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,
2000  through  December  31,  2001.  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, 2000 - March 31, 2000 ...............     $11.75    $10.75    $  --
April 1, 2000 - June 30, 2000 ..................     $11.88    $10.13    $0.10
July 1, 2000 - September 30, 2000 ..............     $12.13    $10.13    $  --
October 1, 2000 - December 31, 2000.............     $12.06    $11.75    $0.10
January 1, 2001 - March 31, 2001 ...............     $12.56    $11.75    $  --
April 1, 2001 - June 30, 2001 ..................     $12.50    $12.13    $0.10
July 1, 2001 - September 30, 2001 ..............     $13.25    $12.35    $  --
October 1, 2001 - December 31, 2001.............     $12.70    $12.40    $0.35



 PAGE>


         The  number  of  shareholders  of  record  as of March  29,  2002,  was
approximately  150.  This does not reflect the number of persons or entities who
held stock in "street" name through various  brokerage firms. At March 29, 2002,
there were 582,995 shares outstanding.

         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 77% of the loan portfolio at December 31, 2001. 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, 2001, 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 6
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, 2001.

             Changes             NPV
             in Rates        Ratio % (1)      Change (2)
             --------        -----------      ----------
           +300 bp              14.78          -466 bp
           +200 bp              16.45          -300 bp
           +100 bp              18.07          -138 bp
              0 bp              19.77             0 bp
           -100 bp              20.39          + 94 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,
                                                ----------------------------------------------------
                                                          2000                       2001
                                                -------------------------  -------------------------
                                                                  Average                    Average
                                                Average            Yield/  Average            Yield/
                                                Balance  Interest   Cost   Balance  Interest   Cost
                                                -------  -------- -------  -------  -------- -------
                                                               (Dollars in Thousands)
<S>                                          <C>        <C>       <C>     <C>      <C>       <C>

Interest-earning assets:
  Loans receivable (1).....................     $45,519   $3,688     8.10%  $46,343  $3,812     8.23%
  Investment securities ...................       3,002      160     5.33     1,215      65     5.35
  Interest-earning deposits................         536       29     5.41     4,964     141     2.84
  Federal Home Loan Bank stock.............         503       37     7.36       541      36     6.65
  Mortgage-backed securities...............       1,833      110     6.00     1,744      93     5.33
                                                 ------    -----             ------   -----
Total interest-earning assets..............      51,393    4,024     7.83    54,807   4,147     7.57
                                                           -----                      -----
Non-interest-earning assets................       2,012                       2,028
                                                  -----                      ------
Total assets                                    $53,405                     $56,835
                                                 ======                      ======
Interest-bearing liabilities:
  Interest-bearing demand deposits.........      $9,311      229     2.46   $10,103     206     2.04
  Certificates of deposit..................      31,609    1,805     5.71    34,416   1,954     5.68
  Short-term borrowings....................         433       29     6.70         -                -
                                                 ------    -----             ------   -----
Total interest-bearing liabilities.........      41,353    2,063     4.99    44,519   2,160     4.85
                                                           -----                      -----
Non-interest-bearing liabilities...........       1,069                       1,084
                                                 ------                      ------
Total liabilities..........................      42,422                      45,603
                                                 ------                      ------
Total stockholders' equity.................      10,983                      11,232
                                                 ------                      ------
Total liabilities and stockholders' equity.     $53,405                     $56,835
                                                 ======                      ======
Net interest income........................               $1,961                     $1,987
                                                           =====                      =====
Interest rate spread (2)...................                         2.84%                      2.72%
                                                                    ====                       ====

Net yield on interest-earning assets (3)...                         3.82%                      3.62%
                                                                    ====                       ====
Ratio of average interest-earning assets to
  average interest-bearing liabilities.....                       124.28%                    123.11%
                                                                  ======                     ======

</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,
                                    ------------------------------------------- -----------------------
                                                2000 vs. 1999                 2001    vs.     2000
                                    -------------------------------    --------------------------------
                                             Increase (Decrease)              Increase (Decrease)
                                                   Due to                           Due to
                                    -------------------------------    --------------------------------
                                                     Rate/                               Rate/
                                    Volume   Rate   Volume    Net      Volume    Rate   Volume    Net
                                    ------  ------  ------  -------    ------   -----   ------  -------
<S>                               <C>     <C>    <C>      <C>        <C>     <C>      <C>     <C>
                                                                  (Dollars in Thousands)
Interest income:
 Loans receivable................    $318    $ 22   $   -    $ 340      $ 67    $ 56     $  1    $ 124
 Mortgage-backed securities......     (48)     15      (4)     (37)       (5)    (12)       -      (17)
 Investment securities...........     (18)      2       -      (16)      (95)      -       (1)     (96)
 Other interest-earning assets...     (89)     35     (22)     (76)      284     (32)    (140)     112
                                      ---     ---    ----     ----       ---     ---     ----     ----
  Total interest income..........    $163    $ 74   $ (26)   $ 211      $251    $ 12    $(140)   $ 123
                                      ===     ===    ====     ====       ===     ===     ====     ====
Interest expense:
 Savings accounts................    $ 20    $195   $   1    $ 216      $179    $(49)   $  (4)   $ 126
 Other liabilities...............      29       -       -       29       29      (29)     (29)     (29)
                                      ---     ---    ----     ----       ---     ---     ----     ----
   Total interest expense........    $ 49    $195       1    $ 245      $208    $(78)   $ (33)   $  97
                                      ===     ===    ====     ====       ===     ===     ====     ====

Net change in net-interest income    $114   $(121)  $ (27)  $ (34)     $ 43    $ 90    $(107)   $  26
                                      ===    ====    ====     ====       ===     ===     ====     ====
</TABLE>


Comparison of Financial Condition

         The Company's total consolidated assets increased by approximately $2.5
million,  or 4.5%,  from $55.0 million at December 31, 2000, to $57.5 million at
December 31,  2001.  The  increase in assets for 2001 was  primarily  due to new
deposit funds of  approximately  $3.1 million and retained  profits of $300,000,
offset by repayment of Federal Home Loan Advances of $1.0 million.

         Investment securities decreased  approximately $984,000 to $1.5 million
at December 31, 2001.  Mortgage backed securities  increased  approximately $1.3
million to $2.9 million at December 31, 2001.

         Stockholders'  equity increased $388,000 to approximately $11.6 million
at December 31, 2001,  from $11.2 million at December 31, 2000. The increase was
attributable  to  comprehensive   income  of  approximately   $526,000  and  the
amortization of $179,000 of unearned  compensation,

<PAGE>



offset by the repurchase of approximately  $70,000 of the Company's  outstanding
capital stock and payment of cash dividends in the amount of $247,000.

Comparison  of the Results of Operations  for the Years Ended  December 31, 2000
and 2001

         Net Income.  Net income  increased  $4,000,  from  $485,000 in 2000, to
$489,000 in 2001.  Dilutive  income per share  increased $.05, from $.84 for the
year ended December 31, 2000, to $.89 for the year ended December 31, 2001.

         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 $26,000  increase in net interest  income for 2001,  as compared to
2000,  primarily  reflects an increase in average  interest-earning  assets over
average interest-bearing  liabilities of approximately $248,000,  offset by a 12
basis point  decrease in the interest rate spread.  The interest rate spread for
2001 decreased to 2.72%.  The net interest  margin  decreased 20 basis points to
3.62% for 2001, from 3.82% for 2000.

         Interest  Income.  Interest income  increased  $123,000,  or 3.1%, from
approximately $4.0 million for 2000, to approximately $4.1 million for 2001. The
overall  increase in interest  income was primarily the result of an increase in
average  interest-earning  assets of  approximately  $3.4  million for 2001,  as
compared to 2000, offset by a decrease in the average yield on  interest-earning
assets of 26 basis points, from 7.83% for 2000, to 7.57% for 2001.

         Interest on loans increased $124,000 for 2001, as compared to 2000. The
increase  primarily  reflects an approximate  $824,000 increase in average loans
outstanding,  combined  with an increase in the average  yield on average  loans
outstanding  of 13 basis points,  from 8.10% for 2000, to 8.23% for 2001.  Loans
receivable  are  the  largest  interest-earning  asset  held  in  the  Company's
portfolio.

         Interest  on  investment  securities  decreased  $96,000  for 2001,  as
compared to 2000. The decrease in interest on investments  primarily  reflects a
decrease of  approximately  $1.8 million in the average  investment  balance for
2001,  compared to 2000.  The  average  yield on  investments  increased 2 basis
points to 5.35% for 2001, compared to 2000.

         Interest on  interest-earning  deposits increased $112,000 for 2001, as
compared 2000. The increase in interest on  interest-earning  deposits primarily
reflects an increase of  approximately  $4.4  million in the average  balance of
interest-earning  deposits in 2001,  compared to 2000.  The Company  anticipates
utilizing  the cash and  interest-earning  deposit  balances to fund future loan
demand.

<PAGE>


         Interest  on  mortgage-backed  securities  decreased  $17,000 for 2001,
compared to 2000. The decrease in the interest on mortgage-backed securities was
primarily  the  result  of  a  decrease  in  the  average  invested  balance  of
mortgage-backed  securities of approximately $89,000 for 2001, compared to 2000,
combined with a 67 basis point  decrease on the average yield to 5.33% for 2001,
from 6.00% for 2000.

         Interest  Expense.  Interest expense increased  approximately  $97,000,
from $2.1 million for the year ended  December 31, 2000, to  approximately  $2.2
million for the year ended December 31, 2001. The increase for 2001, as compared
to 2000, was primarily the result of an approximate $3.2 million increase in the
average  balance of  interest-bearing  liabilities,  offset by a 14 basis  point
decrease  in the  average  cost  of  funds.  As the  interest  rate  environment
stabilized  in the last half of 2001,  the  Company was able to gain relief from
repricing customer deposits at lower cost of funds.

         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, 2001,  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.  Fees on new loan  production and service fees
on other products and services  produce the income.  Total  non-interest  income
amounted to $215,000 and $197,000 for 2001 and 2000, respectively.

         Non-Interest  Expense.   Non-interest  expense  increased  $52,000,  to
approximately  $1.4 million at December 31, 2001. The increase was primarily the
result of increased net  compensation  expense of $20,000 and a combined $32,000
increase in net occupancy,  data  processing  expenses and other  expenses.  The
increase in  compensation  expense for 2001, as compared to 2000,  was primarily
associated  with normal  compensation  increases.  The increase in net occupancy
expense  for  2001,  compared  to 2000,  was  mainly  attributable  to  expenses
associated with the Bank's additional branch office in Mountain City, Tennessee.
The increase in data processing  expense for 2001,  compared to 2000, was mainly
attributable to expenses  associated with increased  transaction  volumes,  data
communications expenses, and inflationary increases in the costs associated with
data processing.  The increase in other expenses for 2001, compared to 2000, was
mainly  attributable  to higher  general  operating  expenses and those expenses
associated with being a public company.

         Income  Taxes.  Income  tax  expense  decreased  $12,000,  or 3.8%,  to
$303,000 for the year ended December 31, 2001,  from $315,000 for the year ended
December 31, 2000.  The effective  tax rate for 2001 and 2000 was  approximately
38.3% and 39.4%, respectively.

<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, 2001 totaled  $810,000,  as compared to $756,000 for the year ended December
31, 2000. The increase in net cash provided by operating activities for 2001, as
compared to 2000, was primarily the result of efficient bank operations.

         Net cash provided by investing  activities  for the year ended December
31, 2001 totaled  approximately $2.1 million,  an increase of approximately $4.1
million in 2001, as compared to 2000. The increase was primarily attributable to
net loan  repayments  and  maturities  of  securities,  offset by  purchases  of
investments securities available for sale.


<PAGE>



         Net  cash   provided  by   financing   activities   for  2001   totaled
approximately  $1.8  million.  This was  primarily  the result of an increase in
deposits in 2001 of $3.1 million, offset by approximately $1.0 million repayment
of FHLB advances and $247,000 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, 2001, 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,  2001,  management  was  not  aware  of  any  current
recommendations by the regulatory  authorities that, if implemented,  would have
such an effect.


<PAGE>




                          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, 2000 and 2001,
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, 2000 and 2001, 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.


/S/CRISP HUGHES EVANS LLP
-------------------------

Asheville, North Carolina
January 24, 2002



<PAGE>






                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>

                                                                                 December 31,
                                                                              -----------------
           Assets                                                              2000       2001
           ------                                                             ------    -------
<S>                                                                        <C>       <C>

Cash on hand                                                                  $   581   $   579
Interest earning deposits                                                       1,540     6,207
                                                                               ------    ------
         Cash and cash equivalents                                              2,121     6,786

Investment securities:
   Held to maturity (market value of $841 in 2000 and $672 in 2001)               870       718
   Available for sale                                                           1,621       789
Loans receivable, net                                                          46,814    44,384
Mortgage-backed securities:
   Available for sale                                                           1,659     2,932
Premises and equipment, net                                                       957       898
Federal Home Loan Bank stock, at cost                                             524       560
Accrued interest receivable                                                       355       262
Other assets                                                                       47       128
                                                                               ------    ------
         Total assets                                                         $54,968   $57,457
                                                                               ======    ======
   Liabilities and Stockholders' Equity
   ------------------------------------
Deposits:
   Non-interest-bearing                                                       $   820     1,388
   Interest-bearing                                                            41,432    43,962
                                                                               ------    ------
         Total deposits                                                        42,252    45,350

Federal Home Loan Bank advances                                                 1,000         -
Advance payments by borrowers for taxes and insurance                             222       198
Accrued expenses and other liabilities                                            128        99
Income taxes:
   Current                                                                         18        53
   Deferred                                                                       129       150
                                                                               ------    ------
         Total liabilities                                                     43,749    45,850
                                                                               ------    ------
Stockholders' equity:
   Common stock ($.10 par value, 4,000,000 shares authorized;
     767,000 shares issued; 588,595 and 582,995 outstanding at                     77        58
     December 31, 2000 and 2001, respectively)
   Paid-in capital                                                              7,392     5,112
   Retained income, substantially restricted                                    6,539     6,781
   Treasury stock at cost (178,405 shares at December 31, 2000)                (2,245)        -
   Accumulated other comprehensive income                                         (57)      (20)
   Unearned compensation:
     Employee stock ownership plan                                               (348)     (278)
     Restricted stock plan                                                       (139)      (46)
                                                                               ------    ------
         Total stockholders' equity                                            11,219    11,607
                                                                               ------    ------
         Total liabilities and stockholders' equity                           $54,968   $57,457
                                                                               ======    ======
</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,
                                                     -------------------------
                                                       2000             2001
                                                     --------         --------
Interest income:
   Loans                                              $3,688            $3,812
   Mortgage-backed securities                            110                93
   Investments                                           197               101
   Interest earning deposits                              29               141
                                                       -----             -----
         Total interest income                        $4,024            $4,147
                                                       -----             -----

Interest expense:
   Deposits                                           $2,034             2,159
   Federal Home Loan Bank advances                        29                 1
                                                       -----             -----
         Total interest expense                        2,063             2,160
                                                       -----             -----

         Net interest income                           1,961             1,987

Provision for loan losses                                 36                36
                                                       -----             -----
         Net interest income after provision
           for loan losses                             1,925             1,951
                                                       -----             -----
Non-interest income:
   Loan fees and service charges                         181               208
   Other                                                  16                 7
                                                       -----             -----
         Total non-interest income                       197               215
                                                       -----             -----
Non-interest expenses:
   Compensation                                          668               683
   Employee benefits                                     126               131
   Net occupancy expense                                 124               135
   Deposit insurance premiums                              8                 8
   Data processing                                       124               129
   Other                                                 272               288
                                                       -----             -----
         Total non-interest expenses                   1,322             1,374
                                                       -----             -----
         Income before income taxes                      800               792

Income tax expense                                       315               303
                                                       -----             -----
         Net income                                   $  485            $  489
                                                       =====             =====
Earnings per share:
   Basic                                              $  .84            $  .89
   Diluted                                               .84               .89
                                                       =====             =====

         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,
                                                ------------------------
                                                 2000              2001
                                                ------            ------

Net income                                      $ 485             $ 489

Other comprehensive income:
   Net unrealized gains (losses) on
     securities available for sale,
     net of tax benefit of $(8) and $24,
     respectively                                 (12)               37
                                                 ----              ----

Comprehensive income                            $ 473             $ 526
                                                 ====              ====







         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>

                                                                                    Accumulated
                                                                                        Other            Unearned Compensation
                                           Common    Paid-In  Retained   Treasury   Comprehensive    ----------------------------
                                            Stock    Capital   Income      Stock       Income        for ESOP   for RSP     Total
                                           ------    -------  --------   --------   -------------    --------   -------  --------
<S>                                        <C>   <C>        <C>       <C>            <C>            <C>       <C>     <C>

Balance at December 31, 1999                  77    $ 7,382    $6,165    $(1,208)       $ (45)         $(419)    (236)   $11,716

Net income                                     -          -       485          -            -              -        -        485

Other comprehensive income                     -          -         -          -          (12)             -        -        (12)

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

Treasury stock purchased (90,822 shares)       -          -         -     (1,037)           -              -        -     (1,037)

Compensation earned                            -         10         -          -            -             71       97        178
                                             ---     ------    ------     ------         ----           ----    -----    -------
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 share)           -          -      (247)         -            -              -        -       (247)

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

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

Compensation earned                            -         16         -          -            -             70       93        179
                                             ---     ------     -----     ------         ----           ----    -----     ------
alance at December 31, 2001                 $ 58    $ 5,112    $6,781    $     -        $ (20)         $(278)     (46)   $11,607
                                             ===     ======     =====     ======         ====           ====    =====     ======

</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,
                                                                        ------------------------
                                                                          2000           2001
                                                                        ---------     ---------
<S>                                                                   <C>          <C>
Operating activities:
   Net income                                                            $   485      $   489
   Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation                                                            100          106
     Provision for loan losses                                                36           36
     Loss on disposal of real estate owned                                    21            -
     Deferred income taxes (benefit)                                          36           (4)
     Net decrease in deferred loan fees                                      (23)         (17)
     Accretion of discounts on investment securities, net                    (24)         (26)
     Amortization of premiums on mortgage-backed securities                    8            5
     Amortization of unearned compensation                                   178          179
     FHLB stock dividends                                                    (37)         (36)
     Net changes in:
       Other assets                                                           62          (20)
       Accrued interest receivable                                           (75)          93
       Accrued expenses and other liabilities                                (29)         (30)
       Income taxes--current                                                  18           35
                                                                          ------      -------
         Net cash provided by operating activities                           756          810
                                                                          ------      -------
Investing activities:
   Maturities of investment securities held to maturity                      171          177
   Maturities of investment securities available for sale                    500        2,325
   Principal payments on mortgage-backed securities
     available for sale                                                      466          326
   Purchase of investment securities available for sale                        -       (3,034)
   Proceeds from disposal of real estate owned                                76            -
   Purchase of other assets                                                               (10)
   Net (increase) decrease in loans                                       (3,135)       2,411
   Purchase of premises and equipment                                        (46)         (97)
                                                                          ------       ------
         Net cash provided (used) by investing activities                 (1,968)       2,098
                                                                          ------       ------
</TABLE>


                                                                     (continued)

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                Consolidated Statements of Cash Flows, Continued
                                 (in thousands)


<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                                          ---------------------------
                                                                             2000              2001
                                                                           --------         ---------
<S>                                                                     <C>              <C>
Financing activities:
   Net increase in deposits                                                $ 1,817          $ 3,098
   Increase (decrease) in advance payments by borrowers
     for taxes and insurance                                                     2              (24)
   Proceeds from FHLB advances                                               3,400                -
   Repayments of FHLB advances                                              (2,900)          (1,000)
   Treasury stock purchased                                                 (1,037)             (70)
   Dividends paid                                                             (111)            (247)
                                                                           -------           ------
         Net cash provided by financing activities                           1,171            1,757
                                                                           -------           ------
         Increase (decrease) in cash and cash equivalents                      (41)           4,665

Cash and cash equivalents at beginning of year                               2,162            2,121
                                                                           -------           ------
Cash and cash equivalents at end of year                                   $ 2,121          $ 6,786
                                                                            ======           ======
Supplemental disclosures of cash flow information:
 Cash paid during the year for:
     Interest                                                              $ 2,078          $ 2,176
     Income taxes                                                              197              273
                                                                            ======           ======
Non-cash transactions:
   Loans to facilitate sale of real estate                                 $   152          $     -
   Foreclosed loans transferred to real estate                                 249                -
   Change in unrealized gains (losses) on securities and mortgage-
     backed securities available for sale, net of income taxes             $   (12)         $    37
                                                                            ======           ======

</TABLE>




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



<PAGE>



SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 2000 and 2001
                         (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 effect 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  which,  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>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


     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  which  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.

     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.


<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

     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.

     For the years ended December 31, 2000 and 2001, 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, 2000 and 2001.

<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

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

                                                    Years Ended December 31,
                                                    ------------------------
                                                      2000             2001
                                                    -------          -------

   Net income applicable to common stock             $ 485            $ 489
                                                      ====             ====

   Average number of common shares outstanding         575              552
   Effect of dilutive options                            -                -
                                                      ----             ----
   Average number of common shares outstanding
     used to calculate diluted earnings per common
     share                                             575              552
                                                      ====             ====


     Comprehensive  Income  -  Accounting   principles  generally  require  that
     ---------------------
     recognized revenue,  expenses,  gains and losses be included in net income.
     Although  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  -  On  July  20,  2001  the  Financial
     -----------------------------------
     Accounting  Standards  Board (the  "FASB")  issued  Statement  of Financial
     Accounting Standards ("SFAS") No. 141, Business Combinations,  and No. 142,
     Goodwill and Other Intangible Assets. SFAS Nos. 141 and 142 will change the
     accounting for business  combinations and goodwill in two significant ways.
     First, SFAS No. 141 requires that the purchase method of accounting be used
     for all business  combinations  initiated  after June 30, 2001.  Use of the
     pooling-of-interests method is prohibited. Second, SFAS No. 142 changes the
     accounting for goodwill from an amortization  method to an  impairment-only
     approach. The impact of these statements is not expected to have a material
     impact on the Company's financial statements.

     In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement
     Obligations and in July 2001, the FASB issued SFAS No. 144,  Accounting for
     Impairment or Disposal of Long-Lived Assets.

     SFAS 143  requires  that  obligations  associated  with the  retirement  of
     tangible   long-lived   assets  be  recorded  as  a  liability  when  those
     obligations are incurred,  with the amount of liability  initially measured
     at  fair  value.  SFAS  143  will be  effective  for  financial  statements
     beginning  after June 15, 2002,  though early adoption is  encouraged.  The
     application of this statement is not expected to have a material  impact on
     the Company's financial statements.

<PAGE>

SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


     SFAS 144 supersedes  SFAS 121,  Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to be Disposed Of. SFAS 144 applies to all
     long-lived assets including discontinued operations,  and amends Accounting
     Principle  Board  Opinion  No. 30,  Reporting  the Effect of  Disposal of a
     Segment  of  a  Business,  and  Extraordinary,   Unusual  and  Infrequently
     Occurring Events and Transactions. SFAS 144 requires that long-lived assets
     that are to be disposed of by sale be measured at the lower of book or fair
     value less cost to sell.  SFAS 144 is effective  for  financial  statements
     issued  for  fiscal  years  beginning  after  December  15,  2001  and  its
     provisions  are  generally  expected  to  be  applied  prospectively.   The
     application of this statement is not expected to have a material 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, 2000:
             U.S. government security            $   487       $   -      $  29       $   458
             Municipal securities                    383           -          -           383
                                                  ------        ----       ----        ------
                                                 $   870       $   -      $  29       $   841
                                                  ======        ====       ====        ======
           December 31, 2001:
             U.S. government security            $   513       $   -      $  46       $   467
             Municipal securities                    205           -          -           205
                                                  ------        ----       ----        ------
                                                 $   718       $   -      $  46       $   672
                                                  ======        ====       ====        ======
         Securities available for sale:
           December 31, 2000:
             U.S. government and
               agency securities                 $ 1,625       $   -      $   4       $ 1,621
                                                  ======        ====       ====        ======
           December 31, 2001:
             U.S. government and
               agency securities                     597           -          -           597
             Other                                   192           -          -           192
                                                  ------        ----       ----        ------
                                                 $   789       $   -      $   -       $   789
                                                  ======        ====       ====        ======
</TABLE>


<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


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


<TABLE>
<CAPTION>
                                                   Amortized             Estimated
                                                      Cost               Fair Value
                                                 ----------------     -----------------
                                                  2000     2001         2000      2001
                                                 ------   ------       ------    ------
 <S>                                           <C>      <C>          <C>       <C>
        Securities to be held to maturity:
           Due in one year                       $   31   $    -       $   31    $   -
           Due  after  one  year  through
             five years                             352      205          352      205
           Due after ten years                      487      513          458      467
                                                  -----    -----        -----     ----
                                                 $  870   $  718       $  841    $ 672
                                                  =====    =====        =====     ====
         Securities available for sale:
           Due in one year                       $1,125   $    -       $1,123    $   -
           Due  after  one  year  through
             five years                             500      597          498      597
                                                  -----    -----        -----     ----
                                                 $1,625   $  597       $1,621    $ 597
                                                  =====    =====        =====     ====
</TABLE>


     The Bank had investment  securities with an amortized cost of approximately
     $1,112,000 and $513,000  pledged against  deposits at December 31, 2000 and
     2001, respectively.

     The Bank had no sales of  investment  securities  to be held to maturity or
     available for sale for the years ended December 31, 2000 and 2001.

3.   Loans Receivable
     ----------------

     Loans receivable are summarized as follows:

                                                          December 31,
                                                      -------------------
                                                        2000       2001
                                                      --------    -------
         Real estate first mortgage loans:
           One-to-four-family                         $30,174     $28,678
           Construction                                 1,784         995
           Commercial real estate                       1,707       2,286
           Multi-family residential                     3,217       3,679
           Land                                         4,363       3,378
                                                       ------      ------
               Total real estate loans                 41,245      39,016
                                                       ------      ------
         Consumer and commercial loans:
           Commercial business                          2,009       2,630
           Auto loans                                   3,488       2,715
           Share loans                                    217         289
           Other                                          747         543
                                                       ------      ------
               Total consumer and commercial loans      6,461       6,177
                                                       ------      ------
               Total loans                            $47,706     $45,193
                                                       ------      ------

                                                                     (continued)

<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

                                                            December 31,
                                                         ------------------
                                                           2000       2001
                                                         -------    -------
         Less:
           Undisbursed portion of loans in process       $   515    $   423
           Net deferred loan fees                             30         13
           Allowance for loan losses                         347        373
                                                          ------     ------
                                                             892        809
                                                          ------     ------
                                                         $46,814    $44,384
                                                          ======     ======

     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,
                                              -------------------------
                                                 2000            2001
                                               -------         --------

         Beginning balance                     $ 352             $ 347
         Provision charged to income              36                36
         Charge-offs, net of recoveries          (41)              (10)
                                                ----              ----
         Ending balance                        $ 347             $ 373
                                                ====              ====


<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


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, 2000:
             GNMA                                 $ 348        $ 1        $ 6         $   343
             FHLMC                                   35          -          -              35
             FHLMC REMIC's                           28          -          -              28
             FNMA                                   370          -         12             358
             FNMA REMIC's                           969          -         74             895
                                                 ------         --        ---          ------
                                                $ 1,750        $ 1       $ 92         $ 1,659
                                                 ======         ==        ===          ======

         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
                                                 ======         ==        ===          ======

</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  $56,000 and $219,000  pledged against deposits and available
     FHLB advances at December 31, 2000 and 2001, respectively.

     There  were no sales of  mortgage-backed  securities  for the  years  ended
     December 31, 2000 and 2001.



<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


5.    Premises and Equipment
      ----------------------

      Premises and equipment are summarized as follows:


                                                     December 31,
                                                  -----------------
                                                    2000      2001
                                                  -------    ------

         Land and improvements                    $  237     $  237
         Buildings                                 1,239      1,246
         Vehicles                                     38         38
         Furniture, fixtures and equipment           570        573
                                                   -----      -----
                                                   2,084      2,094
         Less accumulated depreciation             1,127      1,196
                                                   -----      -----
                                                  $  957     $  898
                                                   =====      =====

6.    Deposits
      --------

     The  Bank  had  deposit   accounts  in  amounts  of  $100,000  or  more  of
     approximately  $11.4  million and $13.3  million at  December  31, 2000 and
     2001, respectively.  Contractual maturities of time deposits are summarized
     as follows:


                                                 December 31,
                                           -----------------------
                                              2000          2001
                                           ---------      --------

         12 months or less                 $ 26,605       $ 29,418
         After 1 but within 3 years           5,781          4,217
         After 3 years                          373            489
                                            -------        -------
                                           $ 32,759       $ 34,124
                                            =======        =======

7.   Federal Home Loan Bank Advances
     -------------------------------

     The Bank had  $1,000,000 in advances from the Federal Home Loan Bank (FHLB)
     outstanding at December 31, 2000.

     The Bank pledges as collateral for these borrowings its FHLB stock, certain
     mortgage-backed  securities,  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 $11.2
     million.



<PAGE>



SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------

8.   Income Taxes
     ------------

     Income tax expense is summarized as follows:

                                   Years Ended December 31,
                    ------------------------------------------------------
                               2000                        2001
                    -------------------------   --------------------------
                    Federal   State    Total    Federal   State     Total
                    -------   -----    ------   -------   ------   -------

  Current            $ 249     $ 30    $ 279     $ 276     $ 31     $ 307
  Deferred              14       22       36       (20)      16        (4)
                      ----      ---     ----      ----      ---      ----
         Total       $ 263     $ 52    $ 315     $ 256     $ 47     $ 303
                      ====      ===     ====      ====      ===      ====


     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,
                                                    -------------------------
                                                      2000             2001
                                                    -------          --------

  Computed income tax expense                        $ 272            $ 269
  Increase (decrease) resulting from:
     State income tax, net of federal tax benefit       34               31
     Non-taxable income                                 (7)              (5)
     Non-deductible expenses                            16               15
     Other                                               -               (7)
                                                      ----            -----
  Actual income tax expense                          $ 315            $ 303
                                                      ====             ====

     The components of net deferred tax liabilities are as follows:

                                                            December 31,
                                                         ------------------
                                                          2000        2001
                                                         ------      ------
  Deferred tax liabilities:
     Loan losses                                          $  20       $   -
     Excess tax depreciation                                 26          24
     FHLB stock dividends                                    81          94
     Deferred cost                                           76          76
     Purchased discounts on mortgage-backed securities        1           1
                                                           ----        ----
                                                          $ 204       $ 195
                                                           ----        ----

                                                                     (continued)

<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


                                                          December 31,
                                                      --------------------
                                                        2000         2001
                                                      --------     -------
 Deferred tax liabilities:
 Deferred tax assets:
    Loan losses                                         $ -        $   4
    Accrued expenses                                       27         27
    Unrealized losses on securities available for sale     38         14
    Other                                                  10          -
                                                          ---       ----
                                                           75         45
                                                          ---       ----
        Net deferred tax liability                      $ 129      $ 150
                                                         ====       ====

     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,  2000 and 2001,  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,  2000 and  2001,  that the Bank  meets all  capital  adequacy
     requirements to which it is subject.



<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


     As of  December  31,  2001,  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, 2000:
           Tier I Capital (to
             average assets)       $  9,971     18.4%       $ 2,162      >4.0%       $ 2,702         >5.0%
                                                                         -                           -
           Tier I Capital (to risk
             weighted assets)      $  9,971     29.2%       $ 1,364      >4.0%       $ 2,046         >6.0%
                                                                         -                           -
           Total Capital (to risk-
             weighted assets)      $ 10,318     30.3%       $ 2,727      >8.0%       $ 3,409        >10.0%
                                                                         -                          -

         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%
                                                                         -                          -

</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, 2001, the loan had an outstanding  balance of approximately
     $263,000 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>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


     For the years ending  December 31, 2000 and 2001,  compensation  related to
     the ESOP of approximately $81,000 and $87,000,  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, 2001, the ESOP had approximately 34,000 allocated
     shares and 27,000  unallocated  shares.  The fair value of unallocated ESOP
     shares at December 31, 2001 was approximately $345,000.

     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 will be fully  vested by 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, 2000 and 2001,  approximately $97,000 and $93,000,
     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, 2000 and
     2001, is summarized below:




<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------



                                          2000               2001
                                  ------------------  --------------------
                                            Weighted             Weighted
                                             Average              Average
                                            Exercise             Exercise
                                   Shares    Price      Shares    Price
                                  -------- ---------  --------- ---------
    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     44,178   $16.69     58,904    $16.69
                                  =======    =====    =======     =====


                              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
   ---------------   -----------  -----------   --------  -----------  ---------
      $16.69             73,630     6.42 years    $16.69     58,904     $16.69
                       ========     ==========     =====     ======      =====



     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, 2000 and 2001, is as follows:

                                   2000                      2001
                          -----------------------   ---------------------
                          As Reported   Pro forma   As Reported  Pro forma
                          -----------   ---------   -----------  --------


   Net income                $ 485       $  471       $  489     $  475
                              ====        =====        =====       ====
   Basic and diluted
     earnings per share      $ .84       $  .82       $  .89     $  .87
                              ====        =====        =====       ====




<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


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 in thousands for use at December 31, 2001:

                                    Commitment
                                    ----------

        Consumer and other lines    $ 729,000
                                     ========

     The Bank had  outstanding  commitments  to originate  mortgage and consumer
     loans of approximately  $1,137,000 at December 31, 2001. The commitments to
     originate  mortgage and consumer loans at December 31, 2001, were all fixed
     rate loans and had  interest  rates  ranging from 6.625% to 8.50% and terms
     ranging from five years to 15 years.

<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


15.  Financial Instruments

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

<TABLE>
<CAPTION>
                                                                     December 31,
                                                  ------------------------------------------------
                                                         2000                      2001
                                                  --------------------    ------------------------
                                                   Stated   Estimated      Stated      Estimated
                                                   Amount   Fair Value     Amount      Fair Value
                                                  --------  ----------    ---------    ----------
<S>                                            <C>        <C>            <C>           <C>
         Financial assets:
           Cash and cash equivalents              $ 2,121    $  2,121       $  6,786      $  6,786
           Investment and mortgage-
             backed securities                      4,150       4,121          4,439         4,393
           Loans receivable, net                   46,814      46,880         44,384        45,750
           Federal Home Loan Bank stock               524         524            560           560
           Other assets                               355         355            262           262

         Financial liabilities:
           Deposits:
             Demand accounts                        9,493       9,493         11,226        11,226
             Certificate accounts                  32,759      32,722         34,124        34,600
           Federal Home Loan Bank
             advances                               1,000       1,000              -             -
           Other liabilities                          279         279            238           238

</TABLE>


     The Bank had off-balance sheet financial  commitments at December 31, 2001,
     which include approximately $1,866,000 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.

     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.


<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


     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.

     Federal Home Loan Bank Advances - The fair value is equal to book value due
     -------------------------------
     to the short-term maturity of the debt.

     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,  2000 and  2001.  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>

SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>


        Parent Company Only
        Condensed Balance Sheets                                   December 31,
        (in thousands)                                        ----------------------
                                                                2000         2001
                                                              ---------    ---------
<S>                                                           <C>          <C>
        Assets:
           Cash and cash equivalents                          $    389     $    680
           Investment securities available for sale                499            -
           ESOP loan receivable                                    339          263
           Equity in net assets of bank subsidiary               9,915       10,612
           Other assets                                             84           55
                                                               -------      -------
               Total assets                                   $ 11,226     $ 11,610
                                                               =======      =======
        Liabilities
           Accrued liabilities                                $      7     $      3
                                                                    --           --
        Stockholders' equity:
           Common stockholders' equity                          11,219       11,607
                                                               -------      -------
               Total liabilities and stockholders' equity     $ 11,226     $ 11,610
                                                               =======      =======
</TABLE>



        Parent Company Only
        Condensed Statements of Income            For the Years Ended
        (in thousands)                            -------------------
                                                   2000         2001
                                                  ------       ------

        Interest income                             $ 94        $ 52
        Interest expense                               4           -
        Non-interest expense                          30          39
                                                    ----        ----
               Income before taxes                    60          13
        Income tax expense                            23           5
                                                    ----        ----
               Income before equity earnings          37           8
        Equity earnings of bank subsidiary           448         481
                                                    ----        ----

               Net income                          $ 485       $ 489
                                                    ====        ====

                                                                     (continued)

<PAGE>


SFB BANCORP, INC. AND SUBSIDIARY      Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>


        Parent Company Only
        Condensed Statements of Cash Flows                           For the Years Ended
        (in thousands)                                              ----------------------
                                                                      2000          2001
                                                                    ---------     --------
<S>                                                              <C>           <C>

        Operating activities:
           Net income                                               $    485      $   489
           Adjustments to reconcile net income to net
             cash provided by operating activities:
             Undistributed equity earnings of bank subsidiary           (448)        (481)
             Amortization (accretion) of premiums (discounts)
               on securities                                              (6)          (1)
             (Increase) decrease in other assets                         (44)          29
             Increase (decrease) in accrued liabilities                    1           (4)
                                                                     -------       ------
               Net cash provided (used) by operating activities          (12)          32
                                                                     -------       ------
        Investing activities:
           Loan repayment from Bank subsidiary                      $    885      $     -
           Principal repayment by ESOP                                    70           76
           Maturities of investment securities                           500          500
                                                                     -------       ------
               Net cash provided by investing activities               1,455          576
                                                                     -------       ------
        Financing activities:
           Purchase of treasury stock                                 (1,037)         (70)
           Payment of cash dividends                                    (111)        (247)
                                                                     -------       ------
               Net cash used by financing activities                  (1,148)        (317)
                                                                     -------       ------
        Net increase in cash and cash equivalents                        295          291

        Cash and cash equivalents at beginning of year                    94          389
                                                                     -------       ------
        Cash and cash equivalents at end of year                    $    389      $   680
                                                                     =======       ======
</TABLE>