Exhibit 13

Corporate Profile

      SFB Bancorp, Inc. (the "Company") is a Tennessee corporation organized in
March 1997 at the direction of Security Federal Bank (the "Bank") to acquire all
of the capital stock that the Bank issued in its conversion from the mutual to
stock form of ownership (the "Conversion"). On May 29, 1997, the Bank completed
the Conversion and became a wholly owned subsidiary of the Company. The Company
is a unitary savings and loan holding company, which, under existing laws,
generally is not restricted in the types of business activities in which it may
engage provided that the Bank retains a specified amount of its assets in
housing-related investments. The Company conducts no significant business or
operations of its own other than holding all of the outstanding stock of the
Bank and investing the Company's portion of the net proceeds obtained in the
Conversion.

      The Bank, chartered in 1963 under the name Security Federal Savings and
Loan Association, is a federally chartered stock savings bank headquartered in
Elizabethton, Tennessee. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift Supervision ("OTS") and its deposits are
federally insured by the Savings Association Insurance Fund ("SAIF") of the
Federal Deposit Insurance Corporation (the "FDIC"). The Bank is a member of and
owns capital stock in the FHLB of Cincinnati, which is one of the 12 regional
banks in the FHLB System. The Bank operates a traditional savings bank business,
attracting deposit accounts from the general public and using those deposits,
together with other funds, primarily to originate and invest in loans secured by
single-family residential real estate primarily in Carter County, Tennessee and
the adjacent Tennessee counties of Johnson, Unicoi, Washington and Sullivan.

Stock Market Information

      The table below reflects the stock trading and dividend payment frequency
of the Company for each quarter completed in the period January 1, 2001 through
December 31, 2002. Since its issuance on May 29, 1997, the Company's common
stock has been traded on the OTC Bulletin Board under the trading symbol "SFBK".
The quotations reflect inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.

                                                                      Dividend
            Date                             High         Low         Declared
----------------------------------         --------     --------      --------
January 1, 2001 - March 31, 2001            $12.56       $11.75         $  --
April 1, 2001 - June 30, 2001                12.50        12.13           .10
July 1, 2001 - September 30, 2001            13.25        12.35            --
October 1, 2001 - December 31, 2001          12.70        12.40           .35

January 1, 2002 - March 31, 2002             14.40        12.45            --
April 1, 2002 - June 30, 2002                17.00        14.85           .10
July 1, 2002 - September 30, 2002            16.00        16.00            --
October 1, 2002 - December 31, 2002          16.32        15.67           .10

      The number of shareholders of record as of March 28, 2003, was
approximately 136. This does not reflect the number of persons or entities who
held stock in "street" name through various brokerage firms. At March 28, 2003,
there were 570,522 shares outstanding.

<PAGE>

      The Company's ability to pay dividends to stockholders is subject to the
requirements of Tennessee law, which generally limits the payment of dividends
to amounts that will not affect the ability of the Company to pay its debts as
they become due in the normal course of business. Further, the Company's ability
to pay dividends is also dependent upon the dividends it receives from the Bank.
Generally, the Bank may not declare or pay a cash dividend if the effect thereof
would cause the Bank's regulatory capital to be reduced below (1) the amount
required for the liquidation account established in connection with the
Conversion, or (2) the regulatory capital requirements imposed by the OTS.

<PAGE>

                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

The Private Securities Litigation Reform Act of 1995 contains safe harbor
provisions regarding forward-looking statements. When used in this discussion,
the words "believes", "anticipates", "contemplates", "expects", and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Those risks and uncertainties include
changes in interest rates, risk associated with the effect of opening a new
branch, the ability to control costs and expenses, and general economic
conditions.

The following discussion and analysis is intended to assist in understanding the
financial condition and the results of operations of the Company. References to
the "Company" include SFB Bancorp, Inc. and/or the Bank as appropriate.

Asset/Liability Management

The Bank's net interest income is sensitive to changes in interest rates; as the
rates paid on interest-bearing liabilities generally change faster than the
rates earned on interest-earning assets. As a result, net interest income will
frequently decline in periods of rising interest rates and increase in periods
of decreasing interest rates.

The Board of Directors reviews the Bank's asset/liability policy and meets
quarterly to review interest rate risk and trends, as well as liquidity and
capital ratios requirements. Rates on deposits are primarily based on the Bank's
need for funds and a review of rates offered by other financial institutions in
the Bank's market area. Interest rates on loans are primarily based on the
interest rates offered by other financial institutions in the Bank's primary
market area as well as the Bank's cost of funds. The Bank's principal strategy
is to manage the interest rate sensitivity of interest-earning assets and to
attempt to match the maturities of interest-earning assets with interest-bearing
liabilities, while allowing for a mismatch in an effort to increase net interest
income.

Because of the lack of customer demand for adjustable rate loans in the Bank's
market area, the Bank primarily originates fixed-rate real estate loans, which
approximated 99% of the loan portfolio at December 31, 2002. To manage the
interest rate risk of this type of loan portfolio, the Bank generally limits
maturities of fixed-rate loans to no more than 15 years and maintains a
portfolio of liquid assets. Maintaining liquid assets tends to reduce potential
net income because liquid assets usually provide a lower yield than less liquid
assets. At December 31, 2002, the estimated average weighted term to maturity of
the Bank's mortgage loan portfolio was slightly more than 10 years and the
estimated average weighted term of the Bank's deposits was slightly over 7
months.

<PAGE>

Net Portfolio Value

The Bank computes amounts by which the net present value of cash flow from
assets, liabilities and off balance sheet items ("net portfolio value" or "NPV")
would change in the event of a range of assumed changes in market interest
rates. These computations estimate the effect on the Bank's NPV from an
instantaneous and permanent 1% to 3% (100 to 300 basis points) increases and
decreases in market interest rates. Based upon OTS assumptions, the following
table presents the Bank's NPV at December 31, 2002.

       Changes                  NPV
       in Rates             Ratio % (1)         Change (2)
       --------             -----------         ----------
       +300 bp                  21.75             -324 bp
       +200 bp                  23.19             -181 bp
       +100 bp                  24.38             - 61 bp
          0 bp                  25.00                0 bp
       -100 bp                  25.37             + 37 bp
       -200 bp                     -- (3)              -- (3)
       -300 bp                     -- (3)              -- (3)

(1)   Calculated as the estimated NPV divided by present value of total assets.

(2)   Calculated as the excess (deficiency) of the NPV ratio assuming the
      indicated change in interest rates over the estimated NPV ratio assuming
      no change in interest rates.

(3)   When the interest rate used to compute a rate shock NPV ratio(s) (e.g.,
      the 3-month Treasury bill) is below the applicable rate category the NPV
      ratio at the applicable scenario is omitted. The NPV ratios percentage is
      not informational.

Computations of prospective effects of hypothetical interest rate changes are
based on numerous assumptions, including relative levels of market interest
rates, prepayments and deposit run-offs and should not be relied upon as
indicative of actual results. Certain shortcomings are inherent in such
computations. Although certain assets and liabilities may have similar maturity
or periods of repricing, they may react at different times and in different
degrees to changes in the market interest rates. The interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while rates on other types of assets and liabilities may lag
behind changes in market interest rates. Certain assets, such as adjustable rate
mortgages, generally have features, which restrict changes in interest rates on
a short-term basis and over the life of the asset. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making calculations set forth above.
Additionally, an increased credit risk may result as the ability of many
borrowers to service their debt may decrease in the event of an interest rate
increase.

<PAGE>

Average Balance Sheet

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. Dividing income or expense by the
average balance of assets or liabilities, respectively, derives such yields and
costs for the periods presented. Average balances are derived from month-end
balances. Management does not believe that the use of month-end balances instead
of daily average balances has caused any material differences in the information
presented.

<TABLE>
<CAPTION>
                                                                  For the Years Ended December 31,
                                              ----------------------------------------------------------------------
                                                            2001                                 2002
                                              ----------------------------------------------------------------------
                                                                       Average                              Average
                                               Average                 Yield/       Average                 Yield/
                                               Balance    Interest      Cost        Balance    Interest      Cost
Interest-earning assets:                                             (Dollars in Thousands)
<S>                                           <C>         <C>           <C>        <C>         <C>            <C>
  Loans receivable (1) ....................   $  46,343   $   3,812        8.23%   $  44,284   $   3,478        7.86%
  Investment securities ...................       1,215          65        5.35        2,821         116        4.08
  Interest-earning deposits ...............       4,964         141        2.84        4,692          63        1.34
  Federal Home Loan Bank stock ............         541          36        6.65          571          26        4.55
  Mortgage-backed securities ..............       1,744          93        5.33        2,801         131        4.68
                                              ---------   ---------                ---------   ---------
Total interest-earning assets .............      54,807       4,147        7.57       55,169       3,814        6.91
                                                          ---------                            ---------
Non-interest-earning assets ...............       2,028                                1,824
                                              ---------                            ---------
Total assets ..............................   $  56,835                            $  56,993
                                              =========                            =========
Interest-bearing liabilities:
  Interest-bearing demand deposits ........   $  10,103         206        2.04    $  11,057         125        1.13
  Certificates of deposit .................      34,416       1,954        5.68       33,015       1,222        3.70
  Short-term borrowings ...................          --          --          --           --          --          --
                                              ---------   ---------                ---------   ---------
Total interest-bearing liabilities ........      44,519       2,160        4.85       44,072       1,347        3.06
                                                          ---------                            ---------
Non-interest-bearing liabilities ..........       1,084                                1,275
                                              ---------                            ---------
Total liabilities .........................      45,603                               45,347
                                              ---------                            ---------

Total stockholders' equity ................      11,232                               11,646
                                              ---------                            ---------
Total liabilities and stockholders' equity    $  56,835                            $  56,993
                                              =========                            =========
Net interest income .......................               $   1,987                           $   2,467
                                                          =========                           =========
Interest rate spread (2) ..................                                2.72%                                3.85%
                                                                      =========                            =========

Net yield on interest-earning assets (3) ..                                3.62%                                4.47%
                                                                      =========                            =========
Ratio of average interest-earning assets to
  average interest-bearing liabilities ....                              123.11%                              125.18%
                                                                      =========                            =========
</TABLE>

---------
(1)   Average balances include non-accrual loans.

(2)   Interest rate spread represents the difference between the average yield
      on interest-earning assets and the average cost of interest-bearing
      liabilities.

(3)   Net yield on interest-earning assets represents net interest income as a
      percentage of average interest-earning assets.

<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 assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in average volume multiplied by old rate); (ii) changes in rates
(changes in rate multiplied by old average volume); (iii) changes in rate-volume
(changes in rate multiplied by the change in average volume).

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                    ------------------------------------------------------------------------------------
                                            2001    vs.     2000                     2002    vs.     2001
                                    ------------------------------------------------------------------------------------
                                              Increase (Decrease)                      Increase (Decrease)
                                                   Due to                                     Due to
                                    ----------------------------- ------------------------------------------------------
                                                          Rate/                                       Rate/
                                    Volume      Rate      Volume       Net      Volume      Rate      Volume       Net
                                    -------    -------    -------    -------    -------    -------    -------    -------
                                                                 (Dollars in Thousands)
<S>                                 <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Interest income:
 Loans receivable ...............   $    67    $    56    $     1    $   124    $  (169)   $  (171)   $     6    $  (334)
 Mortgage-backed securities .....        (5)       (12)        --        (17)        56        (11)        (7)        38
 Investment securities ..........       (95)        --         (1)       (96)        86        (16)       (29)        41
 Other interest-earning assets ..       284        (32)      (140)       112         (8)       (84)        14        (78)
                                    -------    -------    -------    -------    -------    -------    -------    -------
  Total interest income .........   $   251    $    12    $  (140)   $   123    $   (35)   $  (282)   $   (16)   $  (333)
                                    =======    =======    =======    =======    =======    =======    =======    =======

Interest expense:
 Savings accounts ...............   $   179    $   (49)   $    (4)   $   126    $   (22)   $  (799)   $     8    $  (813)
 Other liabilities ..............        29        (29)       (29)       (29)        --         --         --         --
                                    -------    -------    -------    -------    -------    -------    -------    -------
   Total interest expense .......   $   208    $   (78)   $   (33)   $    97    $   (22)   $  (799)   $     8    $  (813)
                                    =======    =======    =======    =======    =======    =======    =======    =======

Net change in net-interest income   $    43    $    90    $  (107)   $    26    $   (13)   $   517    $   (24)   $   480
                                    =======    =======    =======    =======    =======    =======    =======    =======
</TABLE>

Comparison of Financial Condition

Given the current rate environment, the Company has been attempting to increase
its yield on interest-earning assets by moving funds from cash and overnight
accounts to investments and mortgage-backed securities. Total net investment and
mortgage-backed securities increased by approximately $1.5 million, or 33.9% to
$5.9 million at December 31, 2002. Interest-earning deposits decreased
approximately $1.9 million, or 30.6% to $4.3 million at December 31, 2002.

Comparison of the Results of Operations for the Years Ended December 31, 2001
and 2002

Net Income. Net income increased $229,000, or 46.8%, from $489,000 in 2001, to
$718,000 in 2002. The increase for 2002, compared to 2001, was primarily the
result of an increase in the net interest margin of $480,000, offset by an
increase of $187,000 in income tax expense. Diluted income per share increased
$.42, from $.89 in 2001, to $1.31 for 2002.

<PAGE>

Net Interest Income. Net interest income is the most significant component of
the Company's income from operations. Net interest income is the difference
between interest received on interest-earning assets (primarily loans and
investment securities) and interest paid on interest-bearing liabilities
(primarily deposits and borrowed funds). Net interest income depends on the
volume and rate earned on interest-earning assets and the volume and interest
rate paid on interest-bearing liabilities.

The $480,000 increase in net interest income for 2002, as compared to 2001,
primarily reflects an increase in average interest-earning assets over average
interest-bearing liabilities of approximately $809,000, and a 113 basis point
increase in the interest rate spread. The interest rate spread for 2002
increased to 3.85%, from 2.72% in 2001. The net interest margin increased 85
basis points to 4.47% for 2002, from 3.62% for 2001.

Interest Income. Interest income decreased $333,000, or 8.0%, from approximately
$4.0 million for 2001, to approximately $3.8 million for 2002. The overall
decrease in interest income was primarily the result of an a decrease in the
average yield on interest-earning assets of 66 basis points, from 7.57% for
2001, to 6.91% for 2002, offset by an increase in average interest-earning
assets of approximately $362,000 for 2002, as compared to 2001.

Interest on loans decreased $334,000 for 2002, as compared to 2001. The decrease
primarily reflects an approximate $2.1 million decrease in average loans
outstanding, combined with an decrease in the average yield on average loans
outstanding of 37 basis points, from 8.23% for 2001, to 7.86% for 2002. Loans
receivable are the largest interest-earning asset held in the Company's
portfolio.

Interest on investment securities increased $51,000 for 2002, as compared to
2001. The increase in interest on investments primarily reflects an increase of
approximately $1.6 million in the average investment balance for 2002, compared
to 2001. The average yield on investments decreased 127 basis points to 4.08%
for 2002, compared to 2001.

Interest on interest-earning deposits decreased $78,000 for 2002, as compared
2001. The decrease in interest on interest-earning deposits primarily reflects a
decrease of approximately $272,000 in the average balance of interest-earning
deposits in 2002, compared to 2001. The average yield on interest-earning
deposits decreased 150 basis points to 1.34% for 2002, compared to 2001.

Interest on mortgage-backed securities increased $38,000 for 2002, compared to
2001. The increase in the interest on mortgage-backed securities was primarily
the result of an increase in the average invested balance of mortgage-backed
securities of approximately $1.1 million for 2002, compared to 2001, offset by a
65 basis point decrease on the average yield to 4.68% for 2002, from 5.33% for
2001.

Interest Expense. Interest expense decreased approximately $813,000, from $2.2
million for the year ended December 31, 2001, to approximately $1.3 million for
the year ended December 31,

<PAGE>

2002. The decrease for 2002, as compared to 2001, was primarily the result of an
approximate $447,000 decrease in the average balance of interest-bearing
liabilities and a 179 basis point decrease in the average cost of funds.

Since the interest rate environment stabilized in the last half of 2001, the
Company has been able to re-price customer deposits at lower cost of funds.
However, the Company's liabilities are more sensitive to short-term re-pricing
than its assets. Accordingly, if the rate environment were to increase our
interest expense could rise which would potentially result in lower margins.

Provision for Loan Losses. Historically, management has emphasized loss
experience over other factors in establishing the provision for loan losses.
Management reviews the allowance for loan losses in relation to (i) past loan
loss experience, (ii) known and inherent risks in the portfolio, (iii) adverse
situations that may affect the borrower's ability to repay, (iv) the estimated
value of any underlying collateral, and (v) current economic conditions. There
can be no assurances, however, that future losses will not exceed estimated
amounts or that additional provisions for loan losses will not be required in
future periods. At December 31, 2002, the allowance for loan losses was at a
level deemed adequate by management to provide for losses in the portfolio.

Non-Interest Income. Non-interest income continues to be an additional source of
income for the Company. Certain fees on new loan production and service fees on
other products and services produce the income. Total non-interest income
amounted to $202,000 and $215,000 for 2002 and 2001, respectively.

Non-Interest Expense. Non-interest expense increased $51,000, to approximately
$1.4 million at December 31, 2002. The increase was primarily the result of a
$33,000 increase in compensation expense and a $24,000 increase in employee
benefit expense. The increase in compensation expense for 2002, as compared to
2001, was primarily associated with normal compensation increases. The increase
in employee benefit expense for the 2002, compared to 2001, was primarily due to
expensing the monthly allocation of the Employee Stock Ownership Plan shares at
a higher average fair value in 2002, as compared to 2001.

Income Taxes. Income tax expense increased $187,000, or 61.7%, to $490,000 for
the year ended December 31, 2002, from $313,000 for the year ended December 31,
2001. The increase in income tax expense for 2002, compared 2001, was primarily
due to higher pretax income. The effective tax rate for 2002 was approximately
40.6%, and 38.3% in 2001.

<PAGE>

Liquidity and Capital Resources

The primary sources of funds are deposits, repayments of loans and
mortgage-backed securities, maturities of investments and interest-bearing
deposits, funds provided from operations and advances from the FHLB of
Cincinnati. While scheduled repayments of loans and mortgage-backed securities
and maturities of investment securities are predictable sources of funds,
deposit flows and loan prepayments are greatly influenced by the general level
of interest rates, economic conditions and competition. The Bank uses its
sources of funds to fund existing and future loan commitments, to fund maturing
certificates of deposit and demand deposit withdrawals, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating expenses.

Net cash provided by operating activities for the year ended December 31, 2002
totaled approximately $1.1 million, as compared to $810,000 for the year ended
December 31, 2001. The increase in net cash provided by operating activities for
2002, as compared to 2001, was primarily the result of efficient bank
operations.

Net cash used by investing activities for the year ended December 31, 2002
totaled approximately $973,000. This was primarily attributable to purchases of
investments securities available for sale, offset by net loan repayments and
maturities of securities.

Net cash used by financing activities for 2002 totaled approximately $2.0
million. This was primarily the result of a decrease in deposits in 2002 of $1.7
million, purchase of treasury stock of $96,0000 and $111,000 in cash dividends
paid.

Liquidity may be adversely affected by unexpected deposit outflows, excessive
interest rates paid by competitors, adverse publicity relating to the savings
and loan industry and similar matters. Management monitors projected liquidity
needs and determines the level desirable, based in part on the Bank's
commitments to make loans and management's assessment of the Bank's ability to
generate funds.

At December 31, 2002, management had no knowledge of any trends, events or
uncertainties that will have or are reasonably likely to have material effects
on the liquidity, capital resources or operations of the Company. Further at
December 31, 2002, management was not aware of any current recommendations by
the regulatory authorities that, if implemented, would have such an effect.

<PAGE>

                       [CRISP HUGHES EVANS LLP LETTERHEAD]

                          Independent Auditors' Report

To the Board of Directors
SFB Bancorp, Inc. and Subsidiary

We have audited the accompanying consolidated balance sheets of SFB Bancorp,
Inc. and Subsidiary (the "Company") as of December 31, 2001 and 2002, and the
related consolidated statements of income, comprehensive income, 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 audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 2001 and 2002, and the results of their operations and their cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.

Asheville, North Carolina
January 24, 2003

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                         -----------------------
             Assets                                                        2001           2002
             ------                                                        ----           ----
<S>                                                                      <C>            <C>
Cash on hand                                                             $    579       $    654
Interest earning deposits                                                   6,207          4,309
                                                                         --------       --------
           Cash and cash equivalents                                        6,786          4,963

Investment securities:
   Held to maturity (market value of $672 in 2001 and $612 in 2002)           718            592
   Available for sale                                                         789          2,954
Loans receivable, net                                                      44,384         43,880
Mortgage-backed securities:
   Available for sale                                                       2,932          2,396
Premises and equipment, net                                                   898            850
Federal Home Loan Bank stock, at cost                                         560            586
Accrued interest receivable                                                   262            266
Other assets                                                                  128            125
                                                                         --------       --------

          Total assets                                                   $ 57,457       $ 56,612
                                                                         ========       ========

   Liabilities and Stockholders' Equity

Deposits:
   Non-interest-bearing                                                  $  1,388       $  1,341
   Interest-bearing                                                        43,962         42,271
                                                                         --------       --------
          Total deposits                                                   45,350         43,612

Advance payments by borrowers for taxes and insurance                         198            184
Accrued expenses and other liabilities                                         99             73
Income taxes:
   Current                                                                     53            203
   Deferred                                                                   150            216
                                                                         --------       --------
          Total liabilities                                                45,850         44,288
                                                                         --------       --------

Stockholders' equity:
   Common stock ($.10 par value, 4,000,000 shares authorized;
     767,000 shares issued; 582,995 and 578,247 outstanding at
     December 31, 2001 and 2002, respectively)                                 58             58
   Paid-in capital                                                          5,112          5,074
   Retained income, substantially restricted                                6,781          7,388
   Treasury stock at cost (1,300 shares at December 31, 2002)                  --            (21)
   Accumulated other comprehensive income                                     (20)            32
   Unearned compensation:
     Employee stock ownership plan                                           (278)          (207)
     Restricted stock plan                                                    (46)            --
                                                                         --------       --------
          Total stockholders' equity                                       11,607         12,324
                                                                         --------       --------

          Total liabilities and stockholders' equity                     $ 57,457       $ 56,612
                                                                         ========       ========
</TABLE>

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

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                        Consolidated Statements of Income
                      (in thousands, except per share data)

                                                      Years Ended December 31,
                                                     -------------------------
                                                        2001            2002
                                                        ----            ----

Interest income:
   Loans                                              $  3,812        $  3,478
   Mortgage-backed securities                               93             131
   Investments                                             101             142
   Interest earning deposits                               141              63
                                                      --------        --------
           Total interest income                         4,147           3,814
                                                      --------        --------

Interest expense:
   Deposits                                              2,159           1,347
   Federal Home Loan Bank advances                           1              --
                                                      --------        --------
           Total interest expense                        2,160           1,347
                                                      --------        --------

           Net interest income                           1,987           2,467

Provision for loan losses                                   36              36
                                                      --------        --------

           Net interest income after provision
             for loan losses                             1,951           2,431
                                                      --------        --------

Non-interest income:
   Loan fees and service charges                           208             196
   Other                                                     7               6
                                                      --------        --------
           Total non-interest income                       215             202
                                                      --------        --------

Non-interest expenses:
   Compensation                                            683             716
   Employee benefits                                       131             155
   Net occupancy expense                                   135             132
   Deposit insurance premiums                                8               8
   Data processing                                         129             128
   Other                                                   288             286
                                                      --------        --------
           Total non-interest expenses                   1,374           1,425
                                                      --------        --------

           Income before income taxes                      792           1,208

Income tax expense                                         303             490
                                                      --------        --------

           Net income                                 $    489        $    718
                                                      ========        ========

Earnings per share:
   Basic                                              $    .89        $   1.31
   Diluted                                                 .89            1.31
                                                      ========        ========

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

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                 Consolidated Statements of Comprehensive Income
                                 (in thousands)

                                                        Years Ended December 31,
                                                        ------------------------
                                                            2001            2002
                                                        --------        --------

Net income                                              $    489        $    718

Other comprehensive income:
   Net unrealized gains on securities available for
      sale, net of tax benefit of $24 and $35,
      Respectively                                            37              52
                                                        --------        --------

Comprehensive income                                    $    526        $    770
                                                        ========        ========

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

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                 Consolidated Statements of Stockholders' Equity
                        (in thousands, except share data)

<TABLE>
<CAPTION>
                                                                                         Accumu-
                                                                                          lated
                                                                                          Other          Unearned
                                                                                          Compre-       Compensation
                                               Common    Paid-In    Retained   Treasury   hensive    -------------------
                                               Stock     Capital     Income     Stock      Income    for ESOP   for RSP     Total
                                              --------   --------   --------   --------   --------   --------   --------   --------
<S>                                           <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
Balance at December 31, 2000                  $     77   $  7,392   $  6,539   $ (2,245)  $    (57)  $   (348)  $   (139)  $ 11,219

Net income                                          --         --        489         --         --         --         --        489

Other comprehensive income                          --         --         --         --         37         --         --         37

Cash dividends declared ($.45 per share)            --         --       (247)        --         --         --         --       (247)

Treasury stock purchased (5,600 shares)             --         --         --        (70)        --         --         --        (70)

Retirement of treasury stock (184,005
shares)                                            (19)    (2,296)        --      2,315         --         --         --         --

Compensation earned                                 --         16         --         --         --         70         93        179
                                              --------   --------   --------   --------   --------   --------   --------   --------

Balance at December 31, 2001                        58      5,112      6,781         --        (20)      (278)       (46)    11,607

Net income                                          --         --        718         --         --         --         --        718

Other comprehensive income                          --         --         --         --         52         --         --         52

Cash dividends declared ($.20 per share)            --         --       (111)        --         --         --         --       (111)

Treasury stock purchased (6,048 shares)             --         --         --        (96)        --         --         --        (96)

Retirement of treasury stock (4,748 shares)         --        (75)        --         75         --         --         --         --

Compensation earned                                 --         37         --         --         --         71         46        154
                                              --------   --------   --------   --------   --------   --------   --------   --------

Balance at December 31, 2002                  $     58   $  5,074   $  7,388   $    (21)  $     32   $   (207)  $     --   $ 12,324
                                              ========   ========   ========   ========   ========   ========   ========   ========
</TABLE>

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

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                      Consolidated Statements of Cash Flows
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                                   -------------------------
                                                                     2001             2002
                                                                     ----             ----
<S>                                                                <C>              <C>
Operating activities:
   Net income                                                      $    489         $    718
   Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation                                                       106              107
     Provision for loan losses                                           36               36
     Deferred income taxes (benefit)                                     (4)              32
     Net decrease in deferred loan fees                                 (17)              (7)
     Accretion of discounts on investment securities, net               (26)             (30)
     Amortization of premiums on mortgage-backed securities               5                4
     Amortization of unearned compensation                              179              154
     FHLB stock dividends                                               (36)             (26)
     Net changes in:
        Other assets                                                    (20)               2
        Accrued interest receivable                                      93               (4)
        Accrued expenses and other liabilities                          (30)             (27)
        Income taxes--current                                            35              150
                                                                   --------         --------
          Net cash provided by operating activities                     810            1,109
                                                                   --------         --------

Investing activities:
   Maturities of investment securities held to maturity                 177              153
   Maturities of investment securities available for sale             2,325              945
   Principal payments on mortgage-backed securities
     available for sale                                                 326            1,209
   Purchase of investment securities available for sale              (3,034)          (3,697)
   Purchase of other assets                                             (10)              --
   Net decrease in loans                                              2,411              475
   Purchase of premises and equipment                                   (97)             (58)
                                                                   --------         --------
          Net cash provided (used) by investing activities            2,098             (973)
                                                                   --------         --------
</TABLE>

                                                                     (continued)

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                Consolidated Statements of Cash Flows, Continued
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                          Years Ended December 31,
                                                                          -------------------------
                                                                            2001             2002
                                                                            ----             ----
<S>                                                                       <C>              <C>
Financing activities:
   Net increase (decrease) in deposits                                    $  3,098         $ (1,738)
   Increase (decrease) in advance payments by borrowers
     for taxes and insurance                                                   (24)             (14)
   Repayments of FHLB advances                                              (1,000)              --
   Treasury stock purchased                                                    (70)             (96)
   Dividends paid                                                             (247)            (111)
                                                                          --------         --------
          Net cash provided (used) by financing activities                   1,757           (1,959)
                                                                          --------         --------

          Increase (decrease) in cash and cash equivalents                   4,665           (1,823)

Cash and cash equivalents at beginning of year                               2,121            6,786
                                                                          --------         --------

Cash and cash equivalents at end of year                                  $  6,786         $  4,963
                                                                          ========         ========

Supplemental disclosures of cash flow information:
  Cash paid during the year for:
     Interest                                                             $  2,176         $  1,372
     Income taxes                                                              273              308
                                                                          ========         ========

Non-cash transactions:
   Change in unrealized gains (losses) on securities and mortgage-
     backed securities available for sale, net of income taxes            $     37         $     52
                                                                          ========         ========
</TABLE>

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

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2001 and 2002
                         (Tabular amounts in thousands)

1.    Summary of Significant Accounting Policies

      The accounting and reporting policies of SFB Bancorp, Inc. (the "Bancorp")
      and its subsidiary, Security Federal Bank (the "Bank"), conform, in all
      material respects, to U.S. generally accepted accounting principles and to
      general practices within the banking industry. The following summarize the
      more significant of these policies and practices.

      Nature of Operations - Bancorp's only line of business is investing in its
      bank subsidiary. The Bank's principal line of business is originating
      single-family mortgage, consumer, and commercial loans, and accepting
      deposits from the general public from its offices in northeastern
      Tennessee.

      Estimates - The preparation of financial statements in conformity with
      U.S. 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 consolidated financial statements and the reported amounts of
      revenues during the reporting period. Actual results could differ from
      those estimates.

      Principles of Consolidation - The consolidated financial statements
      include the accounts of the Bancorp, the Bank, and the Bank's wholly owned
      subsidiary, SFS, Inc. (SFS), herein collectively referred to as the
      Company. The impact of SFS on the consolidated financial statements is
      insignificant. SFS has no operating activity other than to own stock in a
      third-party service bureau. Intercompany balances and transactions have
      been eliminated.

      Cash and Cash Equivalents - As presented in the consolidated statements of
      cash flows, cash and cash equivalents include cash on hand and
      interest-earning deposits in other banks.

      Loans Receivable - Loans receivable are carried at their unpaid principal
      balance less, where applicable, net deferred loan fees and allowances for
      losses. Additions to the allowances for losses are based on management's
      evaluation of the loan portfolio under current economic conditions and
      such other factors that, in management's judgment, deserve recognition in
      estimating losses. Interest accrual is discontinued when a loan becomes 90
      days delinquent unless, in management's opinion, the loan is well secured
      and in process of collection. Interest income on impaired loans is
      recognized on a cash basis.

<PAGE>

      Loan Fees - Loan fees result from the origination of loans. Such fees and
      certain direct incremental costs related to origination of such loans are
      deferred ("net deferred loan fees") and reflected as a reduction of the
      carrying value of loans. The net deferred loan fees (or costs) are
      amortized using the interest method. Unamortized net deferred loan fees on
      loans sold prior to maturity are credited to income at the time of sale.

      Investment Securities and Mortgage-Backed Securities - Investment
      securities held to maturity are stated at amortized cost since the Company
      has both the ability and positive intent to hold such securities to
      maturity. Premiums and discounts on the investment securities are
      amortized or accreted into income over the contractual terms of the
      securities using a level yield interest method. Gains and losses on the
      sale of these securities are calculated based on the specific
      identification method.

      Investment securities and mortgage-backed securities available for sale
      are carried at fair value. The Company has identified their holdings in
      certain debt securities and all mortgage-backed securities as available
      for sale. The unrealized holding gains or losses on securities available
      for sale are reported, net of related income tax effects, as accumulated
      other comprehensive income. Changes in unrealized holding gains or losses
      are included as a component of other comprehensive income until realized.
      Gains or losses on sales of securities available for sale are based on the
      specific identification method.

      Real Estate - Real estate properties acquired through loan foreclosure are
      initially recorded at fair value at the date of foreclosure, establishing
      a new cost basis. Subsequent to foreclosure, valuations are periodically
      performed by management and the real estate is carried at the lower of
      carrying amount or fair value less estimated costs to sell (net realizable
      value). Real estate property held for investment is carried at the lower
      of cost, including cost of property improvements incurred subsequent to
      acquisition less depreciation, or net realizable value. Costs relating to
      development and improvement of properties are capitalized, whereas costs
      relating to the holding of property are expensed. Revenue and expenses
      from operations and changes in the valuation allowance are included in net
      expenses from real estate.

      Premises and Equipment - Land is carried at cost. Premises and equipment
      are carried at cost less accumulated depreciation. Depreciation is
      computed on a straight-line method over the estimated useful lives of the
      assets ranging from 5 to 40 years. The cost of maintenance and repairs is
      charged to expense as incurred while expenditures that materially increase
      property lives are capitalized.

      Federal Home Loan Bank Stock - Investment in stock of a Federal Home Loan
      Bank is required by law of every federally insured savings and loan or
      savings bank. The investment is carried at cost. No ready market exists
      for the stock, and it has no quoted market value.

<PAGE>

      Income Taxes - The Bank and its subsidiary follow the practice of filing
      consolidated income tax returns. Income taxes are allocated to the Bank
      and subsidiary as though separate returns are being filed. Bancorp files a
      separate federal income tax return.

      The Company utilizes the liability method of computing income taxes. Under
      the liability method, deferred tax liabilities and assets are established
      for future tax return effects of temporary differences between the stated
      value of assets and liabilities for financial reporting purposes and their
      tax bases. The focus is on accruing the appropriate balance sheet deferred
      tax amount, with the statement of income effect being the result of
      changes in balance sheet amounts from period to period. Current income tax
      expense is provided based upon the actual tax liability incurred for tax
      return purposes.

      Stock Compensation Plans - Statement of Financial Accounting Standards
      (SFAS) No. 123, "Accounting for Stock-Based Compensation," encourages all
      entities to adopt a fair value based method of accounting for employee
      stock compensation plans, whereby compensation cost is measured at the
      grant date based on the value of the award and is recognized over the
      service period, which is usually the vesting period. However, it also
      allows an entity to continue to measure compensation cost for those plans
      using the intrinsic value based method of accounting prescribed by
      Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
      to Employees," whereby compensation cost is the excess, if any, of the
      quoted market price of the stock at the grant date (or other measurement
      date) over the amount an employee must pay to acquire the stock. Stock
      options issued under the Company's stock option plan have no intrinsic
      value at the grant date, and under Opinion No. 25 no compensation cost is
      recognized for them. The Company has elected to continue with the
      accounting methodology in Opinion No. 25 and, as a result, has provided
      pro forma disclosures of net income and earnings per share and other
      disclosures, as if the fair value based method of accounting had been
      applied. The pro forma disclosures include the effects of all awards
      granted on or after January 1, 1995. (See Note 12.)

      Earnings Per Share - Basic earnings per share represents income available
      to common shareholders divided by the weighted average number of common
      shares outstanding during the period. Unallocated ESOP shares are not
      considered as outstanding for purposes of this calculation. Diluted
      earnings per share reflects additional common shares that would have been
      outstanding if dilutive potential common shares had been issued, as well
      as any adjustment to income that would result from the assumed issuance.
      Potential common shares that may be issued by the corporation relate
      solely to outstanding stock options, and are determined using the treasury
      stock method. Diluted earnings per share includes the effect of dilution
      for stock options.

<PAGE>

      For the years ended December 31, 2001 and 2002, net income available to
      the common stockholders in both the basic and diluted computations was
      equal to net income. For purposes of the diluted earnings per share
      calculation, there was no dilutive effect for the stock options for the
      years ended December 31, 2001 and 2002.

      Earnings per common share have been computed based on the following:

<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                               2001            2002
                                                               ----            ----
<S>                                                           <C>             <C>
      Net income applicable to common stock                   $    489        $    718
                                                              ========        ========

      Average number of common shares outstanding                  552             549
      Effect of dilutive options                                    --              --
                                                              --------        --------
      Average number of common shares outstanding
         used to calculate diluted earnings per common
         share                                                     552             549
                                                              ========        ========
</TABLE>

      Comprehensive Income - Accounting principles generally require that
      recognized revenue, expenses, gains and losses be included in net income.
      However certain changes in assets and liabilities, such as unrealized
      gains and losses on available for sale securities, are reported as a
      separate component of the equity section of the balance sheet, such items,
      along with net income, are components of comprehensive income.

      Recent Accounting Pronouncements - In April of 2002, the Financial
      Accounting Standards Board (FASB) issued FASB Statement 145, Rescissions
      of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13,
      and Technical Corrections. This statement makes a number of technical
      corrections to various standards, but the main purpose of the statement is
      to clarify that a gain or loss on the extinguishment of debt must meet the
      standards set forth in APB Opinion No. 30 in order to qualify for
      reporting as an extraordinary item. The effects of this statement are not
      expected to have a material impact on the Company's financial statements.

      In June of 2002, the FASB issued FASB Statement No. 146, Accounting for
      Costs Associated with Exit or Disposal Activities. This statement changes
      the timing of the recording of a liability related to the costs of an exit
      or disposal activity from when a plan was committed to by a Company, to
      when the costs related to the liability are actually incurred.
      Additionally, the Statement asserts that the liability generated related
      to these costs should be recorded at fair value. The effects of this
      statement are not expected to materially impact the Company's financial
      statements.

<PAGE>

      In October of 2002, the FASB issued Statement No. 147, Acquisitions of
      Certain Financial Institutions--an Amendment of FASB Statements No. 72 and
      144 and FASB Interpretation No. 9. This statement amends previous
      statements to allow financial institutions to report business combinations
      under guidance from FASB Statement No. 141, Business Combinations. This
      changes the way financial institutions account for goodwill from business
      purchases and combinations. Instead of amortizing goodwill over time,
      institutions will annually evaluate goodwill for impairment as required
      under FASB Statement No. 141. The application of this standard is not
      expected to materially impact the Company's financial statements.

2.    Investment Securities

      The amortized cost and estimated fair values of investment securities are
      summarized as follows:

<TABLE>
<CAPTION>
                                                              Gross             Gross           Estimated
                                          Amortized         Unrealized        Unrealized           Fair
                                             Cost             Gains             Losses            Value
                                             ----             -----             ------            -----
<S>                                       <C>               <C>               <C>               <C>
Securities to be held to maturity:
   December 31, 2001:
     U.S. government security             $      513        $       --        $       46        $      467
     Municipal securities                        205                --                --               205
                                          ----------        ----------        ----------        ----------

                                          $      718        $       --        $       46        $      672
                                          ==========        ==========        ==========        ==========
   December 31, 2002:
     U.S. government security             $      539        $       20        $       --        $      559
     Municipal securities                         53                --                --                53
                                          ----------        ----------        ----------        ----------

                                          $      592        $       20        $       --        $      612
                                          ==========        ==========        ==========        ==========
Securities available for sale:
   December 31, 2001:
     U.S. government and
        agency securities                 $      597        $       --        $       --        $      597
     Other                                       192                --                --               192
                                          ----------        ----------        ----------        ----------

                                          $      789        $       --        $       --        $      789
                                          ==========        ==========        ==========        ==========
   December 31, 2002:
     U.S. government and
        agency securities                 $    2,434        $       34        $       --        $    2,468
     Other                                       486                --                --               486
                                          ----------        ----------        ----------        ----------

                                          $    2,920        $       34        $       --        $    2,954
                                          ==========        ==========        ==========        ==========
</TABLE>

<PAGE>

      The amortized cost and estimated market values of debt securities by
contractual maturity are as follows:

<TABLE>
<CAPTION>
                                                     Amortized                  Estimated
                                                        Cost                    Fair Value
                                                ------------------------------------------------
                                                 2001          2002          2001          2002
                                                 ----          ----          ----          ----
<S>                                             <C>           <C>           <C>           <C>
Securities to be held to maturity:
   Due in one year                              $   --        $   53        $   --        $   53
   Due after one year through five years           205            --           205            --
   Due after ten years                             513           539           467           559
                                                ------        ------        ------        ------

                                                $  718        $  592        $  672        $  612
                                                ======        ======        ======        ======
Securities available for sale:
   Due in one year                              $   --        $  300        $   --        $  305
   Due after one year through five years           597         2,134           597         2,163
                                                ------        ------        ------        ------

                                                $  597         2,434        $  597         2,468
                                                ======        ======        ======        ======
</TABLE>

      The Bank had investment securities with an amortized cost of approximately
      $1,582,000 and $1,112,000 pledged against deposits at December 31, 2001
      and 2002, respectively.

      The Bank had no sales of investment securities to be held to maturity or
      available for sale for the years ended December 31, 2001 and 2002.

3.    Loans Receivable

            Loans receivable are summarized as follows:

                                                         December 31,
                                                   -------------------------
                                                     2001            2002
                                                     ----            ----
Real estate first mortgage loans:
   One-to-four-family                              $ 28,678        $ 28,165
   Construction                                         995           2,044
   Commercial real estate                             2,286           2,436
   Multi-family residential                           3,679           3,621
   Land                                               3,378           2,999
                                                   --------        --------
        Total real estate loans                      39,016          39,265
                                                   --------        --------

Consumer and commercial loans:
   Commercial business                                2,630           3,157
   Auto loans                                         2,715           2,043
   Share loans                                          289             250
   Other                                                543             416
                                                   --------        --------
        Total consumer and commercial loans           6,177           5,866
                                                   --------        --------

        Total loans                                  45,193          45,131
                                                   --------        --------

                                                                     (continued)

<PAGE>

                                                             December 31,
                                                        -----------------------
                                                          2001            2002
                                                          ----            ----
      Less:
         Undisbursed portion of loans in process        $    423        $    882
         Net deferred loan fees                               13               6
         Allowance for loan losses                           373             363
                                                        --------        --------
                                                             809           1,251
                                                        --------        --------

                                                        $ 44,384        $ 43,880
                                                        ========        ========

      The Bank's primary lending area for the origination of mortgage loans
      includes Carter County and adjoining counties. The Bank limits uninsured
      loans to 85% of the appraised value of the property securing the loan.
      Generally, the Bank allows loans covered by private mortgage insurance up
      to 97% of the appraised value of the property securing the loan.

      The general policy is to limit loans on commercial real estate to 80% of
      the lesser of appraised value or construction cost of the property
      securing the loan.

      The Bank's policy requires that consumer and other installment loans be
      supported primarily by the borrower's ability to repay the loan and
      secondarily by the value of the collateral securing the loan, if any.

      Management of the Bank believes that its allowances for losses on its loan
      portfolio are adequate. However, the estimates used by management in
      determining the adequacy of such allowances are susceptible to significant
      changes due primarily to changes in economic and market conditions. In
      addition, various regulatory agencies periodically review the Bank's
      allowance for losses as an integral part of their examination processes.
      Such agencies may require the Bank to recognize additions to the
      allowances based on their judgments of information available to them at
      the time of their examinations.

      The changes in the allowance for loan losses are summarized as follows:

                                          Years Ended December 31,
                                          ------------------------
                                             2001          2002
                                            -----         -----

      Beginning balance                     $ 347         $ 373
      Provision charged to income              36            36
      Charge-offs, net of recoveries          (10)          (46)
                                            -----         -----

      Ending balance                        $ 373         $ 363
                                            =====         =====

<PAGE>

      Non-accrual loans were approximately $189,000 at December 31, 2002. There
      were no accruing loans that were contractually past due 90 days or more.

4.    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>
      Securities available for sale:
         December 31, 2001:
           GNMA                             $     249        $       1        $       2        $     248
           FHLMC                                   27               --               --               27
           FHLMC REMIC's                          988               --               18              970
           FNMA                                   302                1                7              296
           FNMA REMIC's                         1,400               --                9            1,391
                                            ---------        ---------        ---------        ---------

                                            $   2,966        $       2        $      36        $   2,932
                                            =========        =========        =========        =========

      Securities available for sale:
         December 31, 2002:
           GNMA                             $     179        $       1        $      --        $     180
           FHLMC                                   20               --               --               20
           FHLMC REMIC's                          943               10               --              953
           FNMA                                   213               --                1              212
           FNMA REMIC's                         1,023                8               --            1,031
                                            ---------        ---------        ---------        ---------

                                            $   2,378        $      19        $       1        $   2,396
                                            =========        =========        =========        =========
</TABLE>

      Although mortgage-backed securities are initially issued with a stated
      maturity date, the underlying mortgage collateral may be prepaid by the
      mortgagee and, therefore, such securities may not reach their maturity
      date.

      The Bank had mortgage-backed securities with an amortized cost of
      approximately $219,000 and $206,000 pledged against deposits at December
      31, 2001 and 2002, respectively.

      There were no sales of mortgage-backed securities for the years ended
      December 31, 2001 and 2002.

<PAGE>

5.    Premises and Equipment

      Premises and equipment are summarized as follows:

                                                   December 31,
                                               --------------------
                                                2001          2002
                                                ----          ----


      Land and improvements                    $  237        $  237
      Buildings                                 1,246         1,289
      Vehicles                                     38            38
      Furniture, fixtures and equipment           573           586
                                               ------        ------
                                                2,094         2,150
      Less accumulated depreciation             1,196         1,300
                                               ------        ------

                                               $  898        $  850
                                               ======        ======

6.    Deposits

      The Bank had deposit accounts in amounts of $100,000 or more of
      approximately $13.3 million and $12.4 million at December 31, 2001 and
      2002, respectively. Contractual maturities of time deposits are summarized
      as follows:

                                             December 31,
                                        ----------------------
                                          2001           2002
                                          ----           ----
      12 months or less                 $29,418        $24,988
      After 1 but within 3 years          4,217          5,633
      After 3 years                         489          1,426
                                        -------        -------

                                        $34,124        $32,047
                                        =======        =======

7.    Federal Home Loan Bank Advances

      The Bank had no advances from the Federal Home Loan Bank (FHLB)
      outstanding at December 31, 2001 and 2002.

      The Bank pledges as collateral for any borrowings its FHLB stock and its
      entire loan portfolio of qualifying mortgages (as defined) under a blanket
      collateral agreement with the FHLB.

      The Bank has total credit availability with the FHLB of up to $23.5
      million.

<PAGE>

8.    Income Taxes

      Income tax expense is summarized as follows:

<TABLE>
<CAPTION>
                                                                     Years Ended December 31,
                           -------------------------------------------------------------------------------------------
                                              2001                                             2002
                           -----------------------------------------         -----------------------------------------
                           Federal           State           Total           Federal           State           Total
                           -------           -----           -----           -------           -----           -----
<S>                        <C>              <C>             <C>              <C>              <C>             <C>
      Current              $    276         $     31        $    307         $    406         $     52        $    458
      Deferred                  (20)              16              (4)              (5)              37              32
                           --------         --------        --------         --------         --------        --------

              Total        $    256         $     47        $    303         $    401         $     89        $    490
                           ========         ========        ========         ========         ========        ========
</TABLE>

      The differences between actual income tax expense and the amount computed
      by applying the federal statutory income tax rate of 34% to income before
      income taxes are reconciled as follows:

                                                       Years Ended December 31,
                                                      -------------------------
                                                        2001             2002
                                                        ----             ----

Computed income tax expense                           $    269         $    411
Increase (decrease) resulting from:
  State income tax, net of federal tax benefit              31               59
  Non-taxable income                                        (5)              (2)
  Non-deductible expenses                                   15               31
  Other                                                     (7)              (9)
                                                      --------         --------

Actual income tax expense                             $    303         $    490
                                                      ========         ========

      The components of net deferred tax liabilities are as follows:

                                                              December 31,
                                                        ------------------------
                                                          2001            2002
                                                          ----            ----
Deferred tax liabilities:
  Loan losses                                           $     --        $     28
  Excess tax depreciation                                     24              16
  FHLB stock dividends                                        94             104
  Deferred cost                                               76              63
  Unrealized gains on securities available for sale           --              21
  Purchased discounts on mortgage-backed securities            1               1
                                                        --------        --------
                                                             195             233
                                                        --------        --------

                                                                     (continued)

<PAGE>

                                                             December 31,
                                                       ------------------------
                                                         2001            2002
                                                         ----            ----
Deferred tax assets:
  Loan losses                                          $      4        $     --
  Accrued expenses                                           27              12
  Unrealized losses on securities available for sale         14              --
  Other                                                      --               5
                                                       --------        --------
                                                             45              17
                                                       --------        --------

        Net deferred tax liability                     $    150        $    216
                                                       ========        ========

      The Bank's annual addition to its reserve for bad debts allowed under the
      Internal Revenue Code may differ significantly from the bad debt
      experience used for financial statement purposes. Such bad debt deductions
      for income tax purposes are included in taxable income of later years only
      if the bad debt reserves are used for purposes other than to absorb bad
      debt losses. Since the Bank does not intend to use the reserve for
      purposes other than to absorb losses, no deferred income taxes have been
      provided on the amount of bad debt reserves for tax purposes that arose in
      tax years beginning before December 31, 1987, in accordance with SFAS No.
      109. Therefore, retained income at December 31, 2001 and 2002, includes
      approximately $825,000, representing such bad debt deductions for which no
      deferred income taxes have been provided.

9.    Regulatory Matters

      The Bank is subject to various regulatory capital requirements
      administered by the Office of Thrift Supervision (OTS). Failure to meet
      minimum capital requirements can initiate certain mandatory, and possible
      additional discretionary actions by regulators that, if undertaken, could
      have a direct material effect on the Company's and Bank's financial
      statements. Under capital adequacy guidelines and the regulatory framework
      for prompt corrective action, the Bank must meet specific capital
      guidelines that involve quantitative measures of the Bank's assets,
      liabilities, and certain off-balance sheet items as calculated under
      regulatory accounting practices. The Bank's capital amounts and
      classification are also subject to qualitative judgments by the regulators
      about components, risk weightings, and other factors.

      Quantitative measures established by regulation to ensure capital adequacy
      require the Bank to maintain minimum amounts and ratios (set forth in the
      table below) of Tier I capital (as defined in the regulations) to average
      total assets (as defined), and of Tier I and total risk-based capital (as
      defined) to risk-weighted assets (as defined). Management believes, as of
      December 31, 2001 and 2002, that the Bank meets all capital adequacy
      requirements to which it is subject.

<PAGE>

      As of December 31, 2002, the most recent notification from the OTS
      categorized the Bank as well capitalized under the regulatory framework
      for prompt corrective action. To be categorized as well capitalized the
      Bank must maintain minimum (Tier I leverage, Tier I risk-based, total
      risk-based capital) ratios as set forth in the table. There are no
      conditions or events since that notification that management believes have
      changed the institution's category. No deduction from capital for
      interest-rate risk was required.

      The Bank's actual capital amounts (in thousands) and ratios are also
      presented in the following table.

<TABLE>
<CAPTION>
                                                                                                         To Be Well
                                                                                                      Capitalized Under
                                                                              For Capital             Prompt Corrective
                                                   Actual                Adequacy Purposes            Action Provisions
                                          -------------------------  -------------------------    -------------------------
                                            Amount          Ratio     Amount            Ratio      Amount            Ratio
                                            ------          -----     ------            -----      ------            -----
<S>                                       <C>                <C>      <C>                <C>      <C>                <C>
          As of December 31, 2001:
            Tier I Capital (to
               average assets)            $ 10,631           18.7%    $ 2,270            >4.0%     $ 2,837            >5.0%
                                                                                         -                            -
            Tier I Capital (to risk
               weighted assets)           $ 10,631           31.9%    $ 1,334            >4.0%     $ 2,001            >6.0%
                                                                                         -                            -
            Total Capital (to risk-
               weighted assets)           $ 11,004           33.0%    $ 2,668            >8.0%     $ 3,334           >10.0%
                                                                                         -                           -

          As of December 31, 2002:
            Tier I Capital (to
               average assets)            $ 11,508           20.5%    $ 2,240            >4.0%     $ 2,801            >5.0%
                                                                                         -                            -
            Tier I Capital (to risk
               weighted assets)           $ 11,508           35.6%    $ 1,292            >4.0%     $ 1,937            >6.0%
                                                                                         -                            -
            Total Capital (to risk-
               weighted assets)           $ 11,871           36.8%    $ 2,583            >8.0%     $ 3,229           >10.0%
                                                                                         -                           -
</TABLE>

10.   Employee Stock Ownership Plan (ESOP)

      The Bank has an Employee Stock Ownership Plan (ESOP) for all employees who
      have attained the age of 21 and have been credited with at least 1,000
      hours of service during a 12-month period. The ESOP borrowed approximately
      $614,000 from Bancorp and used the funds to purchase 61,360 shares of
      common stock of Bancorp. The loan will be repaid principally from the
      Bank's discretionary contributions to the ESOP over a period of 10 years.
      On December 31, 2002, the loan had an outstanding balance of approximately
      $196,600 and bore an interest rate of 8.5%. The cost of unallocated shares
      is considered unearned compensation and, as such, recorded as a reduction
      of the Company's stockholders' equity. Benefits become fully vested at the
      end of seven years of service under the terms of the ESOP Plan. Benefits
      may be payable upon retirement, death, disability, or separation from
      service. Since the Bank's annual contributions are discretionary, benefits
      payable under the ESOP cannot be estimated.

<PAGE>

      For the years ending December 31, 2001 and 2002, compensation related to
      the ESOP of approximately $87,000 and $108,000, respectively, was
      expensed. Compensation is recognized at the average fair value of the
      ratably released shares during the accounting period as the employees
      performed services. At December 31, 2002, the ESOP had approximately
      40,000 allocated shares and 21,000 unallocated shares. The fair value of
      unallocated ESOP shares at December 31, 2002 was approximately $338,000.

      The ESOP administrators determine whether dividends on allocated and
      unallocated shares are used for debt service. Any allocated dividends used
      will be replaced with common stock of equal value. For the purpose of
      computing earnings per share, only ESOP shares committed to be released
      (allocated shares) are considered outstanding.

11.   Restricted Stock Plan

      The Company has a restricted stock plan ("RSP") which approved 30,680
      shares of common stock for granting. The shares can be granted to certain
      employees, officers, and directors of the Company. The initial grants
      began vesting on June 1, 1998, and were fully vested on June 1, 2002. The
      Company purchased 30,680 shares of common stock in the open market to fund
      the RSP. Compensation expense in the amount of the fair value of the
      common stock at the date of grant will be recognized during the periods
      the participants become vested. The unamortized balance of unearned
      compensation is reflected as a reduction of stockholders' equity. For the
      years ended December 31, 2001 and 2002, approximately $93,000 and $46,000,
      respectively, have been recognized as compensation expense.

12.   Stock Option Plans

      The Company maintains stock option plans. The Plans permit the grant of
      qualified incentive stock options and non-qualified options to certain
      employees and directors. The Stock Option Committee of the Board of
      Directors determines which individuals are eligible to receive awards. The
      stock option plans authorize the granting of stock options up to a maximum
      of 76,700 shares of common stock.

      The option price for each grant of a stock option will not be less than
      the fair market value on the date the option is granted. The Committee may
      determine the restrictions and conditions under which options may be
      exercised. Options must be exercised within ten years of the date granted.
      Vesting is in accordance with the terms of each particular grant.

      Activity under Bank's plans during the years ended December 31, 2001 and
      2002, is summarized below:

<PAGE>

<TABLE>
<CAPTION>
                                              2001                               2002
                                    -------------------------       ----------------------------
                                                    Weighted                          Weighted
                                                     Average                           Average
                                                    Exercise                          Exercise
                                    Shares            Price           Shares            Price
                                    ------            -----           ------            -----
<S>                     <C>           <C>           <C>                 <C>           <C>
Shares under options:
   Outstanding, January 1             73,630        $   16.69           73,630        $   16.69
   Granted                                --               --               --               --
   Exercised                              --               --               --               --
   Forfeited                              --               --               --               --
                                   ---------        ---------        ---------        ---------

   Outstanding, December 31           73,630        $   16.69           73,630        $   16.69
                                   =========        =========        =========        =========

   Exercisable, December 31           73,630        $   16.69           73,630        $   16.69
                                   =========        =========        =========        =========
</TABLE>

<TABLE>
<CAPTION>
                                       Options Outstanding                            Options Exercisable
                        -------------------------------------------------        -------------------------------
                                            Weighted
                                             Average           Weighted                              Weighted
                          Number            Remaining           Average            Number             Average
Range of                  Options          Contractual         Exercise            Options           Exercise
Exercise Prices         Outstanding           Life               Price           Outstanding           Price
---------------         -----------           ----               -----           -----------           -----
<C>                          <C>           <C>                <C>                     <C>           <C>
$16.69                       73,630        5.42 years         $     16.69             73,630        $     16.69
                        ===========        ===========        ===========        ===========        ===========
</TABLE>

      Pro forma information regarding the net income and net income per share is
      required by SFAS No. 123 and has been determined as if the Company had
      accounted for its stock options under the fair value method of that
      statement. The Company last granted stock options in 1998. The fair value
      for these options was estimated at that date of the grant using the
      Black-Scholes option-pricing model.

      For purposes of pro forma disclosures, the estimated fair value of the
      options is amortized to expense over the options' vesting period. The
      Company's pro forma net income (in thousands) and net income per share for
      the years ended December 31, 2001 and 2002, is as follows:

<TABLE>
<CAPTION>
                                           2001                                   2002
                             --------------------------------        --------------------------------
                              As Reported           Pro forma         As Reported           Pro forma
                              -----------           ---------         -----------           ---------
<S>                          <C>                 <C>                 <C>                 <C>
Net income                   $        489        $        475        $        718        $        704
                             ============        ============        ============        ============

Basic and diluted
   earnings per share        $        .89        $        .87        $       1.31        $       1.28
                             ============        ============        ============        ============
</TABLE>

<PAGE>

13.   Employment and Change of Control Agreement

      The Bank entered into an employment agreement with a key officer in 1996.
      The employment agreement provides for three-year terms. Commencing on the
      first anniversary date and continuing each anniversary date thereafter,
      the board of directors may extend the agreement for an additional year so
      that the remaining term shall be three years, unless written notice of
      termination of the agreement is given by the executive officer. The
      agreement provides for severance payments and other benefits in the event
      of involuntary termination of employment in connection with any change in
      control of the Bank. A severance payment will also be provided on a
      similar basis in connection with voluntary termination of employment
      where, subsequent to a change in control, the officer is assigned duties
      inconsistent with his position, duties, responsibilities and status
      immediately prior to such change in control. The severance payment will
      equal 2.99 times the executive officer's base amount of annual
      compensation as defined under the Internal Revenue Code. The payment of
      amounts under the agreement may be paid within 30 days of such
      termination, discounted at an agreed upon rate, or in equal installments
      over thirty-six months. The Bank has not accrued any benefits under this
      postemployment agreement.

14.   Commitments and Contingencies

      The Bank makes commitments to lend funds to customers. Commitments to
      extend credit are agreements to lend to a customer as long as there is no
      violation of any condition established in the contract. 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 Bank evaluates each
      customer's creditworthiness. The amount of collateral obtained, if it is
      deemed necessary by the Bank upon extension of credit, is based on
      management's credit evaluation of the counterparty. Collateral may include
      first and second mortgages; property, plant, and equipment; accounts
      receivable; deposit accounts; and income-producing commercial properties.
      The Bank does not anticipate any losses as a result of these transactions.

      The following summarizes the approximate balances outstanding and amounts
      available for use at December 31, 2002:

                                                         Commitment
                                                         ----------
          Consumer and other lines                       $1,019,000
                                                         ==========

<PAGE>

      The Bank had outstanding commitments to originate mortgage and consumer
      loans of approximately $927,000 at December 31, 2002. The commitments to
      originate mortgage and consumer loans at December 31, 2002, were all fixed
      rate loans and had interest rates ranging from 6.50% to 8.00% and terms
      ranging from one year to 15 years.

15.   Financial Instruments

      The approximate stated and estimated fair value of financial instruments
      are summarized below (in thousands):

<TABLE>
<CAPTION>
                                                                   December 31,
                                       --------------------------------------------------------------------
                                                   2001                                  2002
                                       ------------------------------        ------------------------------
                                         Stated            Estimated           Stated            Estimated
                                         Amount           Fair Value           Amount           Fair Value
                                         ------           ----------           ------           ----------
<S>                                    <C>                <C>                <C>                <C>
Financial assets:
   Cash and cash equivalents           $     6,786        $     6,786        $     4,963        $     4,963
   Investment and mortgage-
     backed securities                       4,439              4,393              5,942              5,962
   Loans receivable, net                    44,384             45,750             43,880             46,596
   Federal Home Loan Bank stock                560                560                586                586
   Other assets                                262                262                266                266

Financial liabilities:
   Deposits:
     Demand accounts                        11,226             11,226             11,566             11,449
     Certificate accounts                   34,124             34,600             32,046             32,555
   Other liabilities                           238                238                201                201
</TABLE>

      The Bank had off-balance sheet financial commitments at December 31, 2002,
      which include approximately $1,946,000 of commitments to originate and
      fund loans and unused consumer lines of credit and letters of credit.
      Since these commitments are based on current market rates, the commitment
      amount is considered to be a reasonable estimate of fair market value.

      Statement of Financial Accounting Standards No. 107, "Disclosures about
      Fair Value of Financial Instruments" (SFAS 107), requires disclosure of
      fair value information about financial instruments, whether or not
      recognized in the balance sheet, for which it is practicable to estimate
      that value. The following methods and assumptions were used by the Bank in
      estimating its fair value disclosures for financial instruments:

      Cash and Cash Equivalents - The carrying amount of such instruments is
      deemed to be a reasonable estimate of fair value.

<PAGE>

      Investments - Fair values for investment securities are based on quoted
      market prices.

      Loans - Fair values for loans held for investment are estimated by
      segregating the portfolio by type of loan and discounting scheduled cash
      flows using interest rates currently being offered for loans with similar
      terms, reduced by an estimate of credit losses inherent in the portfolio.
      A prepayment assumption is used as an estimate of the portion of loans
      that will be repaid prior to their scheduled maturity.

      Federal Home Loan Bank Stock - No ready market exists for this stock and
      it has no quoted market value. However, redemption of this stock has
      historically been at par value. Accordingly, the carrying amount is deemed
      to be a reasonable estimate of fair value.

      Deposits - The fair values disclosed for demand deposits are, as required
      by SFAS 107, equal to the amounts payable on demand at the reporting date
      (i.e., their stated amounts). The fair value of certificates of deposit
      are estimated by discounting the amounts payable at the certificate rates
      using the rates currently offered for deposits of similar remaining
      maturities.

      Other Assets and Other Liabilities - Other assets represent accrued
      interest receivable; other liabilities represent advances from borrowers
      for taxes and insurance and accrued interest payable. Since these
      financial instruments will typically be received or paid within three
      months, the carrying amounts of such instruments are deemed to be a
      reasonable estimate of fair value.

      Fair value estimates are made at a specific point of time, based on
      relevant market information and information about the financial
      instrument. These estimates do not reflect any premium or discount that
      could result from offering for sale the Bank's entire holdings of a
      particular financial instrument. Because no active market exists for a
      significant portion of the Bank's financial instruments, fair value
      estimates are based on judgments regarding future expected loss
      experience, current economic conditions, current interest rates and
      prepayment trends, risk characteristics of various financial instruments,
      and other factors. These estimates are subjective in nature and involve
      uncertainties and matters of significant judgment and therefore cannot be
      determined with precision. Changes in any of these assumptions used in
      calculating fair value also would affect significantly the estimates.
      Further, the fair value estimates were calculated as of December 31, 2001
      and 2002. Changes in market interest rates and prepayment assumptions
      could change significantly the estimated fair value.

      Fair value estimates are based on existing on and off-balance sheet
      financial instruments without attempting to estimate the value of
      anticipated future business and the value of assets and liabilities that
      are not considered financial instruments. For example, the Bank has
      significant assets and liabilities that are not considered financial
      assets or liabilities including deposit franchise value, loan servicing
      portfolio, real estate, deferred tax liabilities, and premises and
      equipment. In addition, the tax ramifications related to the realization
      of the unrealized gains and losses can have a significant effect on fair
      value estimates and have not been considered in any of these estimates.

16.   Condensed Parent Company Financial Information

      The following condensed financial information for SFB Bancorp, Inc.
      (Parent Company Only) should be read in conjunction with the consolidated
      financial statements and the notes thereto.

<PAGE>

Parent Company Only
Condensed Balance Sheets                                     December 31,
(in thousands)                                         ------------------------
                                                         2001            2002
                                                         ----            ----
Assets:
  Cash and cash equivalents                           $    680        $    574
  ESOP loan receivable                                     263             197
  Equity in net assets of bank subsidiary               10,612          11,541
  Other assets                                              55              16
                                                      --------        --------

        Total assets                                  $ 11,610        $ 12,328
                                                      ========        ========

Liabilities
  Accrued liabilities                                 $      3        $      4
                                                      --------        --------

Stockholders' equity:
  Common stockholders' equity                           11,607          12,324
                                                      --------        --------

        Total liabilities and stockholders' equity    $ 11,610        $ 12,328
                                                      ========        ========

Parent Company Only
Condensed Statements of Income                For the Years Ended
(in thousands)                               ------------------------
                                               2001            2002
                                               ----            ----

Interest income                              $     52        $     18
Non-interest expense                               39              26
                                             --------        --------
        Income (loss) before taxes                 13              (8)
Income tax expense (benefit)                        5              (4)
                                             --------        --------
        Income before equity earnings               8              (4)
Equity earnings of bank subsidiary                481             722
                                             --------        --------

        Net income                           $    489        $    718
                                             ========        ========

                                                                     (continued)

<PAGE>

<TABLE>
<CAPTION>
Parent Company Only
Condensed Statements of Cash Flows                            For the Years Ended
(in thousands)                                              -------------------------
                                                               2001             2002
                                                               ----             ----
<S>                                                         <C>              <C>
Operating activities:
  Net income                                                $    489         $    718
  Adjustments to reconcile net income to net
     cash provided by operating activities:
     Undistributed equity earnings of bank subsidiary           (481)            (722)
     Amortization (accretion) of premiums (discounts)
        on securities                                             (1)              --
     Decrease in other assets                                     29               38
     Increase (decrease) in accrued liabilities                   (4)               1
                                                            --------         --------
        Net cash provided by operating activities                 32               35
                                                            --------         --------

Investing activities:
  Principal repayment by ESOP                                     76               66
  Maturities of investment securities                            500               --
                                                            --------         --------
        Net cash provided by investing activities                576               66
                                                            --------         --------

Financing activities:
  Purchase of treasury stock                                     (70)             (96)
  Payment of cash dividends                                     (247)            (111)
                                                            --------         --------
        Net cash used by financing activities                   (317)            (207)
                                                            --------         --------

Net increase (decrease) in cash and cash equivalents             291             (106)

Cash and cash equivalents at beginning of year                   389              680
                                                            --------         --------

Cash and cash equivalents at end of year                    $    680         $    574
                                                            ========         ========
</TABLE>