EXHIBIT 13

<PAGE>


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 June 1, 1997
through  December 31, 1999.  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,
mark-down or commission, and may not represent actual transactions.

                                                                     Dividend
                    Date                         High       Low      Declared
-----------------------------------------      --------   -------    --------

January 1, 1998 - March 31, 1998             $   16.50   $   15.50   $      -
April 1, 1998 - June 30, 1998                $   17.25   $   16.61   $   0.10
July 1, 1998 - September 30, 1998            $   17.25   $   13.75   $      -
October 1, 1998 - December 31, 1998          $   13.00   $   11.50   $   0.10
January 1, 1999 - March 31, 1999             $   12.25   $   10.50   $      -
April 1, 1999 - June 30, 1999                $   12.00   $   10.88   $   0.10
July 1, 1999 - September 30, 1999            $   12.13   $   11.75   $      -
October 1, 1999 - December 31, 1999          $   12.08   $   11.00   $   0.10

         The  number  of  shareholders  of  record  as of March  15,  2000,  was
approximately  161.  This does not reflect the number of persons or entities who
held stock in "street" name through various  brokerage firms. At March 15, 2000,
there were 639,417 shares outstanding.


<PAGE>

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


<PAGE>
                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

The  Private  Securities  Litigation  Reform Act of 1995  contains  safe  harbor
provisions regarding forward-looking  statements.  When used in this discussion,
the words  "believes",  "anticipates",  "contemplates"  "expects",  and  similar
expressions are intended to identify forward-looking statements. Such statements
are subject to certain risks and uncertainties  which 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 Company undertakes no obligation to publicly release the results
of any  revisions  to those  forward  looking  statements  which  may be made to
reflect  events  or  circumstances  after  the date  hereof  or to  reflect  the
occurrence of unanticipated events.

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,  1999.  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, 1999, the estimated average weighted term to maturity of
the Bank's  mortgage loan portfolio was slightly over 11 years and the estimated
average weighted term of the Bank's deposits was slightly less than 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, 1999.

    Changes in  Rates           NPV Ratio %(1)           Change(2)
    -----------------           --------------           ---------
         +300 bp                    13.86                  -466 bp
         +200 bp                    15.51                  -301 bp
         +100 bp                    17.10                  -142 bp
            0 bp                    18.53                     0 bp
         -100 bp                    19.58                  +106 bp
         -200 bp                    20.30                  +177 bp
         -300 bp                    20.94                  +241 bp

------------
(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.

These  calculations  indicate  that the  Bank's  net  portfolio  value  could be
adversely  affected  by  increases  in  interest  rates but  could be  favorably
affected by decreases in interest rates.  In addition,  the Bank would be deemed
to have  more  than a normal  level  of  interest  rate  risk  under  applicable
regulatory capital requirements.

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.  Such yields and costs are derived by
dividing  income or expense  by the  average  balance of assets or  liabilities,
respectively,  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,
                                                ---------------------------------- --------------------------------
                                                              1998                              1999
                                                ---------------------------------- --------------------------------
                                                                           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)......................        $40,608      $3,409       8.39%    $41,566    $3,348       8.05%
  Investment securities ...................          2,971         154       5.18       3,341       176       5.27
  Interest-earning deposits................          3,053         158       5.18       2,321       109       4.70
  Federal Home Loan Bank stock.............            437          31       7.14         469        33       7.04
  Mortgage-backed securities...............          4,287         237       5.53       2,707       147       4.43
                                                    ------       -----                 ------     -----
Total interest-earning assets..............         51,356       3,989       7.77      50,404     3,813       7.56
                                                                 -----                            -----
Non-interest-earning assets................          1,549                              2,450
                                                    ------                             ------
Total assets                                       $52,905                            $52,854
                                                    ======                             ======
Interest-bearing liabilities:
  Interest-bearing demand deposits.........         $9,667         249       2.58     $10,010       248       2.48
  Certificates of deposit..................         30,427       1,710       5.62      30,475     1,570       5.15
  Short-term borrowings....................              -           -          -           -         -          -
                                                    -------      ------                -------    -----
Total interest-bearing liabilities.........         40,094       1,959       4.89      40,485     1,818       4.49
                                                    ------       -----                 ------     -----
Non-interest-bearing liabilities...........          1,046                              1,119
                                                    ------                             ------
Total liabilities..........................         41,140                             41,604
                                                    ------                             ------

Total stockholders' equity.................         11,765                             11,250
                                                    ------                             ------
Total liabilities and stockholders' equity.       $ 52,905                           $ 52,854
                                                    ======                             ======
Net interest income........................                     $2,030                           $1,995
                                                                 =====                            =====
Interest rate spread (2)...................                                  2.88%                            3.07%

Net yield on interest-earning assets(3)....                                  3.95%                            3.96%
Ratio of average interest-earning assets to
  average interest-bearing liabilities.....                                128.09%                          124.50%
</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,
                                                   ------------------------------ ----------------------------------------
                                                         1998 vs. 1997                     1999     vs.     1998
                                                   ------------------------------ ----------------------------------------
                                                          Increase (Decrease)                Increase (Decrease)
                                                              Due to                               Due to
                                                   ------------------------------ ----------------------------------------
                                                                     Rate/                                Rate/
                                                    Volume    Rate   Volume     Net     Volume   Rate     Volume    Net
                                                    ------   ------  ------    -----    ------   -----    ------   -----
                                                                       (Dollars in Thousands)
<S>                                                <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Interest income:
 Loans receivable ...............................   $ 160    $  (8)   $   4    $ 156    $  80    $(138)   $  (3)   $ (61)
 Mortgage-backed securities .....................     105      (14)     (18)      73      (87)      (4)       1      (90)
 Investment securities ..........................     (64)     (14)       3      (75)      19        3       --       22
 Other interest-earning assets ..................     (18)       4       (1)     (15)     (38)     (11)       2      (47)
                                                    -----    -----    -----    -----    -----    -----    -----    -----
  Total interest income .........................   $ 183    $ (32)   $ (12)   $ 139    $ (26)   $(150)   $  --    $(176)
                                                    =====    =====    =====    =====    =====    =====    =====    =====

Interest expense:
 Savings accounts ...............................   $ (49)   $  16    $   8    $ (25)   $  19    $(160)   $  --    $(141)
 Other liabilities ..............................      (3)      --       --       (3)      --       --       --       --
                                                    -----    -----    -----    -----    -----    -----    -----    -----
   Total interest expense .......................   $ (52)   $  16    $   8    $ (28)   $  19    $(160)   $  --    $(141)
                                                    =====    =====    =====    =====    =====    =====    =====    =====

Net change in interest income ...................   $ 235    $ (48)   $ (20)   $ 167    $ (45)   $  10    $  --    $ (35)
                                                    =====    =====    =====    =====    =====    =====    =====    =====
</TABLE>

Comparison of Financial Condition

The Company's total consolidated assets increased by approximately $1.3 million,
or 2.5% from $51.9  million at December 31, 1998,  to $53.2  million at December
31, 1999.  The increase in assets for 1999 was primarily due to the $3.3 million
increase in net loans receivable, offset by an approximate $1.7 million decrease
in investment securities and mortgage-backed securities.

Total cash and  interest-earning  deposits decreased  approximately  $677,000 to
$2.2 million at December  31, 1999,  while  investment  securities  decreased by
approximately  $377,000  million to $3.1 million at December 31, 1999.  Mortgage
backed  securities  decreased  approximately  $1.3  million  to $2.2  million at
December 31, 1999, as the portfolio continues to mature.

Stockholders'  equity  increased  $446,000  to  approximately  $11.7  million at
December  31, 1999 from $11.3  million at December  31,  1998.  The increase was
attributable  to  comprehensive  income  of  $538,000  and the  amortization  of
$194,000 of unearned  compensation,  offset by the


<PAGE>

repurchase of approximately  $174,000 of the Company's outstanding capital stock
and payment of cash dividends in the amount of $126,000.

Comparison  of the Results of Operations  for the Years Ended  December 31, 1999
and 1998

Net Income. Net income increased $62,000, or 12.6%, in 1999 as compared to 1998.
The  increase was  primarily  the result of a $65,000  decrease in  non-interest
expenses,  and a $16,000  increase  in other  non-interest  income,  offset by a
$35,000 decrease in net interest income.  Basic income per share increased $.16,
from $.71 for the year  ended  December  31,  1998,  to $.87 for the year  ended
December 31, 1999.

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.

Net interest income decreased  $35,000,  or 1.7%. The decrease was primarily due
to a decline  in average  interest-earning  assets  and an  increase  in average
interest-bearing  liabilities.  Average  interest-earning  assets  decreased  to
approximately  $50.4 million in 1999, from $51.4 million in 1998,  while average
interest-bearing  liabilities increased  approximately  $391,000. The decline in
average-interest  earning assets was offset by a 19 basis points increase in the
interest rate spread.  The Company's  interest rate spread increased to 3.07% in
1999,  from 2.88% in 1998.  The net interest  margin  increased 1 basis point to
3.96% in 1999.

The 19 basis point  increase in the  interest  rate spread in 1999,  compared to
1998,  was  primarily  due to a 40 basis point  decrease in the average  cost of
interest-bearing liabilities from 4.89% in 1998 to 4.49% in 1999, offset by a 21
basis point decrease in the yield on average  interest-earning assets from 7.77%
in 1998 to 7.56% in 1999.

Interest income. Interest income decreased $176,000, or 4.4%, from approximately
$4.0  million in 1998,  to  approximately  $3.8  million for 1999.  This overall
decrease in interest  income was  primarily  the result of a decrease in average
interest-earning  assets of approximately  $1.0 million for 1999, as compared to
1998.  Interest  income on loans  decreased by $61,000,  as the yield on average
loans  outstanding  decreased 34 basis  points.  For 1999,  the average yield on
loans receivable was 8.05%, compared to 8.39% for 1998. Loans receivable are the
largest interest-earning asset held in the Company's portfolio.

Interest income on investment  securities  increased by $24,000,  as the average
balance invested increased by approximately $370,000 in 1999. Interest income on
interest-earning deposits and mortgage-backed  securities decreased by $139,000.
The  decrease  was  primarily  due to funds  invested in these  interest-earning
assets  being used to fund the Bank's  Year 2000 Cash  Contingency  Plan,  stock
repurchases and cash dividend payments.


<PAGE>

Interest  Expense.   Interest  expense  decreased  approximately  $141,000  from
approximately   $2.0  million  for  the  year  ended   December  31,  1998,   to
approximately  $1.8 million for the year ended  December 31, 1999.  The decrease
for 1999 was the result of a 40 basis  point  decrease  in the  average  cost of
funds,   partially  offset  by  an  approximate  $391,000  increase  in  average
interest-bearing  liabilities. The Bank reflected a decrease in both the average
cost of funds for interest-bearing  demand deposits and certificates of deposits
of 10 basis  points  and 47 basis  points,  respectively.  The  decrease  in the
average costs of funds for both interest-bearing demand deposits and certificate
of deposits for 1999,  as compared to 1998,  was  principally  due to an overall
reduction in deposit rates within the Bank's primary market area.

Provision  for Loan Losses.  The  provision for loan losses was $31,000 for year
ended  December  31,  1998 and  $36,000 for the year ended  December  31,  1999.
Nonperforming assets were $217,000 at December 31, 1999, compared to $437,000 at
December 31, 1998. The ratio of the allowance for loan losses to  non-performing
loans at December  31,  1999 was  approximately  162.21%,  compared to 74.60% at
December 31,  1998.  The  allowance  for loan losses as a percent of total loans
outstanding was .79% at December 31, 1999 and 1998, respectively.

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,  1999,  the  allowance  for loan  losses was at a level  deemed  adequate by
management to provide for losses in the portfolio.

Non-Interest  Expense.  Non-interest expense decreased $65,000. The decrease was
primarily the result of decreased compensation expense of $47,000 and $62,000 of
other  expenses,  offset by a $20,000  increase in net  occupancy  expenses  and
$21,000 data processing expenses during the period. The decrease in compensation
expense for the year ended  December 31, 1999,  compared to 1998,  was primarily
attributable to the compensation  expense  associated with the Bank's Restricted
Stock Plan ("RSP"),  which was approved by the Company's shareholders on June 1,
1998.  The RSP vests  over a four year  period  with 20%  vesting on the date of
grant and 20% annually thereafter. Accordingly, the Company immediately expensed
20% of the  value of the  awards on the grant  date and the  remaining  value is
being  amortized to  compensation  expense on a monthly basis over the remaining
four year vesting term. Compensation expense recognized for the twelve months in
1998 for the RSP awards was approximately $177,000, compared to $136,000 for the
twelve  months in 1999.  The decrease in other  non-interest  expense was mainly
attributable to management's  attempt to control general operating  expenses and
those  expenses  associated  with being a public  company.  The  increase in net
occupancy expense was mainly attributable to expenses associated with the Bank's
recently opened branch office in Mountain City, Tennessee.  The increase in data
processing was mainly  attributable to expenses  associated with ATM service and
year 2000 costs.  Employee  benefits  and deposit  insurance  premiums  remained
relatively stable for 1999, as compared to 1998.
<PAGE>

Income Taxes.  Income tax expense decreased $21,000,  or 6.120%, to $324,000 for
the year ended December 31, 1999,  from $345,000 for the year ended December 31,
1998.  The  effective  tax rate for 1999 and 1998 was  approximately  36.7%  and
40.9%, respectively.

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, 1999
totaled $648,000,  as compared to $187,000 for the year ended December 31, 1998.
The increase was  primarily  the result of the $524,000  purchase of  restricted
stock plan shares 1998, compared to none in 1999.

Net cash used by  investing  activities  for the year ended  December  31,  1999
totaled  approximately $1.9 million,  an increase of approximately $1.6 million,
as compared to 1998.  The increase was primarily  attributable  to a increase in
loans funded of approximately $3.3 million,  purchases of investment  securities
of approximately  $1.8 million,  offset by proceeds from maturities,  sales, and
repayments of investment and mortgage-backed securities in 1999 of approximately
$3.4 million.

Net  cash  provided  by  financing  activities  for 1999  totaled  approximately
$561,000.  This was  primarily  the result of an increase in deposits in 1999 of
$329,000,  proceeds of Federal Home Loan Bank  advances of  $500,000,  offset by
approximately  $174,000  of  common  stock  repurchases  and  $126,000  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,  1999,  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, 1999,  management was not aware of any current  recommendations  by
the regulatory authorities which, if implemented, would have such an effect.

Year 2000 Compliance. Like many financial institutions,  we rely on computers to
conduct our business and information systems  processing.  Industry experts were
concerned that on January 1, 2000, some computers might not be able to interpret
the new year properly,  causing


<PAGE>

computer malfunctions.  Some banking industry experts remain concerned that some
computers  may  not be able to  interpret  additional  dates  in the  year  2000
properly.  We  have  operated  and  evaluated  our  computer  operating  systems
following  January 1, 2000 and have not identified any errors or experienced any
computer  system  malfunctions.  We will  continue  to monitor  our  information
systems to assess whether our systems are at risk of misinterpreting  any future
dates and will develop, if needed,  appropriate contingency plans to prevent any
potential system  malfunction or correct any system  failures.  We have not been
informed of any such problem experienced by our vendors or our customers.

However, it is too early to conclude that there will not be any problems arising
from the Year 2000 issue, particularly with some of our vendors or customers. We
will  continue  to monitor our  significant  vendors of goods and  services  and
customers  with respect to any Year 2000 problems they may  encounter,  as those
issues may effect our ability to continue operations,  or might adversely affect
the our financial position,  results of operations and cash flows. At this time,
we do not believe  that these  potential  problems  will  materially  impact the
ability to continue our operations. However, no assurance can be given that this
will be the case.



<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                        (in thousands, except share data)
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                              --------------------------------------
           Assets                                                                   1998                1999
           ------                                                                   ----                ----

<S>                                                                          <C>                <C>
Cash on hand                                                                  $            467   $          1,424
Interest earning deposits                                                                2,372                738
Investment securities:
   Held to maturity (market value of $1,147 in 1998 and $911 in 1999)                    1,158              1,017
   Available for sale                                                                    2,327              2,091
Loans receivable, net                                                                   40,449             43,789
Mortgage-backed securities:
   Available for sale                                                                    3,502              2,183
Premises and equipment, net                                                                849              1,011
Federal Home Loan Bank stock, at cost                                                      454                487
Accrued interest receivable                                                                265                280
Other assets                                                                                23                109
                                                                               ---------------    ---------------
         Total assets                                                         $         51,866   $         53,129
                                                                               ===============    ===============
   Liabilities and Stockholders' Equity
   ------------------------------------

Deposits:
   Non-interest-bearing                                                       $            705   $            606
   Interest-bearing                                                                     39,401             39,829
                                                                               ---------------    ---------------
                                                                                        40,106             40,435

Federal Home Loan Bank advances                                                              -                500
Advance payments by borrowers for taxes and insurance                                      188                220
Accrued expenses and other liabilities                                                     221                157
Deferred income taxes                                                                       81                101
                                                                               ---------------    ---------------
         Total liabilities                                                              40,596             41,413
                                                                               ---------------    ---------------

Stockholders' equity:
   Preferred stock ($.10 par value, 1,000,000 shares authorized;
     none outstanding)                                                                       -                  -
   Common stock ($.10 par value, 4,000,000 shares authorized;
     767,000 shares issued; 694,150 and 679,417 outstanding at                              77                 77
     December 31, 1998 and 1999, respectively)
   Paid-in capital                                                                       7,368              7,382
   Retained income, substantially restricted                                             5,732              6,165
   Treasury stock at cost (72,850 and 87,583 shares at December 31,
     1998 and 1999, respectively)                                                       (1,034)            (1,208)
   Accumulated other comprehensive income                                                  (24)               (45)
   Unearned compensation:
     Employee stock ownership plan                                                        (491)              (419)
     Restricted stock plan                                                                (358)              (236)
                                                                               ---------------    ---------------
         Total stockholders' equity                                                     11,270             11,716
                                                                               ---------------    ---------------
         Total liabilities and stockholders' equity                           $         51,866   $         53,129
                                                                               ===============    ===============
</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)
<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                          ------------------------------------------
                                                                                  1998                 1999
                                                                                  ----                 ----
<S>                                                                      <C>                   <C>
Interest income:
   Loans                                                                  $           3,409     $           3,348
   Mortgage-backed securities                                                           237                   147
   Investments                                                                          185                   209
   Interest earning deposits                                                            158                   109
                                                                            ---------------       ---------------
         Total interest income                                                        3,989                 3,813
                                                                            ---------------       ---------------
Interest expense:
   Deposits                                                                           1,959                 1,818
                                                                            ---------------       ---------------
         Net interest income                                                          2,030                 1,995

Provision for loan losses                                                                31                    36
                                                                            ---------------       ---------------
         Net interest income after provision
           for loan losses                                                            1,999                 1,959
                                                                            ---------------       ---------------
Non-interest income:
   Loan fees and service charges                                                        157                   173
   Other                                                                                 11                    11
                                                                            ---------------       ---------------
         Total non-interest income                                                      168                   184
                                                                            ---------------       ---------------
Non-interest expenses:
   Compensation                                                                         677                   630
   Employee benefits                                                                    125                   128
   Net occupancy expense                                                                 82                   102
   Deposit insurance premiums                                                            24                    24
   Data processing                                                                       83                   104
   Other                                                                                334                   272
                                                                            ---------------       ---------------
         Total non-interest expenses                                                  1,325                 1,260
                                                                            ---------------       ---------------
         Income before income taxes                                                     842                   883

Income tax expense                                                                      345                   324
                                                                            ---------------       ---------------
         Net income                                                       $             497     $             559
                                                                           ================      ================

Net income per common share:
   Basic                                                                  $             .71     $             .87
   Diluted                                                                              .71                   .87
                                                                            ===============       ===============

Weighted-average shares:
   Basic                                                                                699                   642
   Diluted                                                                              699                   642
                                                                            ===============       ===============
</TABLE>

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)
<TABLE>
<CAPTION>
                                                             Years Ended December 31,
                                                             ------------------------
                                                                   1998    1999
                                                                  -----   -----

<S>                                                              <C>     <C>
Net income                                                        $ 497   $ 559

Other comprehensive income:
   Net unrealized gains (losses) on securities available for
     sale, net of tax expense (benefit) of $19 and $(14),
     respectively                                                    29     (21)
                                                                  -----   -----

Comprehensive income                                              $ 526   $ 538
                                                                  =====   =====
</TABLE>




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, 1997             $   77    $ 7,336    $  5,373   $     -    $       (53)   $   (552)   $     -    $12,181

Net income                                    -          -         497         -              -           -          -        497

Unrealized gain on securities
   available for sale,
   net of income tax expense                  -          -           -         -             29           -          -         29

Common stock purchased
   for RSP (30,680 shares)                    -          -           -         -              -           -       (524)      (524)

Cash dividends declared ($.20 share)          -          -        (138)        -              -           -          -       (138)

Treasury stock purchased
    (72,850 shares)                           -          -           -    (1,034)             -           -          -     (1,034)

Compensation earned                           -         32           -         -              -          61        166        259
                                          -----     ------     -------    ------      ---------     -------     ------     ------

Balance at December 31, 1998                 77      7,368       5,732    (1,034)           (24)       (491)      (358)    11,270

Net income                                    -          -         559         -              -           -          -        559

Unrealized loss on securities
   available for sale,
   net of income tax benefit                  -          -           -         -            (21)          -          -        (21)

Cash dividends declared ($.20 share)          -          -        (126)        -              -           -          -       (126)

Treasury stock purchased
   (14,733 shares)                            -          -           -      (174)             -           -          -       (174)

Compensation earned                           -         14           -         -              -          72        122        208
                                          -----     ------     -------    ------      ---------     -------     ------     ------
Balance at December 31, 1999             $   77    $ 7,382    $  6,165   $(1,208)   $       (45)   $   (419)   $  (236)   $11,716
                                          =====     ======     =======    ======      =========     =======     ======     ======
</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,
                                                           -------------------------
                                                                 1998       1999
                                                              -------    -------
<S>                                                          <C>        <C>
Operating activities:
   Net income                                                 $   497    $   559
   Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation                                                  56         79
     Provision for loan losses                                     31         36
     Deferred income taxes                                         --         34
     Net decrease in deferred loan fees                            (9)       (55)
     Accretion of discounts on investment securities, net         (23)       (24)
     Amortization of premiums on mortgage-backed securities        14          9
     Amortization of unearned compensation                        259        208
     Purchase of RSP shares                                      (524)        --
     FHLB stock dividends                                         (31)       (33)
     Net change in operating assets and liabilities:
       Other assets                                                 5        (30)
       Accrued interest receivable                                 51        (15)
       Accrued expenses and other liabilities                      25        (64)
       Income taxes--current                                     (164)       (56)
                                                              -------    -------
         Net cash provided by operating activities                187        648
                                                              -------    -------

Investing activities:
   Purchase of investment securities held to maturity            (710)        --
   Maturities of investment securities held to maturity           151        165
   Purchase of investment securities available for sale        (2,875)    (1,799)
   Maturities of investment securities available for sale       1,700      2,000
   Principal payments on mortgage-backed securities
     available for sale                                         1,559      1,310
   Net (increase) decrease in loans                               177     (3,321)
   Purchase of premises and equipment                            (278)      (241)
                                                              -------    -------
         Net cash used by investing activities                   (276)    (1,886)
                                                              -------    -------
</TABLE>

                                                                     (continued)


<PAGE>
                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                Consolidated Statements of Cash Flows, Continued
                                 (in thousands)
<TABLE>
<CAPTION>
                                                                                Years Ended December 31,
                                                                                ------------------------
                                                                                      1998       1999
                                                                                   -------    -------
<S>                                                                               <C>        <C>
Financing activities:
   Net increase (decrease) in deposits                                             $  (481)   $   329
   Increase (decrease) in advance payments by borrowers
     for taxes and insurance                                                           (11)        32
   Proceeds from FHLB advances                                                          --        500
   Treasury stock purchased                                                         (1,034)      (174)
   Dividends paid                                                                     (138)      (126)
                                                                                   -------    -------
         Net cash provided (used) by financing activities                           (1,664)       561
                                                                                   -------    -------

         Decrease in cash and cash equivalents                                      (1,753)      (677)

Cash and cash equivalents at beginning of year                                       4,592      2,839
                                                                                   -------    -------

Cash and cash equivalents at end of year                                           $ 2,839    $ 2,162
                                                                                   =======    =======

Supplemental  disclosures  of cash flow  information:
  Cash paid during the year for:
     Interest                                                                      $ 1,946    $ 1,823
     Income taxes                                                                      517        346
                                                                                   =======    =======

Non-cash transactions:
   Unrealized gains (losses) on securities and mortgage-backed
     securities available for sale, net of deferred taxes                          $    29    $   (21)
   Non-cash acquisition of premises and equipment                                       52         --
                                                                                   =======    =======

</TABLE>




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



<PAGE>
                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                           December 31, 1998 and 1999
                         (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 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
      ---------
      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.

      Comprehensive  Income - The Company adopted Financial Accounting Standards
      ---------------------
      Board No. 130,  "Reporting  Comprehensive  Income"  (SFAS 130),  effective
      December  31,  1998.  SFAS No. 130  establishes  standards  for  reporting
      comprehensive  income and its components  (revenues,  expenses,  gains and
      losses).  Components of comprehensive  income are net income and all other
      non-owner changes in equity. The statement requires that an enterprise (a)
      classify  items  of  other  comprehensive  income  by  their  nature  in a
      financial  statement  and (b)  display  the  accumulated  balance of other
      comprehensive  income  separately  from common stock or retained income in
      the equity section of a balance sheet.

      The  Company  has chosen to  disclose  comprehensive  income in a separate
      statement.



<PAGE>

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


      The only component of other  comprehensive  income  consists of unrealized
      holding gains (losses) on securities.

      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.

      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 over the  contractual  lives of the
      loans.  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. Subsequent to
      foreclosure, real estate is recorded at the lower of initial fair value or
      existing 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.

      Valuations are periodically performed by management,  and an allowance for
      losses is  established  by a charge to income if the  carrying  value of a
      property exceeds its estimated net realizable value.


<PAGE>

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


      Premises and Equipment - Land is carried at cost.  Office  properties  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.

      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.

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

     Earnings Per Share - Basic income 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
     income per share includes the effect of dilution for stock options.

      For the years ended  December 31, 1998 and 1999,  net income  available to
      the common  stockholders  in both the basic and diluted  computations  was
      equal  to net  income.  For  purposes  of the  diluted  income  per  share
      calculation,  there was no dilutive  effect for the stock  options for the
      years ended December 31, 1998 and 1999.

      Recent Accounting Pronouncements - In June 1998, the FASB issued Statement
      --------------------------------
      No. 133,  "Accounting for Derivative  Instruments and Hedging Activities,"
      effective for fiscal years  beginning  after June 15, 1999. This statement
      establishes  accounting and reporting standards


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

     for  derivative  instruments  and  hedging  activities,  including  certain
     derivative  instruments  embedded in other contracts,  and requires that an
     entity  recognize all  derivatives  as assets or liabilities in the balance
     sheet and measure  them at fair value.  If certain  conditions  are met, an
     entity may elect to designate a derivative  as follows:  (a) a hedge of the
     exposure to changes in the fair value of a recognized asset or liability or
     an unrecognized  firm  commitment;  (b) a hedge of the exposure to variable
     cash  flows of a  forecasted  transaction;  or (c) a hedge  of the  foreign
     currency exposure of an unrecognized firm commitment, an available-for-sale
     security, a foreign currency denominated forecasted  transaction,  or a net
     investment in a foreign  operation.  The statement  generally  provides for
     matching the timing of the  recognition  of the gain or loss on derivatives
     designated as hedging  instruments  with the  recognition of the changes in
     the fair value of the item being  hedged.  Depending  on the type of hedge,
     such  recognition  will be in  either  net  income  or other  comprehensive
     income. For a derivative not designated as a hedging instrument, changes in
     fair  value  will be  recognized  in net  income in the  period of  change.
     Management is currently evaluating the impact of adopting this statement on
     the consolidated financial statements, but does not anticipate that it will
     have a material impact.

2.   Investment Securities
     ---------------------
     The amortized  cost and estimated  market values of investment  securities
     are summarized as follows:
<TABLE>
<CAPTION>
                                                                      Gross            Gross         Estimated
                                                    Amortized      Unrealized       Unrealized         Market
                                                      Cost            Gains           Losses           Value
                                                      ----            -----           ------           -----
<S>                                             <C>              <C>             <C>              <C>
         Securities to be held to maturity:
           December 31, 1998:
             U.S. government security            $         440    $           -   $          11    $         429
             Municipal securities                          718                -               -    $         718
                                                  ------------     ------------    ------------     ------------

                                                 $       1,158    $           -   $          11    $       1,147
                                                  ============     ============    ============     ============
           December 31, 1999:
             U.S. government security            $         464    $           -   $         106    $         358
             Municipal securities                          553                -               -              553
                                                  ------------     ------------    ------------     ------------

                                                 $       1,017    $           -   $         106    $         911
                                                  ============     ============    ============     ============
         Securities available for sale:
           December 31, 1998:
             U.S. government and
               agency securities                 $       2,325    $           2   $           -    $       2,327
                                                  ============     ============    ============     ============

           December 31, 1999:
             U.S. government and
               agency securities                 $       2,124    $           -   $          33    $       2,091
                                                  ============     ============    ============     ============
</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                            Market Value
                                                 --------------------------------    --------------------------------
                                                      1998            1999                1998             1999
                                                      ----            ----                ----             ----
<S>                                             <C>             <C>                 <C>              <C>
  Securities to be held to maturity:
     Due after one year through five years       $         718   $         553       $         718    $         553
     Due after ten years                                   440             464                 429              358
                                                  ------------    ------------        ------------     ------------
                                                 $       1,158   $       1,017       $       1,147    $         911
                                                  ============    ============        ============     ============

  Securities available for sale:
     Due in one year                             $         250   $         500       $         250    $         495
     Due after one year through five years               2,075           1,624               2,077            1,596
                                                  ------------    ------------        ------------     ------------
                                                 $       2,325   $       2,124       $       2,327    $       2,091
                                                  ============    ============        ============     ============
</TABLE>

      The Bank had investment securities with an amortized cost of approximately
      $1,265,000 and $1,088,000  pledged  against  deposits at December 31, 1998
      and 1999, respectively.

      The Bank had no sales of  investment  securities to be held to maturity or
      available for sale for the years ended December 31, 1998 and 1999.

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

      Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                              December 31,
                                                  --------------------------------------
                                                        1998                1999
                                                        ----                ----
<S>                                              <C>                <C>
         Real estate first mortgage loans:
           One-to-four-family                     $         30,054   $         29,815
           Construction                                      1,216              1,397
           Commercial real estate                            1,566              1,499
           Multi-family residential                          1,011              2,571
           Land                                              3,997              4,280
                                                   ---------------    ---------------
               Total real estate loans                      37,844             39,562
                                                   ---------------    ---------------
         Consumer and commercial loans:
           Commercial business                                 573                420
           Auto loans                                        2,294              3,608
           Share loans                                         322                433
           Other                                               470                640
                                                   ---------------    ---------------
               Total consumer and commercial loans           3,659              5,101
                                                   ---------------    ---------------
               Total loans                                  41,503             44,663
                                                   ---------------    ---------------
</TABLE>

                                                                     (continued)

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

<TABLE>
<CAPTION>
                                                               December 31,
                                                    --------------------------------------
                                                          1998                1999
                                                          ----                ----
<S>                                                <C>                <C>
         Less:
           Undisbursed portion of loans in process  $            619   $            469
           Net deferred loan fees                                109                 53
           Allowance for loan losses                             326                352
                                                     ---------------    ---------------
                                                               1,054                874
                                                     ---------------    ---------------
                                                    $         40,449   $         43,789
                                                     ===============    ===============
</TABLE>

      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,
                                          ------------------------
                                           1998              1999
                                          -----             -----
Beginning balance                         $ 301             $ 326
Provision charged to income                  31                36
Charge-offs, net of recoveries               (6)              (10)
                                          -----             -----
Ending balance                            $ 326             $ 352
                                          =====             =====

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


4.    Mortgage-Backed Securities
      --------------------------

      Mortgage-backed securities are summarized as follows:

                                             Gross       Gross     Estimated
                                Amortized  Unrealized  Unrealized    Market
                                  Cost       Gains       Losses      Value
                                  ----       -----       ------      -----
Securities available for sale:
  December 31, 1998:
    GNMA                         $  525      $    2      $    5      $  522
    FHLMC                            56           1          --          57
    FHLMC REMIC's                   880          --           5         875
    FNMA                            519           1           9         511
    FNMA REMIC's                  1,564          --          27       1,537
                                 ------      ------      ------      ------
                                 $3,544      $    4      $   46      $3,502
                                 ======      ======      ======      ======
Securities available for sale:
  December 31, 1999:
    GNMA                         $  416      $    1      $    4      $  413
    FHLMC                            42          --          --          42
    FHLMC REMIC's                   239          --           2         237
    FNMA                            414          --          17         397
    FNMA REMIC's                  1,114          --          20       1,094
                                 ------      ------      ------      ------
                                 $2,225      $    1      $   43      $2,183
                                 ======      ======      ======      ======

      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   $1,148,000  and  $339,000  pledged  against  deposits  and
      available FHLB advances at December 31, 1998 and 1999, respectively.

      There  were no sales of  mortgage-backed  securities  for the years  ended
      December 31, 1998 and 1999.



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


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

      Premises and equipment are summarized as follows:

                                               December 31,
                                               ------------
                                               1998     1999
                                             ------   ------

         Land and improvements               $  237   $  237
         Buildings                              875    1,227
         Vehicles                                17       17
         Furniture, fixtures and equipment      650      557
         Construction in progress               196       --
                                             ------   ------
                                              1,975    2,038
         Less accumulated depreciation        1,126    1,027
                                             ------   ------
                                             $  849   $1,011
                                             ======   ======

6.  Interest Receivable
    -------------------

      Interest receivable consists of the following:

                                            December 31,
                                            ------------
                                            1998   1999
                                            ----   ----

Loans receivable                            $239   $250
Investments                                   31     42
Mortgage-backed securities                    17     13
Interest earning deposits                      3     --
                                            ----   ----
                                             290    305
Less allowance for uncollectible interest     25     25
                                            ----   ----
                                            $265   $280
                                            ====   ====

7.    Deposits
      --------

      The  Bank  had  deposit  accounts  in  amounts  of  $100,000  or  more  of
      approximately  $10.1  million at December  31, 1998 and 1999.  Contractual
      maturities of time deposits are summarized as follows:

                                             December 31,
                                             ------------
                                           1998      1999
                                          -------   -------

12 months or less                         $24,925   $26,479
After 1 but within 3 years                  5,055     4,339
After 3 years                                 505       152
                                          -------   -------

                                          $30,485   $30,970
                                          =======   =======

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


8.    Federal Home Loan Bank Advances
      -------------------------------

      The  Bank  had  no  advances  from  the  Federal  Home  Loan  Bank  (FHLB)
      outstanding  at December 31, 1998 and  $500,000 in advances  from the FHLB
      outstanding  at December 31, 1999.  The advances  have an interest rate of
      5.90% and mature in January 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 $2.5
      million.

9.    Income Taxes
      ------------

      Income tax expense (benefit) is summarized as follows:

                            Years Ended December 31,
               ----------------------------------------------
                         1998                   1999
               ----------------------  ----------------------

               Federal  State   Total  Federal  State   Total

Current        $ 309    $  36   $ 345   $ 256   $  34   $ 290
Deferred         (20)      20      --      13      21      34
               -----    -----   -----   -----   -----   -----

       Total   $ 289    $  56   $ 345   $ 269   $  55   $ 324
               =====    =====   =====   =====   =====   =====


      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,
                                             ------------------------
                                                   1998     1999
                                                  -----    -----

Computed income tax expense                       $ 286    $ 300
Increase (decrease) resulting from:
   State income tax, net of federal tax benefit      37       35
   Non-taxable income                               (11)     (12)
   Non-deductible expenses                           37       14
   Other                                             (4)     (13)
                                                  -----    -----
Actual income tax expense                         $ 345    $ 324
                                                  =====    =====


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


      The components of net deferred tax liabilities are as follows:

                                                       December 31,
                                                     -----------------
                                                        1998   1999
                                                        ----   ----
Deferred tax liabilities:
   Tax bad debts                                        $ 32   $ 16
   Excess tax depreciation                                14     21
   FHLB stock dividends                                   54     67
   Deferred fees                                          --     52
   Purchased discounts on mortgage-backed securities       9     10
                                                        ----   ----
                                                         109    166
                                                        ----   ----
Deferred tax assets:
   Accrued expenses                                        6     25
   Unrealized losses on securities available for sale     16     30
   Other                                                   6     10
                                                        ----   ----
                                                          28     65
                                                        ----   ----
       Net deferred tax liability                       $ 81   $101
                                                        ====   ====

      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, 1998 and 1999,  includes
      approximately $825,000, representing such bad debt deductions for which no
      deferred income taxes have been provided.

10.   Stockholders' Equity
      --------------------

     The Bank  established a  liquidation  account at the time it converted to a
     federally  chartered  stock savings bank in an amount equal to its retained
     income as reflected in the latest  consolidated  balance  sheet used in the
     final conversion prospectus.  The liquidation account is maintained for the
     benefit of eligible  account holders who continue to maintain their deposit
     accounts  in  the  Bank  after  conversion.  In  the  event  of a  complete
     liquidation  of the Bank (and only in such an event),  eligible  depositors
     who  continue  to  maintain   accounts  shall  be  entitled  to  receive  a
     distribution  from the  liquidation  account before any  liquidation may be
     made with respect to common stock.


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


     The Bank may not declare or pay a cash dividend if the effect thereof would
     cause its net worth to be reduced below either the amounts required for the
     liquidation account discussed above or the regulatory capital  requirements
     imposed by federal and state regulations.

11.  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 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 adjusted
     total  assets  (as  defined),  and of  Tier I and  risk-based  capital  (as
     defined) to risk-weighted assets (as defined).  Management believes,  as of
     December 31, 1999, that the Bank meets all capital adequacy requirements to
     which it is subject.

     As of  December  31,  1999,  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.

     The  Bank's  actual  capital  amounts  (in  thousands)  and ratios are also
     presented  in  the  following   table.   No  deduction   from  capital  for
     interest-rate risk was required.
<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, 1998:
           Tier I Capital (to
             adjusted total assets)  $ 8,639         17.2%       $ 2,004         >4.0%       $ 2,505         >5.0%
                                                                                 -                           -
           Tier I Capital (to risk
             weighted assets)        $ 8,639         29.2%       $ 1,185         >4.0%       $ 1,778         >6.0%
                                                                                 -                           -
           Total Capital (to risk-
             weighted assets)        $ 8,965         30.3%       $ 2,370         >8.0%       $ 2,963        >10.0%
                                                                                 -                          -
</TABLE>
                                                                     (continued)


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

<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, 1999:
           Tier I Capital (to
             adjusted total assets)     $ 9,345         17.9%       $ 2,095         >4.0%       $ 2,619         >5.0%
                                                                                    -                           -
           Tier I Capital (to risk
             weighted assets)           $ 9,345         29.1%       $ 1,289         >4.0%       $ 1,933         >6.0%
                                                                                    -                           -
           Total Capital (to risk-
             weighted assets)           $ 9,697         30.0%       $ 2,578         >8.0%       $ 3,222        >10.0%
                                                                                    -                          -
</TABLE>


12.  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, 1999, the loan had an outstanding  balance of approximately
     $409,000 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.

     For the years ending  December 31, 1998 and 1999,  compensation  related to
     the ESOP of approximately $93,000 and $86,000,  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, 1999, the ESOP had approximately 19,000 allocated
     shares and 42,000  unallocated  shares.  The fair value of unallocated ESOP
     shares at December 31, 1999 was approximately $461,000.

     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, all ESOP shares committed to be released are
     considered outstanding.



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


13.   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 December 31,
      2004.  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, 1998 and 1999, approximately $166,000 and
      $122,000, respectively, have been recognized as compensation expense.

14.   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, 1998  and
      1999, is summarized below:
<TABLE>
<CAPTION>
                                                           1998                                  1999
                                             ----------------------------------    ----------------------------------
                                                                  Weighted                              Weighted
                                                                  Average                               Average
                                                                  Exercise                              Exercise
                                                 Shares            Price               Shares            Price
                                                 ------            -----               ------            -----
<S>                                            <C>           <C>                     <C>           <C>
         Shares under options:
           Outstanding, January 1                         -   $            -               73,630   $        16.69
           Granted                                   73,630            16.69                    -                -
           Exercised                                      -                -                    -                -
           Forfeited                                      -                -                    -                -
                                              -------------    -------------        -------------    -------------

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

           Exercisable, December 31                       -   $            -               14,726   $        16.69
                                              =============    =============        =============    =============

</TABLE>

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


<TABLE>
<CAPTION>

                                                 Options Outstanding                       Options Exercisable
                                    ----------------------------------------------    -------------------------------
                                                       Weighted
                                                       Average        Weighted                           Weighted
                                        Number        Remaining        Average            Number         Average
      Range of                         Options       Contractual      Exercise           Options         Exercise
      Exercise Prices                Outstanding         Life           Price          Outstanding        Price
      ---------------                -----------         ----           -----          -----------        -----

<S>  <C>                                <C>          <C>           <C>                    <C>        <C>
      $16.69                             73,630       8.42 years    $      16.69           14,726     $      16.69
                                     ==========       ==========     ===========       ==========      ===========
</TABLE>


      Proforma 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 fair value for these  options was estimated at the date of
      the grant using the Black-Scholes  option-pricing model with the following
      assumptions for the periods ended December 31, 1998 and 1999:

                                                   1998               1999
                                                   ----               ----

         Risk-free interest rate                    4.52%                N/A
         Dividend yield                             1.19%                N/A
         Expected volatility                       13.00%                N/A
         Average expected life in years             5                    N/A

      For  purposes of proforma  disclosures,  the  estimated  fair value of the
      options is  amortized to expense over the  options'  vesting  period.  The
      Company's  proforma net income (in thousands) and net income per share for
      the years ended December 31, 1998 and 1999, is as follows:
<TABLE>
<CAPTION>
                                                      1998                                      1999
                                      --------------------------------------    -------------------------------------
                                      As Reported             Proforma          As Reported            Proforma
                                      -----------             --------          -----------            --------
<S>                                  <C>                <C>                    <C>                <C>
         Net income                   $           497    $           492        $           559    $           545
                                       ==============     ==============         ==============     ==============
         Diluted earnings
           per share                  $           .71    $           .70        $           .87    $           .85
                                       ==============     ==============         ==============     ==============
</TABLE>

15.   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,


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


     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.

16.   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, 1999:

                                      Committed         Balance      Available
                                   Lines of Credit    Outstanding     For Use

        Consumer and other lines      $ 1,994          $ 1,066        $ 928
                                       ======           ======         ====

     The Bank had  outstanding  commitments  to originate  mortgage and consumer
     loans of  approximately  $1,440,000  and  $622,000 at December 31, 1998 and
     1999,  respectively.  The  commitments  to originate  mortgage and consumer
     loans at December 31, 1998,  were  composed of fixed rate loans.  The fixed
     rate loans had interest  rates  ranging from 6.9% to 9.0% and terms ranging
     from 30  days to 15  years.  The  commitments  to  originate  mortgage  and
     consumer loans at December 31, 1999, were composed of fixed rate loans. The
     fixed rate loans had  interest  rates  ranging from 7.5% to 8.75% and terms
     ranging from 12 months to 15 years.



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


17.   Financial Instruments
      ---------------------

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

<TABLE>
<CAPTION>
                                                                            December 31,
                                                  ------------------------------------------------------------------
                                                               1998                               1999
                                                  -------------------------------    -------------------------------
                                                      Stated        Estimated            Stated        Estimated
                                                      Amount        Fair Value           Amount        Fair Value
                                                      ------        ----------           ------        ----------
<S>                                              <C>             <C>                <C>             <C>
         Financial assets:
           Cash and cash equivalents              $      2,839    $      2,839       $      2,162    $      2,162
           Investment and mortgage-
             backed securities                           6,987           6,976              5,291           5,185
           Loans receivable, net                        40,449          41,553             43,789          43,886
           Federal Home Loan Bank stock                    454             454                487             487
           Other assets                                    265             265                280             280

         Financial liabilities:
           Deposits:
             Demand accounts                             9,621           9,621              9,465           9,465
             Certificate accounts                       30,485          30,683             30,970          30,883
           Federal Home Loan Bank
             advances                                        -               -                500             500
           Other liabilities                               265             265                293             293
</TABLE>

     The Bank had off-balance sheet financial  commitments at December 31, 1999,
     which include approximately $1,550,000 of commitments to originate and fund
     loans and  unused  consumer  lines of credit and  letters of credit.  Since
     these  commitments are based on current market rates, the commitment amount
     is considered to be a reasonable estimate of fair market value.

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

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



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


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

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

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

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

      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, 1998
      and 1999.  Changes in market  interest  rates and  prepayment  assumptions
      could change significantly the estimated fair value.



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


      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.

18.   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.

Parent Company Only
Condensed Balance Sheets                              December 31,
                                                    -----------------
(in thousands)                                        1998      1999
                                                    -------   -------
Assets:
   Cash and cash equivalents                        $   668   $    94
   Investment securities available for sale           1,501       986
   ESOP loan receivable                                 480       409
   Due from subsidiary                                   --       885
   Equity in net assets of bank subsidiary            8,614     9,308
   Other assets                                          17        40
                                                    -------   -------

       Total assets                                 $11,280   $11,722
                                                    =======   =======
Liabilities
   Accrued liabilities                              $    10   $     6
                                                    -------   -------
Stockholders' equity:
   Common stockholders' equity                       11,270    11,716
                                                    -------   -------

       Total liabilities and stockholders' equity   $11,280   $11,722
                                                    =======   =======




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


Parent Company Only
Condensed Statements of Income                         For the Years Ended
                                                       --------------------
(in thousands)                                            1998       1999
                                                        -------    -------

Interest income                                         $   195    $   140
Non-interest expense                                         92         38
                                                        -------    -------
       Income before taxes                                  103        102
Income tax expense                                           40         41
                                                        -------    -------
       Income before equity earnings                         63         61
Equity earnings of bank subsidiary                          434        498
                                                        -------    -------
       Net income                                       $   497    $   559
                                                        =======    =======

Parent Company Only
Condensed Statements of Cash Flows                      For the Years Ended
                                                        -------------------
(in thousands)                                             1998       1999
                                                        -------    -------

Operating activities:
   Net income                                           $   497    $   559
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Undistributed equity earnings of bank subsidiary      (434)      (498)
     Amortization of premiums on securities                  --          1
     (Increase) decrease in other assets                     30        (18)
     Increase (decrease) in accrued liabilities               2         (5)
                                                        -------    -------
       Net cash provided by operating activities             95         39
                                                        -------    -------
Investing activities:
   Loan to Bank subsidiary                                   --       (885)
   Principal repayment by ESOP                               72         71
   Purchase of investment securities                     (2,000)      (499)
   Maturities of investment securities                    1,000      1,000
                                                        -------    -------
       Net cash used by investing activities               (928)      (313)
                                                        -------    -------
Financing activities:
   Purchase of treasury stock                            (1,034)      (174)
   Payment of cash dividends                               (138)      (126)
                                                        -------    -------
       Net cash used by financing activities             (1,172)      (300)
                                                        -------    -------

                                                                     (continued)


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


Parent Company Only
Condensed Statements of Cash Flows               For the Years Ended
                                                 -------------------
(in thousands)                                      1998       1999
                                                 -------    -------

   Net decrease in cash and cash equivalents     $(2,005)   $  (574)

Cash and cash equivalents at beginning of year     2,673        668
                                                 -------    -------
Cash and cash equivalents at end of year         $   668    $    94
                                                 =======    =======