.01% - 5.00%                                                       19,247,838          18.00
                  5.01% - 7.00%                                                       66,399,614          62.12
                                                                                  --------------         ------
                      Total certificates of deposit accounts                          85,647,452          80.12
                                                                                  --------------         ------
                      Total                                                       $  106,905,137         100.00
                                                                                  ==============         ======

               Weighted average annual interest rate on total deposits                                     4.82
                                                                                                         ======

        June 30, 1998
        -------------
          Balance by interest rate:
               Transaction accounts:
                  Demand and NOW checking (including
                    non-interest bearing deposits of $2,425,957)       2.58%      $   10,114,022          10.35
                  Savings                                              1.93%           9,156,751           9.37
                  Money market                                         3.59%             469,336            .48
                                                                                   -------------         ------
                      Total transaction accounts                                      19,740,109          20.20
                                                                                   -------------         ------

               Certificates of deposit accounts:
                  2.75% - 3.00%                                                           79,045            .08
                  3.01% - 5.00%                                                           98,986            .10
                  5.01% - 7.00%                                                       77,801,178          79.62
                                                                                  --------------         ------
                      Total certificates of deposit accounts                          77,979,209          79.80
                                                                                  --------------         ------
                      Total                                                       $   97,719,318         100.00
                                                                                  ==============         ======

               Weighted average annual interest rate on total deposits                                     5.03
                                                                                                         ======
</TABLE>
                                       60
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 9 - DEPOSITS (CONTINUED)
         -------------------

    Remaining  contractual  maturity of certificates of deposit  accounts are as
follows:
<TABLE>
<CAPTION>

                                           2000                              1999                             1998
                                           ----                              ----                             ----

        <S>                          <C>                <C>            <C>               <C>            <C>                 <C>
        Under one year               $ 59,827,081        69.54%        $ 62,729,691       73.24%        $ 55,720,269        71.46%
        One to three years             22,882,687        26.60           19,363,440       22.61           20,195,255        25.90
        Three to five years             3,324,029         3.86            3,532,732        4.12            2,038,140         2.61
        Five to ten years                      --          .00               21,589         .03                9,058          .01
        Ten to twenty years                    --          .00                   --         .00               16,487          .02
                                     ------------       ------         ------------      ------         ------------       ------
           Total                     $ 86,033,797       100.00%        $ 85,647,452      100.00%        $ 77,979,209       100.00%
                                     ============       ======         ============      ======         ============       ======
</TABLE>

    The  aggregate  amount  of jumbo  certificates  of  deposit  with a  minimum
denomination  of  $100,000  was  approximately   $27,850,247,   $29,381,472  and
$16,127,000 at June 30, 2000, 1999 and 1998, respectively.

    Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
                                                                                 2000                1999                1998
                                                                                 ----                ----                ----

        <S>                                                                  <C>                 <C>                <C>
        NOW checking and money market                                        $   234,898         $   224,872        $    227,251
        Savings                                                                  179,430             208,343             244,153
        Certificates of deposit                                                4,619,844           4,722,200           4,205,801
                                                                             -----------         -----------        ------------
           Total                                                             $ 5,034,172         $ 5,155,415         $ 4,677,205
                                                                             ===========         ===========         ===========
</TABLE>

    The Bank held related party deposits of  approximately  $683,000 at June 30,
2000.

NOTE 10 - ADVANCES FROM FHLB
          ------------------

    At June 30, 2000, 1999 and 1998, the Bank has outstanding  advances from the
Federal   Home  Loan  Bank  of   $10,500,000,   $12,000,000   and   $26,000,000,
respectively.  Five and a half million  dollars of  advances,  at June 30, 2000,
bear  interest  at a rate of 7.35%  and  mature  within  the next  year and five
million  dollars of advances  bear interest at a rate of 6.08% and mature March,
2003.

                                       61
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 11 - NOTES PAYABLE
          -------------

    Notes payable at June 30, are as follows:
<TABLE>
<CAPTION>
                                                                                         2000              1999              1998
                                                                                         ----              ----              ----
        <S>                                                                         <C>              <C>               <C>
        Powell Valley  National  Bank note; dated June, 1998;
        secured by ESOP shares;  due in annual  payments of
        $54,362 plus interest at two points over prime rate,
        currently 10.5%; due April, 2008                                            $    406,963     $    458,665      $    502,210
        Powell Valley National Bank note; dated June, 1998;
         secured by ESOP shares; due in annual payments of
         $27,018 plus interest at two points over prime rate,
         currently 10.5%; due May, 2005                                                  133,661          145,911           157,807
        Powell Valley National Bank note; dated June, 1998;
         secured by real estate; due in quarterly payments of
         $29,868 plus interest at one point over prime rate,
         currently 9.5%; due December, 2007                                              880,528        1,000,000         1,000,000
        Individual note; dated January, 1998; secured by real
         estate; due in annual payments of $9,800 including
         interest at 5%; due January, 2008                                                63,339           69,657            75,673
        Individual note, dated January, 1997; secured by real
         estate; due in monthly payments of $1,035 with no
         interest; due May, 1998                                                              --               --            12,029
                                                                                    ------------     ------------      -------------
                                                                                    $  1,484,491     $  1,674,233      $  1,747,719
                                                                                    ============     ============      ============
</TABLE>

    Maturities on the notes payable are as follows:


                     Year              Amount
                     ----              ------

                     2001        $     207,485
                     2002              207,817
                     2003              208,165
                     2004              208,531
                     2005              207,485
                  Thereafter           445,008
                                  ------------
                                  $  1,484,491
                                  ============

                                       62
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 12 - FEDERAL INCOME TAXES
          --------------------

    Income taxes are comprised of the following:
<TABLE>
<CAPTION>
                                                                                      2000             1999              1998
                                                                                      ----             ----              ----

        <S>                                                                         <C>              <C>               <C>
        Current provision                                                           $ 136,847        $ 146,785         $ 463,330
        Deferred benefit                                                              134,524         (270,713)          (92,994)
                                                                                    ---------        ---------         ---------
                                                                                    $ 271,371        $(123,928)        $ 370,336
                                                                                    =========        =========         =========

    Deferred tax assets and liabilities were comprised of the following:
                                                                                      2000             1999              1998
                                                                                      ----             ----              ----
        Tax bases over financial bases for loans (loan loss
         reserve and discounts)                                                     $ 221,844        $ 341,387         $ 111,952
        Deferred compensation                                                          74,044           98,356            66,248
        Retirement plans                                                              125,261           96,241            86,663
        Depreciation                                                                 (121,653)        (101,964)          (96,312)
        Unrealized gains (losses) on securities                                        77,313           63,534            40,414
                                                                                    ---------        ---------         ---------
           Net deferred tax asset                                                   $ 376,809        $ 497,554         $ 208,965
                                                                                    =========        =========         =========
</TABLE>

    The  Company's  effective  tax  rate  varies  from  the  statutory  rate  of
thirty-four percent. The reasons for this difference are as follows:
<TABLE>
<CAPTION>

                                                                                      2000             1999              1998
                                                                                      ----             ----              ----

        <S>                                                                         <C>              <C>               <C>
        Computed "expected" tax provision                                           $ 136,847        $ 146,785         $ 463,330
        Increase (reduction) of taxes:
         Tax-exempt income                                                             40,302           41,678            36,819
         Allowance for loan losses                                                    119,543         (229,434)          (76,495)
         Retirement plans                                                             (18,037)          (9,579)          (30,257)
         Deferred compensation                                                         10,248          (16,180)          (16,282)
         Depreciation                                                                  19,689            5,653            21,065
         ESOP/MRP plan                                                                (35,281)         (61,149)               --
         Other                                                                         (1,940)          (1,702)          (27,844)
                                                                                    ---------        ---------         ---------
              Total                                                                 $ 271,371        $(123,928)        $ 370,336
                                                                                    =========        =========         =========
</TABLE>
                                       63
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 13 - DIRECTORS' RETIREMENT PLAN
          --------------------------

    The Bank has adopted the  Middlesboro  Federal  Bank,  Federal  Savings Bank
Retirement  Plan  for  Directors  (the  "Directors'  Plan")  pursuant  to  which
directors of the Bank are entitled to receive,  upon  retirement,  sixty monthly
payments in the amount of seventy-five  percent of the average monthly fees that
the  respective   director   received  for  service  on  the  Board  during  the
twelve-month period preceding  termination of service on the Board, subject to a
twenty year vesting schedule.  In connection with the adoption of the Directors'
Plan, the Bank incurred an expense of $46,157, $16,565 and $70,940 for the years
ended June 30, 2000, 1999, and 1998,  respectively.  The liability accrued under
this plan was $196,460,  $185,175 and $193,900 at June 30, 2000, 1999, and 1998,
respectively. The related deferred tax asset was $66,796, $62,959 and $65,926 at
June 30, 2000, 1999, and 1998, respectively.

NOTE 14 - EMPLOYMENT AGREEMENT
          --------------------

    In  August,  1996,  the  Bank  entered  into an  employment  agreement  (the
"Employment  Agreement")  with Mr. James J. Shoffner (the "Employee") who serves
as its President,  Chief Managing Officer and as a director.  The Board believes
that the  Employment  Agreement  assures  fair  treatment of the Employee in his
career with the Bank by assuring him of some financial security.  Pursuant to an
amendment  to the  Employment  Agreement,  the  Company  will  become  joint and
severally  liable  with  the  Bank  for its  obligations  under  the  employment
agreement.

    The  Employment  Agreement  provides  for a term of  three  years,  with the
Employee's annual base salary equal to $55,000.  On each anniversary date of the
commencement of the Employment Agreement,  the term of the Employee's employment
will be extended for an additional  one-year  period  beyond the then  effective
expiration  date,  upon a  determination  by the  Board  of  Directors  that the
performance of the Employee has met the required performance  standards and that
such Employment Agreement should be extended.  The Employment Agreement provides
the Employee  with a salary review by the Board of Directors not less often than
annually, as well as with inclusion in any discretionary bonus plans, retirement
and medical  plans,  customary  fringe  benefits,  vacation and sick leave.  The
Employment  Agreement shall terminate upon the Employee's  death,  may terminate
upon the  Employee's  disability  and is terminable by the Bank for "just cause"
(as defined in the Employment  Agreement).  In the event of termination for just
cause, no severance benefits are available.  If the Bank terminates the Employee
without  just cause,  the  Employee  will be entitled to a  continuation  of his
salary and benefits from the date of  termination  through the remaining term of
the  Employment  Agreement  and at the  Employee's  election,  either  continued
participation  in benefits  plans which the Employee would have been eligible to
participate in through the Employment  Agreement's  expiration  date or the cash
equivalent  thereof.  If  the  Employment  Agreement  is  terminated  due to the
Employee's  "disability" (as defined in the Employment Agreement),  the Employee
will be entitled to a continuation  of his salary and benefits  through the date
of such  termination,  including  any period prior to the  establishment  of the
Employee's  disability.  In the event of the Employee's death during the term of
the  Employment  Agreement,  his estate  will be  entitled to receive his salary
through the last day of the calendar month in which the Employee's

                                       64
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 14 - EMPLOYMENT AGREEMENT (CONTINUED)
          -------------------------------

death  occurred.  The Employee is able to  voluntarily  terminate his Employment
Agreement by providing  ninety days written notice to the Boards of Directors of
the Bank and the Company, in which case the Employee is entitled to receive only
his compensation, vested rights and benefits up to the date of termination.

    In the event of (i) the  Employee's  involuntary  termination  of employment
other than for just cause during the period beginning six months before a Change
in Control (as defined) and ending on the later of the first  anniversary of the
Change in  Control  or the  expiration  date of the  Employment  Agreement  (the
"Protected  Period"),  (ii) the Employee's  voluntary  termination within ninety
days  of the  occurrence  of  certain  specified  events  occurring  during  the
Protected Period which have not been consented to by the Employee,  or (iii) the
Employee's  voluntary  termination  of  employment  for any  reason  within  the
thirty-day  period beginning on the date of the Change in Control,  the Employee
will be paid within ten days of such  termination  (or the date of the Change in
Control,  whichever is later) an amount equal to the difference between (i) 2.99
times his "base amount," as defined in Section  28OG(b)(3) of the Code, and (ii)
the sum of any other parachute payments,  as defined under Section 28OG(b)(2) of
the Code,  that the Employee  receives on account of the Change in Control.  The
Employment  Agreement  with the Bank provides that within ten business days of a
Change in Control,  the Bank shall fund,  or cause to be funded,  a trust in the
amount of 2.99 times the  Employee's  base amount,  that will be used to pay the
Employee amounts owed to him. These provisions may have an anti-takeover  effect
by making it more  expensive for a potential  acquirer to obtain  control of the
Company.  In the event that the Employee prevails over the Company and the Bank,
or  obtains  a  written  settlement  in a  legal  dispute  as to the  Employment
Agreement, he will be reimbursed for his legal and other expenses.

The  Employment   Agreement  entitles  Mr.  Shoffner  to  receive   supplemental
retirement  benefits  upon his  termination  of  employment  with the Bank,  for
reasons other than removal for just cause.  Benefits are payable for his life in
an annual amount equal to (i) the product of his vested  percentage  (i.e.,  20%
per year of service under the  agreement,  up to 100%) and 80% of the average of
the  highest  compensation  for  three  of the  five  calendar  years  preceding
termination,  less (ii) the sum of the 50% joint and survivor  annuity  value of
his employer provided benefits under the Bank's  tax-qualified  retirement plans
and his annual social  security  benefit at age 62. Vesting  accelerates to 100%
upon his death or disability.  Upon Mr.  Shoffner's  death, his surviving spouse
would receive a lump-sum payment equal to 50% of the present value of his unpaid
retirement benefits.

    At June 30,  2000,  1999 and 1998,  the accrual for the  estimated  benefits
payable under this agreement was $139,655, $97,889 and $60,990, respectively.

                                       65
<PAGE>



              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 15 - INCENTIVE COMPENSATION PLAN
          ---------------------------

    Effective  July 1,  1996,  the  Bank's  Board of  Directors  implemented  an
incentive  compensation plan (the "Incentive  Compensation Plan"). The Incentive
Compensation  Plan is unfunded and benefits are payable only in the form of cash
from the Bank's general assets. The Incentive  Compensation Plan is administered
by the  Compensation  Committee  (the  "Committee")  consisting  of  the  Bank's
non-employee directors. All employees who are with the Bank on the first and the
last  day  of the  plan  year  are  eligible  to  participate  in the  Incentive
Compensation Plan.

    A  mathematical  formula set forth in the Incentive  Compensation  Plan, and
summarized  below,  determines  the  amount of each  participant's  annual  cash
bonuses  ("bonuses").   Nevertheless,   the  Committee  may  in  its  discretion
determine,  by  resolution  adopted  before the first day of any plan  year,  to
change the employees  participating in the Incentive  Compensation Plan, and the
formula for calculating the bonuses.  Absent such action,  for each plan year in
which the Incentive  Compensation  Plan is in effect,  the bonus pool will equal
$35,000  times  the  return-on-average  assets  ("ROAA")  times the  Safety  and
Soundness  Factor  ("SSF")  (which takes into  account the Bank's  nonperforming
assets ("NPA") and its CAMEL  ratings).  ROAA will be calculated  each year on a
consolidated financial basis on a pre-dividend,  pre-provision for loan loss and
pre-plan  payment  basis.  ROAA factor will equal the square of the ratio of (i)
the  Bank's  return  on  average  assets  for the plan  year to (ii)  0.8%.  The
Committee  may adjust  the  Company's  and the  Bank's  ROAA or NPA to take into
account extraordinary  financial events. The aggregate amount of bonuses payable
for any calendar year will be proportionately reduced (to zero, if necessary) to
the  extent  that  the   payment   would  cause  the  Bank  to  cease  to  be  a
"well-capitalized"  institution  for the year. The Incentive  Compensation  Plan
provides  that no  bonuses  will be paid for any year in which ROAA is less than
0.5%. Eighty percent of the bonus pool is expected to be divided among employees
based on relative compensation amounts and the other twenty percent based on the
Committee's discretion.  Directors would be permitted to make deferral elections
with  respect  to  directors'  fees,  and to have  the rate of  return  on their
deferral be measured by the highest  twelve  month  certificate  of deposit rate
paid by the Bank.

    The Incentive Compensation Plan has an indefinite term, and the Bank has the
right at any time to terminate or amend the Incentive  Compensation Plan for any
reason; provided, that no amendment or termination shall, without the consent of
a participant or, if applicable, the participant's beneficiary, adversely affect
such  participant's or beneficiary's  rights with respect to benefits accrued as
of the date of such  amendment or  termination.  The bonus  accrued was $14,978,
$9,000  and  $9,000  for  the  years  ended  June  30,  2000,   1999  and  1998,
respectively.

                                       66
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 16 - DEFERRED COMPENSATION
          ---------------------

    The Bank  has an  unfunded  deferred  compensation  agreement  with a former
officer that provides additional benefits upon retirement.  The plan specifies a
benefit of $1,000 per month for fifteen  years from the date of his  retirement,
which was December 31, 1993.  If he does not live to receive all of his deferred
compensation, the unpaid balance at the time of his death shall be forfeited. He
is required to perform  various  future  services  under this  agreement for the
fifteen year term.  A life  insurance  policy has been  purchased on his life to
reimburse  the Bank for the net cost of the  deferred  compensation.  The amount
expensed under this agreement at June 30, 2000, 1999 and 1998, was $12,000.

    The Company  specified an annual salary of $52,000 for Mr. Roy Shoffner.  He
has elected to defer  partially this annual salary.  At June 30, 2000,  1999 and
1998, $81,000, $104,000 and $52,000,  respectively,  has been accrued under this
contract  and this  liability  and the  related  deferred  tax asset of $27,540,
$35,360 and $17,680, respectively, are recognized in these financial statements.

    In connection with a deferred  compensation  agreement  between the Bank and
another  former  officer,  provision  has been made for the future  compensation
which is payable over the next twenty  years.  At June 30, 2000,  1999 and 1998,
$136,777,  $141,505 and  $145,915,  respectively,  has been  accrued  under this
contract  and this  liability  and the  related  deferred  tax asset of $46,504,
$48,111 and $49,611,  respectively,  are recognized in the financial statements.
The Bank is the owner and  beneficiary  of a life insurance  policy  aggregating
$200,000  on the  life  of this  employee.  The  policy  had an  aggregate  cash
surrender value of $21,480,  $14,807 and $8,447 at June 30, 2000, 1999 and 1998,
respectively.

NOTE 17 - OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES
          -----------------------------------------------------

    CONCENTRATION OF CREDIT RISK: The Company's  core customer loan  origination
    ----------------------------
        base is located in Southeastern Kentucky and Northeastern  Tennessee. At
        June 30, 2000,  approximately  eighty-two  percent of the Company's loan
        portfolio was secured by real estate.  Mortgage  loans secured by one to
        four family properties  comprised  approximately  sixty-three percent of
        total mortgage loans at June 30, 2000.

    OFF-BALANCE- SHEET ITEMS: The Company enters into financial instruments with
    ------------------------
        off-balance-sheet  risk in the  normal  course of  business  to meet the
        financing needs of its customers.  These financial  instruments  include
        commitments  to extend  credit and  commercial  and  standby  letters of
        credit.  These  instruments  involve,  to varying  degrees,  elements of
        credit  and   interest-rate   risk  that  are  not   recognized  in  the
        accompanying consolidated balance sheets.

        The Company's  exposure to credit loss in the event of nonperformance by
        the  other  party  to  the  financial  instruments  discussed  above  is
        represented by the contractual amount of those instruments.  The Company
        uses the same credit  policies  in making  commitments  and  conditional
        obligations as it does for on-balance-sheet instruments.

                                       67
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 17 - OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES (CONTINUED)
          ----------------------------------------------------------------

        A summary of financial instruments with  off-balance-sheet  risk at June
30, is as follows (in thousands):
<TABLE>
<CAPTION>

                                                          2000    1999      1998
                                                          ----    ----      ----
           <S>                                          <C>      <C>      <C>
           Commitments to extend credit                 $  499   $  482   $1,589
           Unfunded lines of credit                      1,542    1,798    2,444
           Commercial and standby letters of credit         90      191      210
                                                        ------   ------   ------
               Total                                    $2,131   $2,471   $4,243
                                                        ======   ======   ======
</TABLE>

        Commitments  to extend  credit are  agreements  to lend to a customer as
        long as  there  is no  violation  of any  condition  established  in the
        agreement.  Commitments  generally have fixed  expiration dates or other
        termination  clauses and may require payment of a fee. Since many of the
        commitments  are expected to expire  without being drawn upon, the total
        commitment   amounts   do  not   necessarily   represent   future   cash
        requirements.  The Company evaluates each customer's creditworthiness on
        a  case-by-case  basis.  The amount of  collateral  obtained,  if deemed
        necessary  upon  extension of credit,  is based on  management's  credit
        evaluation of the  counterparty.  Collateral held varies but may include
        premises and  equipment,  inventory  and accounts  receivable.  Unfunded
        lines of credit  represent  the  undisbursed  portion of lines of credit
        which have been extended to customers.

        Commercial  and standby  letters of credit are  conditional  commitments
        issued by the Company to guarantee  the  performance  of a customer to a
        third party,  which  typically do not extend beyond one year. The credit
        risk involved in issuing  letters of credit is  essentially  the same as
        that  involved in extending  loans to customers.  The Company  typically
        holds   certificates   of  deposit  as   collateral   supporting   those
        commitments, depending on the strength of the borrower.

    DIVIDENDS: Regulations limit the amount of dividends the Bank can pay in any
    ---------
        given year to that year's net income plus  retained  net income from the
        two preceding years.  Additionally,  the Bank and the Company cannot pay
        dividends which would cause either to be  undercapitalized as defined by
        federal regulations.

    COMMITMENTS:  The  Company has entered  into three  noncancelable  operating
    -----------
        leases for branch banking  locations.  At June 30, 2000,  minimum rental
        commitments  based on the  remaining  noncancelable  lease terms were as
        follows:

                        Year                   Amount
                        ----                   ------
                        2001                 $  89,820
                        2002                    73,020
                        2003                    60,000
                        2004                    60,000
                        2005                    60,000
                     Thereafter                495,000
                                             ---------
                                             $ 837,840

                                       68
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 17 - OFF-BALANCE-SHEET RISK, COMMITMENTS AND CONTINGENCIES (CONTINUED)
          ----------------------------------------------------------------

        Total rent expense for the years ended June 30, 2000,  1999 and 1998 was
        $91,126, $89,820 and $76,220, respectively.

    INDEMNIFICATION  AGREEMENTS:  The Bank and the  Company  have  entered  into
    ---------------------------
        Indemnification  Agreements (the "Indemnification  Agreements") with all
        of  the  Bank's  and  the  Company's   directors.   The  Indemnification
        Agreements    provide   for   retroactive   as   well   as   prospective
        indemnification  to the fullest extent  permitted by law against any and
        all  expenses  (including  attorneys'  fees  and  all  other  costs  and
        obligations),   judgements,   fines,   penalties  and  amounts  paid  in
        settlement in connection with any claim or proceeding arising out of the
        indemnitee's service as a director. The Indemnification  Agreements also
        provide  for the prompt  advancement  of  expenses  to the  director  in
        connection  with   investigating,   defending  or  being  a  witness  or
        participating in any proceeding.  The Indemnification Agreements further
        provide a mechanism  through which the director may seek court relief in
        the event the  Company's  or the  Bank's  Board of  Directors  (or other
        person  appointed by such Board)  determines that the director would not
        be permitted to be indemnified under applicable law. The Indemnification
        Agreements impose on the Bank and the Company the burden of proving that
        the director is not entitled to  indemnification in any particular case.
        If a change in  control  (as  defined)  occurs,  the  director  would be
        entitled  to  continue  on as a  director  emeritus  or  as an  advisory
        director for one year after the change in control,  with annual  renewal
        by the Board of  Directors of the  successor  entity upon a duly adopted
        resolution.

       While not requiring the  maintenance of directors'  liability  insurance,
       the  Indemnification  Agreements provide that the Bank or the Company may
       obtain  such  insurance,   if  desired.   Further,   the  Indemnification
       Agreements  provide  that if the  Bank  or the  Company  pays a  director
       pursuant to an Indemnification Agreement, the Bank or the Company will be
       subrogated to such director's rights to recover from third parties.

    CONTINGENCIES:  The Bank has a potential claim involving a loan customer who
    -------------
        had filed bankruptcy. The bankruptcy court awarded the Bank a settlement
        of eighty  percent  of the Bank's  original  claim.  Subsequent  to this
        action, the bankruptcy attorney of the debtor filed a motion in the U.S.
        Bankruptcy  court  requesting an  appointment of a law firm to represent
        the debtor in  connection  with  claims or causes of action  against the
        Bank.  Based upon review of motion filed, the Bank's attorney feels that
        there is no firm basis for a claim. There has been no provision for this
        unasserted claim in the accompanying financial statements.

        The  Bank is  involved  in  negotiation  with  their  insurance  company
        regarding  loans  purchased from an outside lender which was found to be
        uncollectible  due to fraud on the part of one of the  outside  lender's
        employees.  The  amount  due to the  Bank  of  $668,254,  which  was the
        remaining  principal amount of the mortgages which were found to be paid
        in full,  is reflected in other assets.  A specific  reserve of $218,000
        has been allocated in the allowance for loan loss to reflect the maximum
        estimated loss.

                                       69
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 18 - MANAGEMENT RECOGNITION PLAN
          ---------------------------

    The Company established the Management  Recognition Plan ("MRP") as a method
to reward and retain  personnel of  experience  and ability in key  positions of
responsibility by providing employees of the Company,  Middlesboro Federal Bank,
F.S.B. and their subsidiaries with a proprietary  interest in the Company,  with
compensation for their past contributions to the Company,  and with an incentive
to make such contributions in the future.

    A  committee  of not  less  than  two  members  of the  Board  who  are  the
nonemployee  directors  administer the trust and make awards.  The assets of the
Plan are held in a trust which is  administered  by trustees  designated  by the
Board. Under terms of the plan, the MRP trust may purchase, in the aggregate, up
to a maximum of 17,589 shares of common  stock.  Such shares may be newly issued
shares,  shares held in the treasury,  or shares held in a grantor trust.  As of
October 21, 1999,  awards  covering  7,036 shares of common stock were  granted.
One-third of these plan shares will be vested upon their award, one-third of the
shares will vest when the participant  completes two years of service  following
the award date and the remaining one-third shares will vest when the participant
completes four years of service following the initial award date.

    Participants will recognize  compensation  income when their interest vests.
Generally,  the Company may claim a compensation  expense  deduction at the same
time and same amount as a participant recognizes compensation income.

NOTE 19 - 1998 STOCK OPTION AND INCENTIVE PLAN
          ------------------------------------

    The  purpose  of the stock  option  and  incentive  plan (the  "Plan") is to
advance the  interests of the Company  through  providing  select  employees and
directors of the Company and its  subsidiaries  with the  opportunity to acquire
shares of common stock. By encouraging such stock  ownership,  the Company seeks
to attract,  retain and motivate the best  available  personnel for positions of
substantial  responsibility and to provide additional incentive to employees and
directors  of the  Company  or any  subsidiary  to  promote  the  success of the
business. The Plan is not qualified under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"),  and is exempt from the provisions of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA").

    The Plan became effective August 18, 1998 (the "Effective Date"), contingent
upon  approval of the  Company's  stockholders.  Such  approval  was obtained on
October  21,  1998.  The Plan is to continue in effect for a period of ten years
from its effective  date,  unless  terminated  earlier by the Board of Directors
(the "Board"). The expiration of the Plan, or its termination by the Board, will
not affect  any awards  previously  granted  under the Plan.  The Board may also
modify the Plan.

                                       70
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 19 - 1998 STOCK OPTION AND INCENTIVE PLAN (CONTINUED)
          -----------------------------------------------

    The Plan is administered  by a committee (the  "Committee") of not less than
two (2) members of the Board who are "non-employee directors" within the meaning
of the  federal  securities  laws and who are  appointed  by,  and  serve at the
pleasure of, the Board. A majority of the entire Committee constitutes a quorum,
and the action of a majority  of the  members  present at any meeting at which a
quorum is present,  or acts  approved in writing by a majority of the  Committee
without a meeting, shall be deemed the action of the Committee.

    Subject to the express provisions of the Plan and to any resolutions adopted
by the Board,  the Committee has sole and complete  authority and  discretion to
select  participants  and grant awards under the Plan, to determine the form and
content of awards,  to interpret the Plan,  and to prescribe,  amend and rescind
the rules and  regulations  relating to the Plan. In addition,  the Committee is
authorized  to make all other  determinations  deemed  necessary or expedient to
promote  the best  interests  of the  Company  with  respect  to the  Plan.  All
decisions,  determinations,  and  interpretations of the Committee are final and
conclusive on all persons  affected  thereby.  Members of the Committee  will be
indemnified to the extent permissible under the Company's governing  instruments
in  connection  with any claims or other  actions  relating to any action  taken
under the Plan.

    Options may be either incentive stock options ("ISOs") as defined in Section
422 of the Code, or options that are not ISOs ("Non-ISOs").  Under the Plan, the
aggregate  fair market  value of the common  stock for which an employee  may be
granted ISOs which become first  exercisable in any calendar year may not exceed
$100,000. An optionee may purchase common stock through exercising an option and
paying the exercise price associated therewith.  Only common stock is subject to
purchase upon exercise of the options.  On the effective date,  options covering
32,980 shares of the common stock were granted under the Plan pursuant to a Plan
provision for automatic grants on that date.

    Under the Plan, the Committee determines the price at which options and SARs
may be exercised, provided that the exercise price for any option or SAR may not
be less than 100% of the fair market  value per share of the common stock on the
date such option is granted (110%, in the case of ISOs granted to persons owning
more than 10% of the outstanding common stock).

    Unless the Committee  specifically  eliminates  any vesting  requirement  or
imposes a different  vesting schedule in an option  agreement,  each option will
become  exercisable  with  respect  to 33 1/3% of the  optioned  shares  upon an
optionee's  completion  of  each of  three  years  of  service  as an  employee,
director,  or  advisory  or  emeritus  director,  after  the date of the  Award,
provided that an option shall become fully (100%) exercisable  immediately if an
optionee's  continuous  service terminates due to retirement at or after age 65,
death,  or disability (as determined by the  Committee),  as well as immediately
upon a change in control or execution of a written  agreement to effect a change
in control.  The term of options and SARs granted under the Plan may not be more
than ten years from the date of grant (five years in the case of ISOs granted to
an  Optionee  who owns  stock  representing  more than 10% of the  common  stock
outstanding at the time the ISO is granted).

                                       71
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 20 - EMPLOYEE STOCK OWNERSHIP PLAN
          -----------------------------

    The Company  sponsors a leveraged  employee stock ownership plan (ESOP) that
covers all  employees  who work forty or more hours per week.  The Company makes
annual contributions to the ESOP equal to the ESOP's debt service less dividends
received by the ESOP.  All  dividends  received by the ESOP are used to pay debt
service.  The ESOP shares  initially are pledged as collateral  for its debt. As
the debt is repaid,  shares are released from collateral and allocated to active
employees, based on the proportion of debt service paid in the year. The debt of
the ESOP is recorded as debt and the shares  pledged as collateral  are deducted
from   stockholders'   equity  as  unearned  ESOP  shares  in  the  accompanying
consolidated statement of financial condition.

    As shares are released from  collateral,  the Company  reports  compensation
expense  equal to the current  market price of the shares and the shares  become
outstanding for  earning-per-share  (EPS)  computations.  Dividends on allocated
ESOP shares are  recorded as a reduction  of  retained  earnings;  dividends  on
unallocated  ESOP  shares  are  recorded  as a  reduction  of debt  and  accrued
interest.  The ESOP  compensation  expense  for the year ended June 30, 2000 and
1999 was $75,023 and $208,432, respectively.

    Shares of the Company held by the ESOP at June 30 are as follows:
<TABLE>
<CAPTION>

                                                2000         1999         1998
                                                ----         ----         ----

<S>                                          <C>          <C>          <C>
Allocated shares                                     --           --           --
                                             ==========   ==========   ==========

Shares released for allocation                    6,257       13,027           ==
                                             ==========   ==========   ==========

Unreleased (unearned) shares                     68,572       74,829       87,856
                                             ==========   ==========   ==========

Fair value of unreleased (unearned) shares   $  839,321   $  626,693   $1,405,696
                                             ==========   ==========   ==========

</TABLE>
NOTE 21 - REGULATORY CAPITAL REQUIREMENT
          ------------------------------

    The  Company and the Bank are  required to comply with the capital  adequacy
standards established by the Office of Thrift Supervision (OTS). There are three
basic  measures of capital  adequacy for banks that have been  promulgated;  two
risk-based  measures and a leverage  measure.  All applicable  capital standards
must be satisfied for a bank holding company to be considered in compliance.

    The minimum guidelines for the ratio  ("Risk-Based  Capital Ratio") of total
capital   ("Total   Capital")  to   riskweighted   assets   (including   certain
off-balance-sheet  items,  such as standby  letters of credit) is 8.0%. At least
half of Total Capital (i.e., 4.0% of risk-weighted  assets) must comprise common
stock,  minority  interests in the equity account of consolidated  subsidiaries,
noncumulative  perpetual  preferred  stock,  and a limited  amount of cumulative
perpetual  preferred stock,  less goodwill and certain other  intangible  assets
("Tier I  Capital").  The  remainder  may consist of  subordinated  debt,  other
preferred stock, and a limited amount of loan loss reserves ("Tier 2 Capital").

                                       72
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 21 - REGULATORY CAPITAL REQUIREMENT (CONTINUED)
          -----------------------------------------

    Failure to meet capital  guidelines  could  subject a bank or a bank holding
company to a variety of enforcement  remedies,  including  issuance of a capital
directive,  the  termination of deposit  insurance by the FDIC, a prohibition on
the taking of brokered deposits, and certain other restrictions on its business.
Substantial additional  restrictions can be imposed upon FDIC-insured depository
institutions that fail to meet applicable capital requirements under the federal
prompt corrective action regulations.

    As of June 30,  2000,  1999 and  1998,  the  Company  was  considered  "well
capitalized"  under the federal banking  agencies for prompt  corrective  action
regulations.  The table  which  follows  sets forth the  amounts of capital  and
capital  ratios of the  Company  as of June 30,  and the  applicable  regulatory
minimums (in thousands):
<TABLE>
<CAPTION>
                                                          2000                   1999                    1998
                                                          ----                   ----                    ----
                                                   Amount        Ratio      Amount      Ratio      Amount      Ratio
                                                   ------        -----      ------      -----      ------      -----
        <S>                                      <C>              <C>      <C>            <C>     <C>            <C>
        Tangible Capital Requirement:
           Actual                                $   9,265        7.22     $   8,831      6.81    $ 8,840        6.50
           Minimum required                          1,925        1.50         1,943      1.50      2,040        1.50
                                                 ---------      ------     ---------    ------     ------       -----
           Excess over minimum                   $   7,340        5.72     $   6,888      5.31    $ 6,800        5.00
                                                 =========      ======     =========    ======     ======       =====

        Core Capital Requirement:
           Actual                                $   9,265        7.22     $   8,831      6.81    $ 8,840        6.50
           Minimum required                          5,132        4.00         5,184      4.00      5,439        4.00
                                                 ---------      ------     ---------    ------    -------       -----
           Excess over minimum                   $   4,133        3.22     $   3,647      2.81    $ 3,401        2.50
                                                 =========      ======     =========    ======    =======       =====

        Risk-Based Capital Requirement:
           Actual                                $  10,297       11.42     $  10,011     10.65    $ 9,639       10.04
           Minimum required                          7,210        8.00         7,521      8.00      7,681        8.00
                                                 ---------      ------     ---------    ------    -------       -----
           Excess over minimum                   $   3,087        3.42     $   2,490      2.65    $ 1,958        2.04
                                                 =========      ======     =========    ======     ======       =====
</TABLE>

                                       73
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS
          -----------------------------------

     Condensed  financial   statements  of  the  Company  (Cumberland   Mountain
Bancshares,  Inc.) are  presented  below.  Amounts  shown as  investment  in the
wholly-owned  subsidiaries  and  equity  in  earnings  of the  subsidiaries  are
eliminated in consolidation.

                        STATEMENTS OF FINANCIAL CONDITION
                        ---------------------------------
                                     ASSETS
                                     ------
<TABLE>
<CAPTION>
                                                                                 2000            1999            1998
                                                                                 ----            ----            ----

<S>                                                                          <C>             <C>             <C>
Cash                                                                         $        420    $      4,600    $    393,972
Investment in wholly-owned subsidiaries                                        10,535,868      10,416,268      10,641,915
Other investments                                                                      --              --         108,340
Deferred tax                                                                       38,522          50,245              --
                                                                             ------------    ------------    ------------
    TOTAL ASSETS                                                             $ 10,574,810    $ 10,471,113    $ 11,144,227
                                                                             ============    ============    ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY
                      ------------------------------------

Accounts payable and accrued expenses                                        $     38,496    $    158,466    $    723,375
Notes payable                                                                   1,421,152       1,604,576       1,660,017
                                                                             ------------    ------------    ------------
    Total liabilities                                                           1,459,648       1,763,042       2,383,392
                                                                             ------------    ------------    ------------

Common stock                                                                        6,788           6,788           6,788
Treasury stock                                                                         --         (87,750)       (258,551)
Unearned MRP shares                                                               (90,156)             --              --
Unearned stock options                                                           (328,668)       (240,918)       (240,918)
Unearned ESOP shares                                                             (822,113)       (897,135)     (1,053,328)
Paid-in capital                                                                 5,560,396       5,560,396       5,541,930
Retained earnings                                                               4,938,993       4,490,020       4,844,981
Net unrealized gains (losses) on available
   for sale securities, net of tax effect                                        (150,078)       (123,330)        (80,067)
                                                                             ------------    ------------    ------------
    Total stockholders' equity                                                  9,115,162       8,708,071       8,760,835
                                                                             ------------    ------------    ------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                   $ 10,574,810    $ 10,471,113    $ 11,144,227
                                                                             ============    ============    ============
</TABLE>
                                       74

<PAGE>
              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
          ----------------------------------------------

                              STATEMENTS OF INCOME
                              --------------------
<TABLE>
<CAPTION>

                                                                                   2000          1999            1998
                                                                                   ----          ----            ----
<S>                                                                          <C>             <C>              <C>
INCOME (EXPENSE)
    Investment income                                                        $          13   $        375     $    12,101
    Gain (loss) on sale of investment securities                                        --         18,338         112,544
    Equity in undistributed net income (loss) of subsidiaries                      619,350        (55,767)        766,586
    Other income                                                                   105,533         51,612              --
    Interest expense                                                              (139,561)      (144,065)        (81,082)
    Compensation                                                                  (127,523)      (220,194)        (52,000)
    Miscellaneous expenses                                                          (8,839)        (5,260)         (6,787)
                                                                             -------------   ------------    ------------
        Net income (loss)                                                    $     448,973   $   (354,961)   $    751,362
                                                                             =============   ============    ============

                            STATEMENTS OF CASH FLOWS
                            ------------------------

CASH FLOWS FROM OPERATING ACTIVITIES
    Net income (loss)                                                        $     448,973   $   (354,961)   $    751,362
    Reconciliation of net income to net cash provided by
      operating activities:
        Equity in undistributed net income of subsidiary                          (619,350)        55,767        (751,290)
        Gain (loss) on sale of investment securities                                    --        (18,338)       (112,544)
        (Increase) decrease in deferred tax                                         11,725        (50,245)             --
        Increase (decrease) in accounts payable and accrued
         expenses                                                                 (119,970)      (564,909)        723,375
                                                                             -------------   ------------    ------------
           Net cash provided by (used in) operating activities                    (278,622)      (932,686)        610,903
                                                                             -------------   ------------    ------------

CASH FLOWS FROM INVESTING ACTIVITIES
    Purchase of investments                                                             --             --      (3,651,797)
    Sales of investment securities                                                      --        126,678       3,644,154
                                                                             -------------   ------------    ------------
           Net cash provided by (used in) investing activities                          --        126,678          (7,643)
                                                                             -------------   ------------    ------------

CASH FLOWS FROM FINANCING ACTIVITIES
    Dividends received from subsidiary                                             473,000        125,000         400,000
    Proceeds from borrowings                                                            --             --       1,000,000
    Payments on borrowings                                                        (183,424)       (53,824)        (54,576)
    Purchase of stock for ESOP plan                                                     --             --         (66,905)
    Proceeds from sale of treasury stock                                                --        170,801              --
</TABLE>

                                       75
<PAGE>


              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 22 - PARENT COMPANY FINANCIAL STATEMENTS (CONTINUED)
          ----------------------------------------------
<TABLE>
<CAPTION>

                                                                   2000          1999          1998
                                                                   ----          ----          ----
    <S>                                                            <C>           <C>
    ESOP shares earned, net of tax                                 75,022        174,659             --
    Purchase of shares for stock option plan                           --             --       (240,918)
    Purchase of treasury stock                                         --             --       (258,551)
    Purchase of shares for MRP plan                               (90,156)            --             --
    Additional investment in subsidiary                                --             --     (1,000,000)
                                                              -----------    -----------    -----------
        Net cash provided by (used in) financing activities       274,442        416,636       (220,950)
                                                              -----------    -----------    -----------

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                                      (4,180)      (389,372)       382,310

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                        4,600        393,972         11,662
                                                              -----------    -----------    -----------

CASH AND CASH EQUIVALENTS, END OF YEAR                        $       420    $     4,600    $   393,972
                                                              ===========    ===========    ===========

</TABLE>
NOTE 23 - EMPLOYEE BENEFIT PLANS
          ----------------------

    On July 1,  1995,  a 401(K)  plan was  adopted  covering  substantially  all
employees.   Each  employee  of  the  Bank  automatically  becomes  eligible  to
participate  in the plan on the July 1  immediately  following the date on which
such employee attains the age of 18 and completes one year of service.

    Employees'  before-tax  contributions  are  limited  based  on  restrictions
established by the Internal  Revenue  Service.  In each plan year, the Bank will
make matching  contributions to each account equal to twenty-five percent of the
employees' elective  contributions.  Employees are one hundred percent vested at
all  times  in  their  contributions  and  regular  matching  contributions.  In
addition,  the  401(K)  arrangement  plan  permits  the  Bank  to  contribute  a
discretionary  amount to all of the  participants  for any plan year,  and those
contributions  will  be  allocated  among  the  participants  based  upon  their
respective  shares of the total  compensation  paid  during the plan year to all
participants  eligible.  The Bank's  contributions  for the years ended June 30,
2000, 1999 and 1998 were $12,542, $12,921 and $13,987, respectively.

NOTE 24 - LOAN SERVICING
          --------------

    The Bank sold $2,783,000 of loans and retained servicing rights ranging from
 .125% to .25%.  There was no servicing asset or liability  recorded  because the
Bank  estimated  that the benefits of servicing  are just adequate to compensate
for its servicing responsibilities. Servicing income for June 30, 2000, 1999 and
1998 was $5,817, $13,000, and $4,289, respectively.

                                       76
<PAGE>





              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS
          -----------------------------------

    Generally,  the  Company's  practice  and  intent  is to hold its  financial
instruments to maturity,  unless otherwise designated.  Where available,  quoted
market prices are used to determine fair value.  However,  many of the Company's
financial  instruments  lack  quoted  market  prices.  Although  the Company has
incorporated  what it considers to be appropriate  estimation  methodologies for
those  financial  instruments  which lack quoted  market  prices,  a significant
number of assumptions  must be used in  determining  such estimated fair values.
Such assumptions  include  subjective  assessments of current market conditions,
perceived risks  associated with these financial  instruments and other factors.
Different  assumptions  might  be  considered  by  the  user  of  the  financial
statements to be more  appropriate,  and the use of  alternative  assumptions or
estimation  methodologies  could  have a  significant  effect  on the  resulting
estimated fair values.  The estimated fair value presented  neither includes nor
gives effect to the values  associated  with the  Company's  business,  existing
customer relationships, and branch banking network, among other things.

    The following  estimates of the fair value of certain financial  instruments
held  by  the  Company  includes  only  instruments  that  could  reasonably  be
evaluated. The investment securities portfolio was evaluated using market quotes
as of June 30, 2000.  The fair value of the loan  portfolio was evaluated  using
market quotes for similar  financial  instruments,  where available.  Otherwise,
discounted cash flows, after adjusting for credit deterioration, were used based
upon  current  rates the Company  would use in  extending  credit  with  similar
characteristics.  These  rates may not  necessarily  be the same as those  which
might be used by other financial  institutions for similar loans.  Cash and cash
equivalents are valued at cost. The fair values disclosed for checking accounts,
savings accounts, and certain money market accounts are, by definition, equal to
the  amount  payable  on demand at the  reporting  date,  i.e.,  their  carrying
amounts.  Fair values for time  deposits are estimated  using a discounted  cash
flow  calculation  that applies  current  interest rates to aggregated  expected
maturities.  Standby  letters of credit and  commitments  to extend  credit were
valued at book value as the majority of these  instruments are based on variable
rates.

    These  evaluations  may  incorporate   specific  value  to  the  Company  in
accordance with its  asset/liability  strategies,  interest rate projections and
business  plans  at  a  specific  point  in  time,  and  therefore,  should  not
necessarily  be viewed as  liquidation  value.  They  should also not be used in
determining  overall  value of the Company  due to  undisclosed  and  intangible
aspects such as business and franchise  value, and due to changes to assumptions
of interest rates and expected cash flows which might need to be made to reflect
expectations of returns to be earned on instruments with higher credit risks.

                                       77
<PAGE>

              CUMBERLAND MOUNTAIN BANCSHARES, INC. AND SUBSIDIARIES
                              Middlesboro, Kentucky

                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2000


NOTE 25 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
          ----------------------------------------------

    The table  below  illustrates  the  estimated  fair  value of the  Company's
financial  instruments as of June 30, using the assumptions  described above (in
thousands):
<TABLE>
<CAPTION>

                                                                      2000        1999
                                                                      ----        ----
        <S>                                                         <C>        <C>
        Cash and cash equivalents                                   $  1,581   $  1,317
                                                                    ========   ========
        Investment securities                                       $  6,413   $  7,076
                                                                    ========   ========
        Loans                                                       $ 93,697   $101,483
                                                                    ========   ========
        Deposits                                                    $104,699   $106,423
                                                                    ========   ========
        Advances from FHLB                                          $ 10,500   $ 12,000
                                                                    ========   ========
        Notes payable                                               $  1,484   $  1,674
                                                                    ========   ========
        Standby letters of credit                                   $     90   $    191
                                                                    ========   ========
        Commitments to extend credit and unfunded lines of credit   $  2,041   $  2,280
                                                                    ========   ========
</TABLE>

NOTE 26 - RECLASSIFICATIONS
          -----------------

    There have been some  reclassifications  of amounts within the stockholders'
equity for the year ended June 30, 1999 to properly reflect stock option shares,
treasury shares and unearned ESOP shares.


                                       78

<PAGE>
ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
--------------------------------------------------------------------------------
         FINANCIAL DISCLOSURE
         --------------------

         Not applicable.

                                    PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
--------------------------------------------------------------------------------
        WITH SECTION 16(a) OF THE EXCHANGE ACT
        --------------------------------------

         For  information  concerning  the  Board  of  Directors  and  executive
officers of the Company,  the information  contained under the section captioned
"Proposal  I --  Election  of  Directors"  in  the  Company's  definitive  proxy
statement  for the Company's  2000 Annual  Meeting of  Stockholders  (the "Proxy
Statement") is incorporated herein by reference.

         Information  required by Item 405 of Regulation S-B is  incorporated by
reference  from  the  section  captioned  "Section  16(a)  Beneficial  Ownership
Reporting Compliance" in the Proxy Statement.

ITEM 10.  EXECUTIVE COMPENSATION
--------------------------------

         The  information  contained  under  the  section  captioned  "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
         (A)      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

                  The information  required by this item is incorporated  herein
                  by reference to the section captioned  "Voting  Securities and
                  Principal Holders Thereof" in the Proxy Statement.

         (B)      SECURITY OWNERSHIP OF MANAGEMENT

                  The information  required by this item is incorporated  herein
                  by reference to the section captioned  "Proposal I -- Election
                  of Directors" in the Proxy Statement.

         (C)      CHANGES IN CONTROL

                  Management of the Company knows of no arrangements,  including
                  any  pledge by any  person  of  securities  of the  Bank,  the
                  operation of which may at a subsequent date result in a change
                  in control of the registrant.

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference to the section captioned  "Transactions  with Management" in the Proxy
Statement.

ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K
-----------------------------------------------

         (a)      List of Documents Filed as Part of This Report
                  ----------------------------------------------

                  (1)    Consolidated   Financial   Statements.   The  following
                         financial   statements  of  the registrant are included
                         herein under Item 7.


                                       79
<PAGE>

               (1)  Independent Auditor's Report

                    (a)  Consolidated  Statements  of Financial  Condition as of
                         June  30,   2000,   1999  and  1998  (b)   Consolidated
                         Statements of Income for the Years Ended June 30, 2000,
                         1999   and   1998  (c)   Consolidated   Statements   of
                         Stockholders' Equity for the Years Ended June 30, 2000,
                         1999 and 1998 (d) Consolidated Statements of Cash Flows
                         for the Years  Ended June 30,  2000,  1999 and 1998 (e)
                         Notes to Consolidated Financial Statements

               (2)  Financial Statement Schedules. None
                    -----------------------------

               (3)  Exhibits. The following exhibits are either filed as part of
                    --------
                    this Annual Report on Form 10-KSB or incorporated  herein by
                    reference:

               Exhibit No.

               3.1  Charter of Cumberland Mountain Bancshares, Inc. *

               3.2  Bylaws of Cumberland Mountain Bancshares, Inc. *

               10.1 Employment   Agreement  between  Middlesboro  Federal  Bank,
                    Federal Savings Bank and James J. Shoffner and amendment * +

               10.2 Middlesboro Federal Bank, FSB 1993 Stock Option Plan * +

               10.3 Middlesboro  Federal Bank, FSB 1993  Management  Recognition
                    and Retention Plan (As Amended and Restated) *+

               10.4 Middlesboro  Federal Bank,  Federal  Savings Bank Retirement
                    Plan for Non-Employee Directors * +

               10.5 Middlesboro Federal Bank, FSB Incentive Compensation Plan *+

               10.6 Form of indemnification agreements with directors *

               10.7 Cumberland Mountain  Bancshares,  Inc. 1998 Stock Option and
                    Incentive Plan +

               10.8 Cumberland Mountain Bancshares,  Inc. Management Recognition
                    Plan +

               21   Subsidiaries of Registrant

               23   Consent of Marr, Miller & Myers, PSC

               27   Financial Data Schedule (EDGAR Only)

___________
*    Incorporated  by reference from  Registration  Statement on Form SB-2 filed
     February 5, 1997 (File No. 333-18665)
+    Management  contract or  compensatory  plan or  arrangement  required to be
     filed as an exhibit to this Form.

          (b)  Reports  on Form 8-K.  No  current  reports on Form 8-K have been
               --------------------
               filed  during the last quarter of the fiscal year covered by this
               report.


                                       80
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) 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.

                                     CUMBERLAND MOUNTAIN BANCSHARES, INC.


Date:  September 27, 2000            By: /s/ James J. Shoffner
                                         ---------------------------------
                                         James J. Shoffner
                                         President and Chief Executive Officer
                                         (Duly Authorized Officer)

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.


By: /s/ J. Roy Shoffner                      By:
    ---------------------------------            ------------------------------
    J. Roy Shoffner                              Reecie Stagnolia, Jr.
    Chairman of the Board                        Director

Date:  September 27, 2000                        Date:  September 27, 2000


By: /s/ James J. Shoffner                    By: /s/ Raymond C. Walker
    ---------------------------------            ------------------------------
    James J. Shoffner                            Raymond C. Walker
    President and Director                       Director
   (Chief Executive Officer)

Date:  September 27, 2000                        Date:  September 27, 2000


By: /s/ J. D. Howard                         By:
    ---------------------------------            ------------------------------
    J. D. Howard                                 Barry Litton
    Vice President                               Director
    (Chief Financial and Accounting
    Officer)

Date:  September 27, 2000                        Date:  September 27, 2000