SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

(Mark One)
[X]      Annual  report  pursuant  to  section  13 or 15 (d)  of the  Securities
         Exchange  Act of 1934  (No Fee  required)  For the  fiscal  year  ended
         December 31, 1997

[ ]      Transition  report  pursuant  to section 13 or 15(d) of the  Securities
         Exchange Act of 1934 (No Fee required) For the  transition  period from
                       to
         ------------      ---------------.

Commission File No. 0-22587
                                SFB Bancorp, Inc.
                 ----------------------------------------------
                 (Name of Small Business Issuer in Its Charter)

Tennessee                                                      62-1683732
---------------------------------------------               -------------------
(State or Other Jurisdiction of Incorporation                (I.R.S. Employer
or Organization)                                            Identification No.)

632 East Elk Avenue, Elizabethton, Tennessee                       37643
---------------------------------------------               -------------------
(Address of Principal Executive Offices)                         (Zip Code)

Issuer's Telephone Number, Including Area Code:                (423) 543-3518
                                                              ---------------

Securities registered under to Section 12(b) of the Exchange Act:  None
                                                                  ------

Securities registered under to Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.10 per share
                     ---------------------------------------
                                (Title of Class)

         Check  whether  the issuer:  (1) has filed all  reports  required to be
filed by Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or
for such shorter  period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
YES  X   NO    .
   -----   ----

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

         State issuer's revenues for its most recent fiscal year:   $4,009,000

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant,  based on the average bid and asked price of the registrant's
Common Stock on March 1, 1998 was $10.4 million.

         As of December  31,  1997,  there were issued and  outstanding  767,000
shares of the registrant's Common Stock.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

         1.       Portions of the Annual Report to  Stockholders  for the Fiscal
                  Year ended December 31, 1997. (Part II)
         2.       Portions  of the Proxy  Statement  for the  Annual  Meeting of
                  Stockholders  for the Fiscal  Year ended  December  31,  1997.
                  (Part III)



<PAGE>



PART I

         SFB BANCORP, INC. (THE "COMPANY") MAY FROM TIME TO TIME MAKE WRITTEN OR
ORAL  "FORWARD-LOOKING  STATEMENTS",   INCLUDING  STATEMENTS  CONTAINED  IN  THE
COMPANY'S  FILINGS WITH THE SECURITIES AND EXCHANGE  COMMISSION  (INCLUDING THIS
ANNUAL  REPORT ON FORM  10-KSB  AND THE  EXHIBITS  THERETO),  IN ITS  REPORTS TO
STOCKHOLDERS AND IN OTHER COMMUNICATIONS BY THE COMPANY,  WHICH ARE MADE IN GOOD
FAITH BY THE COMPANY  PURSUANT TO THE "SAFE  HARBOR"  PROVISIONS  OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995.

         THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES,  SUCH
AS STATEMENTS OF THE COMPANY'S PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND
INTENTIONS,  THAT ARE SUBJECT TO CHANGE BASED ON VARIOUS IMPORTANT FACTORS (SOME
OF WHICH ARE BEYOND THE COMPANY'S CONTROL). THE FOLLOWING FACTORS, AMONG OTHERS,
COULD CAUSE THE COMPANY'S  FINANCIAL  PERFORMANCE TO DIFFER  MATERIALLY FROM THE
PLANS,  OBJECTIVES,  EXPECTATIONS,  ESTIMATES AND  INTENTIONS  EXPRESSED IN SUCH
FORWARD-LOOKING STATEMENTS: THE STRENGTH OF THE UNITED STATES ECONOMY IN GENERAL
AND  THE  STRENGTH  OF  THE  LOCAL  ECONOMIES  IN  WHICH  THE  COMPANY  CONDUCTS
OPERATIONS;  THE EFFECTS OF, AND CHANGES IN, TRADE,  MONETARY AN FISCAL POLICIES
AND LAWS,  INCLUDING  INTEREST  RATE  POLICIES OF THE BOARD OF  GOVERNORS OF THE
FEDERAL  RESERVE  SYSTEM,   INFLATION,   INTEREST  RATE,   MARKET  AND  MONETARY
FLUCTUATIONS;  THE TIMELY  DEVELOPMENT  OF AND  ACCEPTANCE  OF NEW  PRODUCTS AND
SERVICES OF THE COMPANY AND THE PERCEIVED  OVERALL  VALUE OF THESE  PRODUCTS AND
SERVICES BY USERS,  INCLUDING  THE  FEATURES,  PRICING  AND QUALITY  COMPARED TO
COMPETITORS'  PRODUCTS AND  SERVICES;  THE  WILLINGNESS  OF USERS TO  SUBSTITUTE
COMPETITORS' PRODUCTS AND SERVICES FOR THE COMPANY'S PRODUCTS AND SERVICES;  THE
SUCCESS OF THE  COMPANY IN  GAINING  REGULATORY  APPROVAL  OF ITS  PRODUCTS  AND
SERVICES,  WHEN REQUIRED;  THE IMPACT OF CHANGES IN FINANCIAL SERVICES' LAWS AND
REGULATIONS   (INCLUDING  LAWS  CONCERNING   TAXES,   BANKING,   SECURITIES  AND
INSURANCE);  TECHNOLOGICAL CHANGES,  ACQUISITIONS;  CHANGES IN CONSUMER SPENDING
AND  SAVINGS  HABITS;  AND THE  SUCCESS  OF THE  COMPANY AT  MANAGING  THE RISKS
INVOLVED IN THE FOREGOING.

         THE COMPANY  CAUTIONS THAT THE FOREGOING  LIST OF IMPORTANT  FACTORS IS
NOT  EXCLUSIVE.  THE COMPANY DOES NOT  UNDERTAKE TO UPDATE ANY FORWARD-  LOOKING
STATEMENT,  WHETHER WRITTEN OR ORAL, THAT MAY BE MADE FROM TIME TO TIME BY OR ON
BEHALF OF THE COMPANY.

Item 1.  Description of Business
--------------------------------

General

         SFB Bancorp,  Inc. (the "Company") is a Tennessee corporation organized
in March 1997 at the direction of Security Federal Bank (the "Bank" or "Security
Federal")  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

                                        2

<PAGE>



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.

Competition

         Security  Federal is one of many  financial  institutions  serving  its
market  area  which  consists  of  Carter  County,  Tennessee  and the  adjacent
Tennessee counties of Johnson, Unicoi, Washington, and Sullivan. The competition
for deposit  products comes from other insured  financial  institutions  such as
commercial banks, thrift  institutions,  credit unions, and multi-state regional
banks in the Bank's market area.  Deposit  competition also includes a number of
insurance  products sold by local agents and investment  products such as mutual
funds and other securities sold by local and regional brokers.  Loan competition
varies depending upon market  conditions and comes from other insured  financial
institutions  such as commercial  banks,  thrift  institutions,  credit  unions,
multi-state regional banks, and mortgage bankers.


                                        3

<PAGE>



Lending Activities

         Analysis of Loan  Portfolio.  Set forth below is selected data relating
to the  composition  of the Bank's  loan  portfolio  by type of loan and type of
security on the dates indicated:

<TABLE>
<CAPTION>
                                                                                    December 31,
                                                            ----------------------------------------------------------------
                                                                     1996                                   1997
                                                            --------------------------           ---------------------------
                                                            Amount             Percent            Amount             Percent
                                                            -------            ------            -------              ------
                                                                               (Dollars in Thousands)
<S>                                                         <C>                <C>              <C>                   <C>
Type of Loans:
Real Estate Loans:
  One- to four-family................................       $29,653             77.67%           $31,382               75.63%
  Construction.......................................         1,125              2.95              1,600                3.86
  Commercial.........................................         1,288              3.37              1,433                3.45
  Multi-family residential...........................           912              2.39                687                1.65
  Land...............................................         1,732              4.54              2,982                7.19
Commercial business loans............................           558              1.46                425                1.02
Consumer Loans:
  Automobile loans...................................         1,949              5.11              2,119                5.10
  Share loans........................................           435              1.14                517                1.25
  Other..............................................           524              1.37                351                 .85
                                                            -------            ------            -------              ------
     Total loans.....................................        38,176            100.00%            41,496              100.00%
                                                                               ======                                 ======
Less:
  Loans in process...................................           942                                  429
  Deferred loan origination fees and costs...........           122                                  118
  Allowance for loan losses..........................           304                                  301
                                                            -------                              -------
     Total loans, net................................       $36,808                              $40,648
                                                            =======                              =======
</TABLE>


Loan Maturity Tables

         The  following  table sets forth the  estimated  maturity of the Bank's
loan  portfolio,  including loans held for sale, at December 31, 1997. The table
does not include  prepayments or scheduled  principal  repayments.  All mortgage
loans are shown as maturing based on contractual maturities.

<TABLE>
<CAPTION>
                                                                         Due after
                                                       Due within        1 through          Due after
                                                         1 year           5 years            5 years             Total
                                                         ------           -------            -------             -----
                                                                                (In Thousands)

<S>                                                      <C>               <C>                 <C>             <C>
One- to four-family residential...................       $  109            $1,574              $29,699         $31,382
Construction......................................          460                69                1,071           1,600
Commercial........................................           --               376                1,057           1,433
Multi-family residential..........................           --                72                  615             687
Land..............................................          604             2,079                  299           2,982
Commercial business loans.........................          345                80                   --             425
Consumer..........................................          753             2,204                   30           2,987
                                                         ------            ------              -------         -------
     Total Amount Due.............................       $2,271            $6,454              $32,771         $41,496
                                                         ======            ======              =======         =======
</TABLE>




                                        4

<PAGE>





         The following table sets forth the dollar amount of all loans due after
December  31,  1998,  which have  pre-determined  interest  rates and which have
floating or adjustable interest rates.

<TABLE>
<CAPTION>
                                                                       Floating or
                                                  Fixed Rates         Adjustable Rates       Total
                                                  -----------         ----------------       -----
                                                                      (In Thousands)
<S>                                                 <C>                    <C>              <C>
One- to four-family residential.............        $29,131                $2,142           $31,273
Construction................................          1,060                    80             1,140
Commercial..................................          1,183                   250             1,433
Multi-family................................            580                   107               687
Land........................................          1,647                   731             2,378
Commercial business loans and
  consumer..................................          1,973                   341             2,314
                                                    -------                ------           -------
    Total...................................        $35,574                $3,651           $39,225
                                                    =======                ======           =======
</TABLE>



         One- to  Four-Family  Residential  Loans.  Security  Federal's  primary
lending activity consists of the origination of one- to four-family  residential
mortgage  loans secured by property in the Bank's  primary market area. The Bank
generally  originates one- to four-family  residential mortgage loans in amounts
up to 97% of the lesser of the appraised value or purchase  price,  with private
mortgage  insurance  required on loans with a  loan-to-value  ratio in excess of
85%.  The  maximum  loan-to-value  ratio on mortgage  loans  secured by nonowner
occupied properties  generally is limited to 85%. The Bank primarily  originates
and  retains  fixed-rate  balloon  loans  having  terms of up to 15 years,  with
principal and interest  payments  calculated using up to a 30-year  amortization
period.

         Security  Federal  also offers  adjustable  rate  mortgage  loans.  The
interest  rate on  adjustable  rate  mortgage  loans is based on an index plus a
stated  margin.  The  Bank  may  offer  discounted  initial  interest  rates  on
adjustable  rate mortgage loans but the Bank requires that the borrower  qualify
for the adjustable rate mortgage loans at the fully indexed rate (the index rate
plus the margin).  Adjustable rate mortgage loans provide for periodic  interest
rate  adjustments  upward or downward of up to 2% per  adjustment.  The interest
rate  may not  increase  more  than 5% over  the  life of the  loan  and may not
decrease  below the  initial  interest  rate.  Adjustable  rate  mortgage  loans
typically  reprice every one, three or five years and provide for terms of up to
30 years.

         Adjustable  rate  mortgage  loans  decrease  the risk  associated  with
changes in interest  rates by  periodically  repricing,  but involve other risks
because as interest  rates  increase,  the  underlying  payments by the borrower
increase, thus increasing the potential for default by the borrower. At the same
time, the marketability of the underlying  collateral may be adversely  affected
by higher interest rates. Upward adjustment of the contractual  interest rate is
also  limited by the maximum  periodic  and lifetime  interest  rate  adjustment
permitted  by the loan  documents,  and,  therefore  is  potentially  limited in
effectiveness during periods of rapidly rising interest rates.

         Mortgage  loans  originated  and held by the Bank  generally  include a
due-on-sale clause,  which gives the Bank the right to deem the loan immediately
due and payable in the event the  borrower  transfers  ownership of the property
securing the mortgage loan without the Bank's consent.

         Residential  Construction  Loans.  Security Federal offers  residential
construction  loans  on  one-  to  four-family   residential   property  to  the
individuals   who  will  be  the  owners  and  occupants   upon   completion  of
construction.  These loans are made on a long-term  basis and are  classified as
construction/permanent  loans. Usually no principal payments are required during
the first six to eight

                                        5

<PAGE>



months. After that time, the payments are set at an amount that will pay off the
amount of the loan over the term of the loan. The maximum loan to value ratio is
97% with private mortgage insurance.  Because residential construction loans are
not rewritten if permanent  financing is obtained from the Bank, these loans are
made on terms similar to those of the Bank's single family residential loans and
may be paid off over terms of up to 30 years, with payment in full due within 15
years.

         On a limited  basis,  the Bank  also  originates  speculative  loans to
residential builders who have established business  relationships with the Bank.
These  speculative  loans typically are made for a term of twelve months and may
not require principal payments during the term of the loan. In underwriting such
loans,  the Bank  considers  the  number  of units  that  the  builder  has on a
speculative  bid basis that remain unsold.  The Bank's  experience has been that
most  speculative  loans  are  repaid  well  within  the  twelve  month  period.
Speculative loans are generally  originated with a loan to value ratio that does
not exceed 80%.

         Construction lending is generally considered to involve a higher degree
of credit risk than long-term  financing of residential  properties.  The Bank's
risk of loss on a  construction  loan is dependent  largely upon the accuracy of
the initial  estimate of the property's  value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability  of the  property  upon  completion  of the  project  prove  to be
inaccurate,  the Bank may be compelled to advance  additional  funds to complete
the construction.  Furthermore,  if the final value of the completed property is
less  than  the  estimated  amount,  the  value  of the  property  might  not be
sufficient to assure the repayment of the loan. For  speculative  loans that the
Bank  originates  to  builders,  the  ability of the  builder to sell  completed
dwelling  units  will  depend,  among  other  things,  on  demand,  pricing  and
availability of comparable properties, and general economic conditions.

         Commercial and  Multi-Family  Loans.  Commercial  real estate loans are
secured  by  churches,   office  buildings,  and  other  commercial  properties.
Multi-family  loans are secured by apartment and  condominium  buildings.  These
loans generally have not exceeded $450,000 or had terms greater than 10 years.

         Commercial and  multi-family  real estate lending  entails  significant
additional risks compared to residential property lending. These loans typically
involve large loan balances to single borrowers or groups of related  borrowers.
The repayment of these loans typically is dependent on the successful  operation
of the real estate project  securing the loan.  These risks can be significantly
affected  by supply  and demand  conditions  in the market for office and retail
space and may also be subject to adverse conditions in the economy.  To minimize
these risks,  the Bank generally limit this type of lending to their market area
and to borrowers who are otherwise well known to the Bank.

         Commercial Business Loans.  Security Federal offers commercial business
loans to benefit from the higher fees and interest rates and the shorter term to
maturity.  Commercial  business loans consist of equipment,  lines of credit and
other  business  purpose  loans,  which  generally  are  secured  by either  the
underlying properties or by the personal guarantees of the borrower.

         Unlike  residential  mortgage  loans,  which  generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable,  commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business  loans may be  substantially  dependent  on the success of the business
itself and the general economic environment.


                                        6

<PAGE>



         Consumer  Loans.  Consumer  loans  consist of home equity,  automobile,
farm, mobile home, and demand loans secured by savings deposit  accounts.  These
type loans may entail greater risk than residential mortgage loans, particularly
in the case of  consumer  loans that are  unsecured  or  secured by assets  that
depreciate rapidly. Repossessed collateral for a defaulted consumer loan may not
be  sufficient  for  repayment  of  the  outstanding  loan,  and  the  remaining
deficiency may not be collectible.

         Loan Approval  Authority  and  Underwriting.  The Bank's  President has
unlimited loan approval  authority.  The loan committee  generally  approves all
residential mortgage loans of $25,000 or more, and the Bank's Board of Directors
ratifies all mortgage loans and consumer loans at its regular  monthly  meeting.
Commercial  real  estate  loans and  commercial  business  loans  generally  are
approved in advance by the loan committee.

         Upon  receipt  of a  completed  loan  application  from  a  prospective
borrower,  a credit report is ordered.  Income and certain other  information is
verified. If necessary,  additional financial  information may be requested.  An
appraisal or other  estimate of value of the real estate  intended to be used as
security for the proposed loan is obtained.  Appraisals  are processed by one of
the members of the Bank's  Board of  Directors  and an outside  independent  fee
appraiser.

         Construction/permanent  loans are made on individual properties.  Funds
advanced during the construction  phase are held in a  loans-in-process  account
and disbursed at various stages of completion,  following physical inspection of
the construction by a loan officer or appraiser.

         Either title insurance or a title opinion is generally  required on all
real estate loans. Borrowers also must obtain fire and casualty insurance. Flood
insurance is also  required on loans  secured by property  which is located in a
flood zone.

         Loan Commitments. Verbal commitments are given to prospective borrowers
on all approved real estate loans. Generally, the commitment requires acceptance
within 30 days of the date of issuance.  At December 31,  1997,  commitments  to
cover originations of mortgage loans and undisbursed funds for  loans-in-process
were $489,500 and $429,000, respectively.

         Non-Performing  Assets.  The  following  table sets  forth  information
regarding  non-accrual  loans,  real estate owned, and certain other repossessed
assets and loans. As of the dates indicated,  the Bank had no loans  categorized
as troubled debt restructuring within the meaning of SFAS 15.

<TABLE>
<CAPTION>
                                                                                                At December 31,
                                                                                            -------------------------
                                                                                              1996             1997
                                                                                            --------          -------
                                                                                              (Dollars in Thousands)
<S>                                                                                          <C>              <C>
Loans accounted for on a nonaccrual basis:
Real estate loans:
  One- to four-family residential................................................            $  235           $  150
  Commercial.....................................................................                60               --
Consumer.........................................................................                16               59
                                                                                             ------           ------
    Total nonaccrual loans.......................................................               311              209
Accruing loans which are contractually past due 90 days or more..................                 -                -
                                                                                             ------           ------
    Total nonperforming loans....................................................               311              209
Real estate owned................................................................                60                -
                                                                                             ------           ------
Total nonperforming assets.......................................................              $371             $209
                                                                                             ======           ======
Nonaccrual and 90 days past due as a percentage of net loans.....................             0.84%            0.51%
Nonaccrual and 90 days past due as a percentage of total assets..................             0.67%            0.39%
Total nonperforming assets as a percentage of total assets.......................             0.80%            0.39%
</TABLE>



                                        7

<PAGE>




         At December 31, 1997,  interest income that would have been recorded on
loans accounted for on a nonaccrual basis under the original terms of such loans
was immaterial.

         Classified Assets. OTS regulations provide for a classification  system
for problem assets of insured  institutions.  Under this classification  system,
problem  assets  of  insured   institutions  are  classified  as  "substandard,"
"doubtful," or "loss." An asset is considered  substandard if it is inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral  pledged,  if any.  Substandard assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as doubtful have all of
the  weaknesses  inherent in those  classified  as  substandard,  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable  and  improbable."  Assets  classified as loss are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the  establishment  of a specific loss reserve is not warranted.  Assets
may be designated  "special mention" because of potential weakness that does not
currently warrant classification in one of the aforementioned categories.

         When  an  insured  institution  classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets. When an insured  institution  classifies
problem assets as loss, it is required either to establish a specific  allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. An institution's  determination as to the classification of its
assets and the amount of its  valuation  allowances  is subject to review by the
OTS, which may order the  establishment  of additional  general or specific loan
loss  allowances.  A portion of the general loan loss  allowance  established to
cover possible  losses  related to assets  classified as substandard or doubtful
may be  included in  determining  an  institution's  regulatory  capital,  while
specific  valuation  allowances  for loan  losses  generally  do not  qualify as
regulatory capital.

         In  accordance  with its  classification  of  assets  policy,  the Bank
regularly  reviews the problem assets in its portfolio to determine  whether any
assets require classification in accordance with applicable regulations.  On the
basis of management's  review of its assets,  at December 31, 1997, the Bank had
classified  approximately  $306,000  of assets as  substandard,  and  $30,000 of
assets  as  special  mention.  The Bank did not have any  assets  classified  as
doubtful or loss.

         Foreclosed  Real  Estate.  Real  estate  acquired  by us as a result of
foreclosure  is recorded as "real  estate  owned" until such time as it is sold.
When real estate  owned is  acquired,  it is recorded at the lower of the unpaid
principal balance of the related loan or its fair value less disposal costs. Any
write-down of real estate owned is charged to operations.  At December 31, 1997,
the Bank had no foreclosed real estate.

         Allowances for Loan Losses.  It is  management's  policy to provide for
losses on unidentified loans in the loan portfolio.  A provision for loan losses
is charged to  operations  based on  management's  evaluation  of the  potential
losses that may be incurred in the loan portfolio.  The evaluation,  including a
review of all loans on which full  collectibility  of interest and principal may
not be reasonably assured,  considers: (i) the Bank's 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.

         Management monitors the allowance for loan losses and make additions to
the allowance as economic conditions dictate. There can be no assurance that the
allowance for losses will be adequate

                                        8

<PAGE>



to cover losses which may in fact be realized in the future and that  additional
provisions for losses will not be required.

         The following table sets forth  information  with respect to the Bank's
allowance for loan losses at the dates indicated:
<TABLE>
<CAPTION>
                                                                       At December 31,
                                                                    ---------------------
                                                                      1996         1997
                                                                    --------     --------
                                                                    (Dollars in Thousands)

<S>                                                                 <C>          <C>
Total loans outstanding .........................................   $ 38,176     $ 41,496
                                                                    ========     ========
Average loans outstanding .......................................   $ 36,437     $ 39,881
                                                                    ========     ========
Allowance at beginning of period ................................   $    279     $    304
Provision .......................................................         30           10
Recoveries ......................................................         --           --
Charge-offs (consumer loans in 1996) ............................         (5)         (13)
                                                                    --------     --------
Allowance at end of period ......................................   $    304     $    301
                                                                    ========     ========
Allowance for loan losses as a percent of total loans outstanding       0.80%        0.73%
Net loans charged off as percent of average loans outstanding ...         --         0.03%
Ratio of allowance to nonperforming loans .......................       97.7%       144.0%

</TABLE>


Analysis of the Allowance for Loan Losses

         The  following  table sets forth the  allocation  of the  allowance  by
category,  which  management  believes can be allocated  only on an  approximate
basis.  The  allocation  of the  allowance to each  category is not  necessarily
indicative  of future loss and does not  restrict  the use of the  allowance  to
absorb losses in any category.
<TABLE>
<CAPTION>
                                                                                   At December 31,
                                                             -------------------------------------------------------------
                                                                   1996                                     1997
                                                             -------------------------          --------------------------
                                                                         Percent of                            Percent of
                                                                        Loans in Each                        Loans in Each
                                                                         Category to                          Category to
                                                             Amount      Total Loans            Amount        Total Loans
                                                             ------      -----------            ------        ------------
                                                                                 (Dollars in Thousands)

<S>                                                           <C>          <C>                   <C>            <C>
Real estate loans:
  One- to four-family residential..............                $144         77.67%                $136           75.63%
  Construction.................................                  20          2.95                   25            3.86
  Commercial...................................                  45          3.37                   40            3.45
  Multi-family residential.....................                  20          2.39                   20            1.65
  Land.........................................                  25          4.54                   30            7.19
Commercial business and consumer...............                  50          9.08                   50            8.22
                                                               ----        ------                 ----          ------
     Total allowance for loan losses...........                $304        100.00%                $301          100.00%
                                                               ====        ======                 ====          ======
</TABLE>



Investment Activities and Mortgage-Backed Securities

         General.  The Bank is required under federal  regulations to maintain a
minimum  amount of liquid  assets which may be invested in specified  short term
securities  and certain other  investments.  The Bank has maintained a liquidity
portfolio in excess of regulatory requirements. Liquidity levels may be

                                        9

<PAGE>



increased or decreased depending upon the yields on investment  alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other  opportunities  and its expectation of future yield levels,
as well as management's  projections as to the short term demand for funds to be
used in the Bank's loan  origination and other  activities.  The Bank classifies
its investments as securities  available for sale or investment  securities held
to maturity in  accordance  with SFAS No. 115. At December 31, 1997,  the Bank's
investment  portfolio  policy allowed  investments  in instruments  such as U.S.
Treasury  obligations,   U.S.  federal  agency  or  federally  sponsored  agency
obligations,   municipal  obligations,   mortgage-backed  securities,   banker's
acceptances,  certificates of deposit,  federal funds,  including FHLB overnight
and term deposits, as well as investment grade corporate bonds, commercial paper
and the mortgage derivative products described below. The Board of Directors may
authorize additional investments.

         The Bank's  investment  securities  available  for sale and  investment
securities  held to maturity  portfolios  at  December  31, 1997 did not contain
securities  of any issuer with an  aggregate  book value in excess of 10% of the
Bank's  equity,  excluding  those issued by the United States  Government or its
agencies.

         Mortgage-Backed  Securities. To supplement lending activities, the Bank
has  invested  in  residential   mortgage-backed   securities.   Mortgage-backed
securities can serve as collateral for borrowings and, through repayments,  as a
source  of  liquidity.  Mortgage-backed  securities  represent  a  participation
interest in a pool of  single-family  or other type of mortgages,  the principal
and interest payments on which are passed from the mortgage originators, through
intermediaries (generally  quasi-governmental  agencies) that pool and repackage
the participation interests in the form of securities,  to investors such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and  interest  to  investors,  primarily  include  Federal  Home  Loan  Mortgage
Association  ("FHLMC"),   Government  National  Mortgage  Association  ("GNMA"),
Federal   National   Mortgage   Association   ("FNMA"),   and   Small   Business
Administration ("SBA").

         Mortgage-backed  securities  typically are issued with stated principal
amounts and the securities are backed by pools of mortgages that have loans with
interest  rates  that  are  within  a range  and have  varying  maturities.  The
underlying   pool  of  mortgages  can  be  composed  of  either   fixed-rate  or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  are  generally
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages (i.e., fixed-rate or adjustable-rate), as well as prepayment risk, are
passed on to the certificate holder. The life of a mortgage-backed  pass-through
security is equal to the life of the underlying  mortgages.  Expected maturities
will differ from contractual  maturities due to scheduled repayments and because
borrowers  may have the  right to call or  prepay  obligations  with or  without
prepayment penalties.

         Real Estate Mortgage Investment Conduits ("REMIC") are typically issued
by a special purpose entity, which may be organized in a variety of legal forms,
such as a trust, a corporation or a partnership.  The entity aggregates pools of
pass-through  securities or mortgage loans,  which are used to collateralize the
mortgage related securities.  Once combined,  the cash flows can be divided into
"tranches"  or  "classes"  of  individual  securities,   thereby  creating  more
predictable  average lives for each security  than the  underlying  pass-through
pools of  mortgage  loans.  Accordingly,  under  this  security  structure,  all
principal  paydowns  from the  various  mortgage  pools or  mortgage  loans  are
allocated to a mortgage-related  securities' class or classes structured to have
priority  until it has been paid off.  These  securities  generally  have  fixed
interest  rates,  and as a result,  changes in interest  rates  generally  would
affect the market value and possibly the  prepayment  rates of such  securities.
The characterization of a mortgage-related security as a REMIC relates solely to
the tax treatment of the mortgage  related  security under the Internal  Revenue
Code.

                                       10

<PAGE>




Investment Activities

         Investment Portfolio. The following table sets forth the carrying value
of the Bank's  securities  at the dates  indicated.  At December 31,  1997,  the
approximate  fair  value  of  the  Bank's  securities  available  for  sale  was
$6,178,000 resulting in a net unrealized loss of $88,000.

<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                                            -------------------------
                                                                             1996              1997
                                                                             ----              ----
                                                                              (Dollars in Thousands)

<S>                                                                         <C>               <C>
U.S. government and agency securities available for sale.........           $  597            $1,148
U.S. government securities.......................................              398               418
Political subdivision notes......................................              317               159
Mortgage-backed securities available for sale....................            5,768             5,030
FHLB Stock.......................................................              394               423
                                                                            ------            ------
  Total..........................................................           $7,474            $7,178
                                                                            ======            ======
</TABLE>










                                       11

<PAGE>



         The  following  table sets forth  information  regarding  the scheduled
maturities,  carrying  values,  market value and weighted average yields for the
Bank's investment securities portfolio at December 31, 1997. The following table
does not take into  consideration  the effects of  scheduled  repayments  or the
effects of possible prepayments.

<TABLE>
<CAPTION>

                                                         At December 31, 1997
                         ------------------------------------------------------------------------------------------------
                             Less than           1 to           Over 5 to         Over 10            Total
                               1 year           5 years         10 years           years           Securities
                         ----------------- ---------------- ---------------- -------- -------  --------------------------
                          Carrying Average Carrying Average Carrying Average Carrying Average  Carrying          Market
                           Value   Yield    Value    Yield   Value    Yield   Value    Yield    Value    Yield   Value
                           -----   -----    -----    -----   -----    -----   -----    -----    -----    -----   -----
                                                              (Dollars in Thousands)
<S>                        <C>      <C>     <C>      <C>    <C>        <C>    <C>        <C>    <C>        <C>    <C>
U.S. government and
  agencies securities
  available for sale.....  $  899    5.55%   $249      5.50% $   --       --% $   --       --%  $ 1,148     5.54%  $1,148
U.S. government
securities...............      --              --               418     5.91      --       --       418     5.91     367
Political subdivision
notes....................      34    4.95     125      4.50      --       --      --       --       159     4.60     159
Mortgage-backed
  securities available
  for sale:
  GNMA...................       6    9.50      --        --      --       --     682     6.99       688     7.02     688
  FHLMC..................      --      --       4      7.00      --       --      65     7.93        69     7.88      69
  FHLMC Remic............     109    5.50     387      5.54     632     5.50     609     5.33     1,737     5.46   1,737
  FNMA...................      --      --       7     11.00      --       --     607     6.57       614     6.11     614
  FNMA Remic.............      --      --      --        --      --       --   1,922     5.58     1,922     5.58   1,922
FHLB stock (1)...........      --      --      --        --      --       --     423     7.30       423     7.30     423
                           ------    ----    ----      ----  ------     ----  ------     ----   -------     ----  ------

  Total..................  $1,048    5.55%   $772      5.44% $1,050     5.66% $4,308     6.11%  $ 7,178     5.85% $7,127
                           ======    ====    ====      ====  ======     ====  ======     ====   =======     ====  ======
</TABLE>

----------------------------
(1)  Recorded at cost.

                                       12

<PAGE>



Sources of Funds

         General. Deposits are the major external source of the Bank's funds for
lending and other investment purposes.  The Bank derives funds from amortization
and prepayment of loans and, to a much lesser  extent,  maturities of investment
securities,  borrowings,  mortgage-backed  securities and operations.  Scheduled
loan principal repayments are a relatively stable source of funds, while deposit
inflows and  outflows  and loan  prepayments  are  significantly  influenced  by
general interest rates and market conditions.

         Deposits.  Consumer and commercial  deposits are attracted  principally
from within the Bank's  primary  market area through the offering of a selection
of  deposit  instruments  including  regular  savings  accounts,   money  market
accounts, and term certificate accounts. Deposit account terms vary according to
the minimum balance required,  the time period the funds must remain on deposit,
and the interest rate,  among other factors.  At December 31, 1997, the Bank had
no brokered accounts.

         Time Deposits.  The following  table indicates the amount of the Bank's
time  deposits  of  $100,000  or more by time  remaining  until  maturity  as of
December 31, 1997.

                      Maturity Period                           Time Deposits
                      ---------------                           -------------
                                                           (Dollar in Thousands)

Within three months........................................        $1,393
More than three through six months.........................         1,991
More than six through nine months..........................         3,031
Over nine months...........................................         1,121
                                                                   ------
         Total.............................................        $7,536
                                                                   ======


Borrowings

         The Bank may obtain  advances from the FHLB of Cincinnati to supplement
its supply of lendable funds. Advances from the FHLB of Cincinnati are typically
secured by a pledge of the Bank's stock in the FHLB of Cincinnati  and a portion
of the Bank's first  mortgage  loans and certain other assets.  Each FHLB credit
program has its own interest rate, which may be fixed or variable,  and range of
maturities.  The Bank, if the need arises,  may also access the Federal  Reserve
Bank  discount  window to  supplement  its supply of lendable  funds and to meet
deposit withdrawal requirements.

         The following table sets forth information concerning borrowings during
the periods indicated.

                                                     Year Ended June 30,
                                                 ----------------------------
                                                  1996                 1997
                                                 ------               -------
                                                      (Dollars In Thousands)
   Ending balance.............................   $  800               $    --
   Average balance during year ...............       92                    50
   Maximum month-end balance during the year..      800                   900
   Average interest rate during the year......     5.85%                 6.00%
   Weighted average rate at year end..........     5.85%                   --%



                                       13

<PAGE>



Employees

         At  December  31,  1997  the  Bank  had 17  full-time  and 3  part-time
employees.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining  group. The Bank believes that its relationship with its employees is
good.

Regulation

         Set forth below is a brief description of certain laws which related to
the regulation of the Company and the Bank. The description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

Company Regulation

         General.  The  Company is a unitary  savings and loan  holding  company
subject to regulatory  oversight by the OTS. As such, the Company is required to
register  and  file  reports  with  the OTS and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Company and its non-savings association  subsidiaries,  should such subsidiaries
be formed,  which also permits the OTS to restrict or prohibit  activities  that
are determined to be a serious risk to the subsidiary savings association.  This
regulation  and  oversight  is  intended  primarily  for the  protection  of the
depositors of the Bank and not for the benefit of stockholders of the Company.

         Qualified  Thrift  Lender Test.  As a unitary  savings and loan holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the Qualified  Thrift  Lender  ("QTL") test. If the Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the  Company  and any of its  subsidiaries  (other  than the  Bank or any  other
SAIF-insured   savings   association)   would  become  subject  to  restrictions
applicable to bank holding  companies unless such other  associations  each also
qualify  as a QTL  and  were  acquired  in a  supervisory  acquisition.  See  "-
Regulation of the Bank Qualified Thrift Lender Test."

Regulation of the Bank

         General. As a federally  chartered,  SAIF-insured  savings association,
the Bank is subject to  extensive  regulation  by the OTS and the FDIC.  Lending
activities and other  investments must comply with various federal statutory and
regulatory   requirements.   The  Bank  is  also  subject  to  certain   reserve
requirements promulgated by the Federal Reserve Board.

         The OTS, in conjunction with the FDIC,  regularly examines the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that are found in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
and state law,  especially in such matters as the ownership of savings  accounts
and the form and content of the Bank's mortgage documents.

         The Bank must file  reports  with the OTS and the FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended primarily for

                                       14

<PAGE>



the protection of the SAIF and depositors.  The regulatory  structure also gives
the  regulatory  authorities  extensive  discretion  in  connection  with  their
supervisory  and  enforcement  activities and  examination  policies,  including
policies with respect to the  classification  of assets and the establishment of
adequate loan loss reserves for regulatory purposes.

         Under  separate  proposed  legislation,  Congress  is  considering  the
elimination of the federal thrift charter and the separate federal regulation of
thrifts.  As a result,  the Bank might have to convert to a different  financial
institution  charter and be  regulated  under  federal law as a bank,  including
being subject to the more restrictive  activity  limitations imposed on national
banks.  The Bank cannot  predict the impact of its  conversion to, or regulation
as, a bank until the legislation requiring such change is enacted.

         Insurance of Deposit Accounts.  The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured  member (as defined by law
and  regulation).  Insurance  of deposits may be  terminated  by the FDIC upon a
finding that the institution has engaged in unsafe or unsound  practices,  is in
an unsafe or unsound  condition  to continue  operations,  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's  primary  regulator.   The  FDIC  may  also  prohibit  an  insured
depository institution from engaging in any activity the FDIC determines poses a
serious threat to the SAIF.

         The FDIC  charges an annual  assessment  for the  insurance of deposits
based on the risk a particular  institution poses to its deposit insurance fund,
depending upon the institution's risk  classification.  This risk classification
is based on an institution's  capital group and supervisory subgroup assignment.
In addition,  the FDIC is authorized to increase  deposit  insurance  rates on a
semi-annual  basis if it  determines  that such action is necessary to cause the
balance  in the  SAIF  to  reach  the  designated  reserve  ratio  of  1.25%  of
SAIF-insured  deposits  within a reasonable  period of time. The FDIC may impose
special  assessments  on SAIF members to repay  amounts  borrowed  from the U.S.
Treasury  or for any  other  reason  deemed  necessary  by the  FDIC.  Prior  to
September 30, 1996, savings  associations paid within a range of .23% to .31% of
domestic  deposits and the SAIF was  substantially  underfunded.  By comparison,
prior to  September  30,  1996,  members  of the Bank  Insurance  Fund  ("BIF"),
predominantly  commercial banks,  were required to pay  substantially  lower, or
virtually no, federal deposit insurance premiums.

         Effective  September  30,  1996,  federal  law was revised to mandate a
one-time  special  assessment on SAIF members such as the Bank of  approximately
 .657% of deposits held on March 31, 1995.  The Bank recorded a $264,000  pre-tax
expense for this  assessment at September 30, 1996.  Beginning  January 1, 1997,
deposit  insurance  assessments  for SAIF members were reduced to  approximately
 .064% of deposits on an annual basis;  this rate may continue through the end of
1999. During this same period,  BIF members are expected to be annually assessed
approximately  .013%  of  deposits.  Thereafter,  assessments  for BIF and  SAIF
members  should be the same and the SAIF and BIF may be merged.  It is  expected
that these continuing  assessments for both SAIF and BIF members will be used to
repay outstanding Financing  Corporation bond obligations.  As a result of these
changes,  beginning January 1, 1997, the rate of deposit insurance  assessed the
Bank substantially declined.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted  assets,  (2) a leverage ratio (core capital) equal to
at least 3% of total adjusted assets, and (3) a risk-based  capital  requirement
equal to 8.0% of total risk-weighted assets.


                                       15

<PAGE>



         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require  the  Bank  to  give  the OTS 30 days  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory powers to prohibit the payment of dividends to the Company.

         OTS regulations  impose  limitations upon all capital  distributions by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional capital  distributions  require prior regulatory approval.  As of
December 31, 1997,  the Bank was a Tier 1  institution.  In the event the Bank's
capital fell below its fully  phased-in  requirement or the OTS notified it that
it was in need of more than  normal  supervision,  the  Bank's  ability  to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed  capital  distribution  by any  institution,  which would  otherwise be
permitted by the regulation,  if the OTS determines that such distribution would
constitute an unsafe or unsound practice.

         In January 1998, the OTS proposed amendments to its current regulations
with  respect  to  capital  distributions  by  savings  associations.  Under the
proposed regulation,  savings associations that would remain at least adequately
capitalized  following the capital  distribution,  and that meet other specified
requirements,  would not be required to file a notice or application for capital
distributions (such as cash dividends)  declared below specified amounts.  Under
the proposed  regulation,  savings associations which are eligible for expedited
treatment  under current OTS regulations are not required to file a notice or an
application  with the OTS if (i) the savings  association  would remain at least
adequately capitalized following the capital distribution and (ii) the amount of
the  capital  distribution  does not  exceed  an  amount  equal  to the  savings
association's  net income for that year to date, plus the savings  association's
retained  net  income  for the  previous  two years.  Thus,  under the  proposed
regulation,  only  undistributed  net  income  for the  prior  two  years may be
distributed in addition to the current year's  undistributed  net income without
the filing of an application  with the OTS.  Savings  associations  which do not
qualify for expedited  treatment or which desire to make a capital  distribution
in excess of the specified amount, must file an application with, and obtain the
approval  of, the OTS prior to making the capital  distribution.  Under  certain
other circumstances, savings associations will be required to file a notice with
OTS prior to making the capital  distribution.  The OTS proposed  limitations on
capital  distributions  are similar to the  limitations  imposed  upon  national
banks.  The Bank is unable to predict  whether or when the  proposed  regulation
will become effective.

         Qualified  Thrift  Lender Test.  Savings  institutions  must meet a QTL
test. If the Bank maintains an appropriate level of Qualified Thrift Investments
(primarily  residential  mortgages and related  investments,  including  certain
mortgage-related  securities) ("QTIs") and otherwise qualifies as a QTL, it will
continue to enjoy full borrowing  privileges  from the FHLB of  Cincinnati.  The
required  percentage of QTIs is 65% of portfolio  assets  (defined as all assets
minus  intangible  assets,  property used by the  institution  in conducting its
business and liquid  assets equal to 10% of total  assets).  Certain  assets are
subject to a  percentage  limitation  of 20% of portfolio  assets.  In addition,
savings associations may include shares of stock of the FHLBs, FNMA and FHLMC as
qualifying QTIs. An association must be

                                       16

<PAGE>



in  compliance  with  the QTL  test on a  monthly  basis in nine out of every 12
months.  As of  December  31,  1997,  the  Bank was in  compliance  with its QTL
requirement with 87.82% of its assets invested in QTIs.

         Federal  Home  Loan  Bank  System.  The Bank is a member of the FHLB of
Cincinnati,  which  is  one of 12  regional  FHLBs  that  administers  the  home
financing credit function of savings associations. Each FHLB serves as a reserve
or  central  bank for its  members  within  its  assigned  region.  It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB  System.  It makes loans to members  (i.e.,  advances) in  accordance  with
policies and procedures established by the Board of Directors of the FHLB.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of  Cincinnati  in an amount equal to at least 1% of its  aggregate  unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year.

         Liquidity  Requirements.  All  savings  associations  are  required  to
maintain an average  daily  balance of liquid  assets in each  calendar  quarter
equal  to a  certain  percentage  of the  sum of its  net  withdrawable  deposit
accounts and borrowings  payable in one year or less at the end of the preceding
quarter,  or the average daily balance of its net withdrawable  deposit accounts
and  borrowings  payable in one year or less during the preceding  quarter.  The
liquidity  requirement may vary from time to time (between 4% and 10%) depending
upon  economic  conditions  and savings  flows of all savings  associations.  At
December 31, 1997, the Bank's required  liquidity ratio was 4.00%, an its actual
ratio was 12.46%.

         Federal  Reserve  System.   The  Federal  Reserve  Board  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction  accounts (primarily  checking,  NOW, and Super
NOW checking accounts) and non-personal time deposits.  The balances  maintained
to meet the reserve  requirements  imposed by the Federal  Reserve  Board may be
used to satisfy  the  liquidity  requirements  that are  imposed by the OTS.  At
December 31, 1997, the Bank was in compliance  with these Federal  Reserve Board
requirements.

Item 2. Description of Property
-------------------------------

                                                               Year Leased
Location                             Leased or Owned           or Acquired
--------                             ---------------           -----------

MAIN OFFICE:
  632 East Elk Avenue                     Owned                   1980
  Elizabethton, Tennessee

BRANCH OFFICE:
  510 Wallace Avenue                      Owned                   1989
  Elizabethton, Tennessee


         In addition  the Bank owns  property at the  intersection  of Riverside
Drive  and  Hattie  Avenue,   Elizabethton,   Tennessee   which  consists  of  a
single-family  dwelling  that the Bank  rents  for  $400 per  month  and a paved
parking area for the Bank's customers and employees.


                                       17

<PAGE>



(b)      Investment Policies.

         See "Item 1.  Business"  above for a general  description of the Bank's
investment  policies and any  regulatory  or Board of  Directors'  percentage of
assets  limitations  regarding certain  investments.  The Bank's investments are
primarily acquired to produce income,  and to a lesser extent,  possible capital
gain.

         (1)      Investments  in Real Estate or Interests  in Real Estate.  See
"Item 1. Business - Lending  Activities and - Regulation of the Bank," and "Item
2. Description of Property."

         (2)      Investments in Real Estate Mortgages.  See "Item 1. Business -
Lending Activities and Regulation of the Bank."

         (3)      Investments in Securities of or Interests in Persons Primarily
Engaged in Real Estate  Activities.  See "Item 1. Business - Lending  Activities
and - Regulation of the Bank."

(c)      Description of Real Estate and Operating Data.

         Not Applicable.

Item 3. Legal Proceedings
-------------------------

         There are various  claims and lawsuits in which the Company or the Bank
are  periodically  involved,  such as  claims  to  enforce  liens,  condemnation
proceedings  on properties in which the Bank holds  security  interests,  claims
involving  the making and  servicing of real  property  loans,  and other issues
incident to the Bank's business. In the opinion of management,  no material loss
is expected from any of such pending claims or lawsuits.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.

                                     PART II

Item  5.  Market for Common Equity and Related Stockholder Matters
------------------------------------------------------------------

         The  Company's  common stock has been traded on the OTC Bulletin  Board
under the trading symbol of "SFBK" since it commenced  trading in June 1997. The
following  table  reflects high and low bid quotations as published by Bloomberg
News. The  quotations  reflect  inter-dealer  prices,  without  retail  mark-up,
mark-down, or commission, and may not represent actual transactions.

                                                                     Dividends
             Date                        High         Low            Declared
             ----                        ----         ---            --------

June 1, 1997 - June 30, 1997             $14.00      $13.38            $ --

July 1, 1997 - September 30, 1997        $15.50      $14.00            $ --

October 1, 1997 - December 31, 1997      $15.63      $14.50            $ --



                                       18

<PAGE>



         The number of  shareholders  of record of common  stock as of March 15,
1998,  was  approximately  162.  This does not  reflect the number of persons or
entities who held stock in nominee or "street"  name through  various  brokerage
firms. At March 15, 1998, there were 767,000 shares  outstanding.  The Company's
ability to pay  dividends to  stockholders  is dependent  upon the  dividends it
receives  from the Bank.  The Bank may not declare or pay a cash dividend on any
of its stock 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.

Item  6.  Management's Discussion and Analysis or Plan of Operation
-------------------------------------------------------------------

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Annual Report is incorporated herein by reference.

Item  7.  Financial Statements
------------------------------

         The  Registrant's   financial  statements  listed  under  Item  13  are
incorporated herein by reference.

Item  8.  Changes  in and  Disagreements  with  Accountants  On  Accounting  and
--------------------------------------------------------------------------------
Financial Disclosure.
--------------------

         Not applicable.

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons: Compliance
--------------------------------------------------------------------------------
with Section 16(a) of the Exchange Act.
--------------------------------------

         The information  contained under the sections  captioned "Section 16(a)
Beneficial  Ownership  Reporting  Compliance" and "Proposal I - Information with
Respect to Nominees for Director,  Directors Continuing in Office, and Executive
Officers - Election  of  Directors"  and " -  Biographical  Information"  in the
"Proxy Statement" is incorporated herein by reference.

Item 10.  Executive Compensation
--------------------------------

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

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         (a)      Security Ownership of Certain Beneficial Owners

                  Information  required by this item is  incorporated  herein by
                  reference  to  the  first  chart  in  the  section   captioned
                  "Proposal  I  -  Information  with  Respect  to  Nominees  for
                  Director,   Directors  Continuing  in  Office,  and  Executive
                  Officers" in the Proxy Statement.


                                       19

<PAGE>



         (b)      Security Ownership of Management

                  Information  required by this item is  incorporated  herein by
                  reference  to  the  first  chart  in  the  section   captioned
                  "Proposal  I  -  Information  with  Respect  to  Nominees  for
                  Director,   Directors  Continuing  in  Office,  and  Executive
                  Officers" in the Proxy Statement.

         (c)      Management  of  the  Registrant   knows  of  no  arrangements,
                  including  any  pledge  by any  person  of  securities  of the
                  Registrant,  the  operation of which may at a subsequent  date
                  result in a change in control of the Registrant.

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

         The  information  required  by this  item  is  incorporated  herein  by
reference  to  the  section   captioned   "Certain   Relationships  and  Related
Transactions" in the Proxy Statement.

Item 13. Exhibits, List and Reports on Form 8-K
-----------------------------------------------

         (a) Listed below are all  financial  statements  and exhibits  filed as
part of this report.

                  (1)      The consolidated balance sheets of SFB Bancorp,  Inc.
                           and  subsidiary  as of December 31, 1996 and 1997 and
                           the related consolidated  statements of comprehensive
                           income,  changes  in  stockholders'  equity  and cash
                           flows  for each of the  years in the two year  period
                           ended  December 31, 1997,  together  with the related
                           notes and the independent  auditors'  report of Crisp
                           Hughes  Evans  LLP,   independent   certified  public
                           accountants.

                   (2)     Schedules omitted as they are not applicable.

                  3.       The following exhibits are included in this Report or
incorporated herein by reference:

                   (a)     List of Exhibits:
                   3(i)    Charter of SFB Bancorp, Inc.
                   3(iii)  Bylaws of SFB Bancorp, Inc.
                   4       Specimen Stock Certificate *
                  10       Employment  Agreement  between  the Bank and Peter W.
                           Hampton*
                  13       1997 Annual Report to Stockholders
                  21       Subsidiaries   of  the   Registrant   (See  "Item  1-
                           Description of Business)
                  23       Consent of Independent Auditors
                  27       Financial Data Schedule (electronic filing only)

---------------------
*         Incorporated by reference to the  registration  statement on Form SB-2
          (File No. 333-23505) declared effective by the SEC on April 14, 1997.

                  (b)      Not applicable.

                                       20

<PAGE>



                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its   behalf   by   the   undersigned,   thereunto   duly   authorized   as   of
March 26, 1998.

                                    SFB BANCORP, INC.


                                    By:/s/Peter W. Hampton
                                       -----------------------------------------
                                       Peter W. Hampton
                                       President and Director
                                       (Duly Authorized Representative)

         Pursuant to the  requirement  of the  Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities indicated as of March 26, 1998.


/s/ Peter W. Hampton                   /s/ Donald W. Tetrick
------------------------------------   -----------------------------------------
Peter W. Hampton                       Donald W. Tetrick
President and Director                 Director
(Principal Executive Officer)


/s/ Peter W. Hampton, Jr.              /s/ John R. Crockett, Jr.
------------------------------------   -----------------------------------------
Peter W. Hampton, Jr.                  John R. Crockett, Jr.
Secretary and Director                 Treasurer and Director


/s/ Julian T. Caudill, Jr.             /s/ Estill L. Caudill, Jr.
------------------------------------   -----------------------------------------
Julian T. Caudill, Jr.                 Estill L. Caudill, Jr.
Director                               Director


/s/ Bobby Hyatt
------------------------------------
Bobby Hyatt
Assistant Vice President
(Principal Accounting Officer)