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  January 1,
1999  through  December  31,  2000.  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, 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
January 1, 2000 - March 31, 2000          $   11.75   $   10.75   $     --
April 1, 2000 - June 30, 2000             $   11.88   $   10.13   $   0.10
July 1, 2000 - September 30, 2000         $   12.13   $   10.13   $     --
October 1, 2000 - December 31, 2000       $   12.06   $   11.75   $   0.10

         The  number  of  shareholders  of  record  as of March  22,  2001,  was
approximately  150.  This does not reflect the number of persons or entities who
held stock in "street" name through various  brokerage firms. At March 22, 2001,
there were 582,995 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  refer  collectively  to the Company and Security  Federal Bank (the
"Bank"), unless the context indicates otherwise.

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  75% of the loan  portfolio  at December  31,  2000.  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, 2000, the estimated average weighted term to maturity of
the Bank's  mortgage  loan  portfolio  was  slightly  less than 11 years and the
estimated  average  weighted  term of the Bank's  deposits was  slightly  over 7
months.


<PAGE>

Net Portfolio Value

The Bank  computes  amounts  by which  the net  present  value of cash flow from
assets, liabilities and off balance sheet items ("net portfolio value" or "NPV")
would  change  in the event of a range of  assumed  changes  in market  interest
rates.  These  computations  estimate  the  effect  on the  Bank's  NPV  from an
instantaneous  and  permanent 1% to 3% (100 to 300 basis  points)  increases and
decreases in market interest rates.  Based upon OTS  assumptions,  the following
table presents the Bank's NPV at December 31, 2000.

        Changes in  Rates           NPV Ratio %(1)           Change(2)
        -----------------           --------------           ---------
             +300 bp                    15.62                  -415 bp
             +200 bp                    17.13                  -264 bp
             +100 bp                    18.55                  -122 bp
                0 bp                    19.77                     0 bp
             -100 bp                    20.52                  + 75 bp
             -200 bp                    21.09                  +132 bp
             -300 bp                    21.90                  +213 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.

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,
                                                -------------------------------------------------------------------
                                                               1999                              2000
                                                -----------------------------------  ------------------------------
                                                                           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)......................        $41,566      $3,348       8.05%    $45,519    $3,688       8.10%
  Investment securities ...................          3,341         176       5.27       3,002       160       5.33
  Interest-earning deposits................          2,321         109       4.70         536        29       5.41
  Federal Home Loan Bank stock.............            469          33       7.04         503        37       7.36
  Mortgage-backed securities...............          2,707         147       5.43       1,833       110       6.00
                                                   -------      ------               --------    ------
Total interest-earning assets..............         50,404       3,813       7.56      51,393     4,024       7.83
                                                                ------                           ------
Non-interest-earning assets................          2,450                              2,012
                                                   -------                            -------
Total assets                                       $52,854                            $53,405
                                                    ======                             ======
Interest-bearing liabilities:
  Interest-bearing demand deposits.........        $10,010         248       2.48      $9,311       229       2.46
  Certificates of deposit..................         30,475       1,570       5.15      31,609     1,805       5.71
  Short-term borrowings....................              -           -          -         433        29       6.70
                                                   --------     -------               -------    -----
Total interest-bearing liabilities.........         40,485       1,818       4.49      41,353     2,063       4.99
                                                                ------                           ------
Non-interest-bearing liabilities...........          1,119                              1,069
                                                   -------                           --------
Total liabilities..........................         41,604                             42,422
                                                   -------                            -------
Total stockholders' equity.................         11,250                             10,983
                                                   -------                            -------
Total liabilities and stockholders' equity.        $52,854                            $53,405
                                                   =======                            =======
Net interest income........................                     $1,995                           $1,961
                                                                 =====                            =====
Interest rate spread (2)...................                                  3.07%                            2.84%
                                                                             ====                             ====
Net yield on interest-earning assets (3)...                                  3.96%                            3.82%
                                                                             ====                             ====
Ratio of average interest-earning assets to
  average interest-bearing liabilities.....                                124.50%                          124.28%
                                                                           ======                           ======
</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,
                                          --------------------------------------- ------------------------------
                                                    1999 vs. 1998                      2000 vs. 1999
                                          --------------------------------------- ------------------------------
                                                 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                          $  80    $(138)   $  (3)   $ (61)   $ 318    $  22    $   -    $ 340
 Mortgage-backed securities                  (87)      (4)       1      (90)     (48)      15       (4)     (37)
 Investment securities                        19        3        -       22      (18)       2        -      (16)
 Other interest-earning assets               (38)     (11)       2      (47)     (89)      35      (22)     (76)
                                           -----    -----    -----    -----    -----    -----    -----    -----
  Total interest income                    $ (26)   $(150)   $   -    $(176)   $ 163    $  74    $ (26)   $ 211
                                           =====    =====    =====    =====    =====    =====    =====    =====
Interest expense:
 Savings accounts                          $  19    $(160)   $   -    $(141)   $  20    $ 195    $   1    $ 216
 Other liabilities                             -        -        -        -       29        -        -       29
                                           -----    -----    -----    -----    -----    -----    -----    -----
   Total interest expense                  $  19    $(160)   $   -    $(141)   $  49    $ 195    $   1    $ 245
                                           =====    =====    =====    =====    =====    =====    =====    =====
Net change in net-interest income          $ (45)   $  10    $   -    $ (35)   $ 114    $(121)   $ (27)   $ (34)
                                           =====    =====    =====    =====    =====    =====    =====    =====
</TABLE>

Comparison of Financial Condition

The Company's total consolidated assets increased by approximately $1.8 million,
or 3.5% from $53.1  million at December 31, 1999,  to $54.9  million at December
31, 2000.  The increase in assets for 2000 was primarily  due to an  approximate
$3.0 million  increase in net loans  receivable,  offset by an approximate  $1.1
million decrease in investment securities and mortgage-backed securities.

Total cash and interest-earning deposits decreased approximately $41,000 to $2.1
million  at  December  31,  2000,  while  investment   securities  decreased  by
approximately  $617,000 to $2.5 million at December 31,  2000.  Mortgage  backed
securities  decreased  approximately  $524,000 to $1.7  million at December  31,
2000, as the portfolio continues to mature.

Stockholders'  equity  decreased  $497,000  to  approximately  $11.2  million at
December 31,  2000,  from $11.7  million at December 31, 1999.  The decrease was
attributable  to the repurchase of

<PAGE>

approximately  $1.0  million  of the  Company's  outstanding  capital  stock and
payment of cash  dividends  in the amount of $111,000,  offset by  comprehensive
income of $473,000 and the amortization of $168,000 of unearned compensation.

Comparison  of the Results of Operations  for the Years Ended  December 31, 1999
and 2000

Net Income. Net income decreased $74,000, or 13.2% in 2000, as compared to 1999.
The  decrease  was  principally  due to a  decrease  in net  interest  income of
approximately  $34,000,  combined with an increase in  non-interest  expenses of
$62,000,  offset by an  increase  in  non-interest  income of $13,000  and lower
income tax expense for 2000,  as  compared  to 1999.  Dilutive  income per share
decreased  $.03, from $.87 for the year ended December 31, 1999, to $.84 for the
year ended December 31, 2000.

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  $34,000,  or 1.7%. The decrease was primarily due
to a decline in the  Company's  net interest  margin and interest rate spread in
2000,  compared to 1999.  The  increase  in interest  expense for fiscal 2000 of
$245,000 more than offset the $211,000 increase in interest income. The increase
in the cost of funds of 50 basis points resulted in a 23 basis point decrease in
the  interest  rate spread to 2.84% for the year ended  December  31,  2000,  as
compared to 3.07% for the year ended December 31, 1999.

Interest Income. Interest income increased $211,000, or 5.5%, from approximately
$3.8 million for 1999,  to  approximately  $4.0  million for 2000.  This overall
increase in interest  income was  primarily  the result of a increase in average
interest-earning assets of approximately $989,000 for 2000, as compared to 1999,
combined with a increase in the average yield on  interest-earning  assets of 26
basis points, from 7.56% for 1999, to 7.83% for 2000.

Interest on loans increased $340,000 for 2000, as compared to 1999. The increase
primarily  reflects  an  approximate  $4.0  million  increase  in average  loans
outstanding, and a increase in the average yield on average loans outstanding of
5 basis points, from 8.05% for 1999, to 8.10% for 2000. Loans receivable are the
largest interest-earning asset held in the Company's portfolio.

Interest on  investment  securities  decreased  $12,000 for 2000, as compared to
1999. The decrease in interest on investments  primarily reflects an decrease of
approximately  $339,000 in the average investment balance for 2000,  compared to
1999,  offset by a  increase  in the  average  yield on  investments  of 6 basis
points, from 5.27% in 1999, to 5.33% in 2000.

<PAGE>

Interest on  interest-earning  deposits  decreased $80,000 for 2000, as compared
1999. The decrease in interest on interest-earning deposits primarily reflects a
decrease   of   approximately   $1.8   million   in  the   average   balance  of
interest-earning deposits in 2000, compared to 1999.

Interest on mortgage-backed  securities  decreased $37,000 for 2000, compared to
1999,  as the  portfolio  continued to pay down  principal  and those funds were
invested in other earning assets.

The decrease in average  interest-earning  deposits for 2000,  compared to 1999,
along with the principal payments from  mortgage-backed  securities were used to
fund loan demand, deposit withdrawals and stock repurchases.

Interest  Expense.  Interest  expense  increased  approximately  $245,000,  from
approximately   $1.8  million  for  the  year  ended   December  31,  1999,   to
approximately  $2.0 million for the year ended  December 31, 2000.  The increase
for 2000,  as compared  to 1999,  was  primarily  the result of a 50 basis point
increase in the average cost of funds,  combined  with an  approximate  $868,000
increase in the average balance of interest-bearing liabilities.  Interest rates
of certificate of deposits increased during 2000, compared to 1999. The increase
was primarily due to the continued  increase in short-term  interest rates which
forced the Company to reprice its certificate of deposits at a much higher rate.
Until the interest rate environment  stabilizes and returns to a normal pattern,
management  does not  foresee  any relief in  repricing  customer  deposits at a
higher cost of funds.

Provision  for  Loan  Losses.  Historically,   management  has  emphasized  loss
experience  over other  factors in  establishing  the provision for loan losses.
Management  reviews the  allowance  for loan losses in relation to (i) past loan
loss experience,  (ii) known and inherent risks in the portfolio,  (iii) adverse
situations that may affect the borrower's  ability to repay,  (iv) the estimated
value of any underlying collateral,  and (v) current economic conditions.  There
can be no  assurances,  however,  that future  losses will not exceed  estimated
amounts or that  additional  provisions  for loan losses will not be required in
future  periods.  At December 31, 2000,  the  allowance for loan losses was at a
level deemed adequate by management to provide for losses in the portfolio.

Non-Interest Income. Non-interest income continues to be an additional source of
income for the  Company.  The income is produced by fees on new loan  production
and service  fees on other  products and  services.  Total  non-interest  income
amounted to $197,000 and $184,000 for 2000 and 1999, respectively.

Non-Interest  Expense.  Non-interest expense increased $62,000, to approximately
$1.3  million at December 31, 2000.  The  increase was  primarily  the result of
increased net  compensation  expense of $36,000,  a combined $42,000 increase in
net occupancy and data  processing  expenses,  offset by a $16,000  reduction in
deposit insurance  premiums.  The increase in compensation  expense for 2000, as
compared to 1999,  was primarily  attributable  normal  compensation  increases,
combined  with the addition of extra  personnel  associated  with the new branch
office in Mountain City,

<PAGE>

Tennessee. The increase in net occupancy expense for 2000, compared to 1999, was
mainly  attributable to expenses  associated with the Bank's  additional  branch
office in Mountain City, Tennessee.  The increase in data processing expense for
2000,  compared to 1999, was mainly  attributable  to expenses  associated  with
increased transaction volumes, data communications  expenses, and the new teller
operating system. The decrease in deposit insurance premiums for 2000,  compared
to 1999,  was  attributable  to reduced  insurance  assessment  rates  beginning
January 1, 2000.

Income Taxes.  Income tax expense decreased $9,000, or 2.8%, to $315,000 for the
year ended  December 31,  2000,  from  $324,000 for the year ended  December 31,
1999.  The  effective  tax rate for 2000 and 1999 was  approximately  39.4%  and
36.7%, 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, 2000
totaled $756,000,  as compared to $648,000 for the year ended December 31, 1999.
The increase in net cash provided by operating  activities for 2000, as compared
to 1999, was primarily the result normal banking operations.

Net cash used by  investing  activities  for the year ended  December  31,  2000
totaled  approximately $2.0 million,  an increase of approximately  $82,000,  as
compared to 1999. The increase was primarily attributable to a increase in loans
funded of  approximately  $3.0  million,  purchases of premises and equipment of
approximately $46,000, offset by proceeds from maturities, sales, and repayments
of  investment  and  mortgage-backed  securities in 2000 of  approximately  $1.1
million.


<PAGE>

Net cash provided by financing  activities for 2000 totaled  approximately  $1.2
million.  This was  primarily  the result of an  increase in deposits in 2000 of
$1.8  million,  net  proceeds of Federal  Home Loan Bank  advances of  $500,000,
offset by approximately $1.0 million of common stock repurchases and $111,000 in
cash dividends paid.

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

At December 31,  2000,  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, 2000,  management was not aware of any current  recommendations  by
the regulatory authorities which, if implemented, would have such an effect.


<PAGE>
[LOGO]    CRISP
          HUGHES
          EVANS                       Certified Public Accountants & Consultants
          LLP
          ----------------------------------------------------------------------
                                  Affiliated worldwide through AGN International


                          Independent Auditors' Report
                          ----------------------------


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


We have audited the  accompanying  consolidated  balance  sheets of SFB Bancorp,
Inc. and  Subsidiary  (the  "Company") as of December 31, 1999 and 2000, and the
related consolidated statements of income,  comprehensive income,  stockholders'
equity, and cash flows for the years then ended. These financial  statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material  respects,  the financial  position of the Company as of
December 31, 1999 and 2000,  and the results of their  operations and their cash
flows for the years  then  ended,  in  conformity  with U.S  generally  accepted
accounting principles.


                                               /s/ Crisp Hughes Evans LLP
                                               --------------------------


Asheville, North Carolina
January 25, 2001

                                  500 Ridgefield Court          828 254 2254
                                  PO Box 3049                   Fax 828 254 6859
                                  Asheville, NC 28802           www.che-llp.com

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                           Consolidated Balance Sheets
                        (in thousands, except share data)

<TABLE>
<CAPTION>

                                                                                          December 31,
                                                                              --------------------------------------
           Assets                                                                   1999                2000
           ------                                                                   ----                ----
<S>                                                                          <C>                <C>
Cash on hand                                                                   $         1,424    $           581
Interest earning deposits                                                                  738              1,540
                                                                               ---------------    ---------------
         Cash and cash equivalents                                                       2,162              2,121

Investment securities:
   Held to maturity (market value of $911 in 1999 and $841 in 2000)                      1,017                870
   Available for sale                                                                    2,091              1,621
Loans receivable, net                                                                   43,789             46,814
Mortgage-backed securities:
   Available for sale                                                                    2,183              1,659
Premises and equipment, net                                                              1,011                957
Federal Home Loan Bank stock, at cost                                                      487                524
Accrued interest receivable                                                                280                355
Other assets                                                                               109                 47
                                                                               ---------------    ---------------
         Total assets                                                          $        53,129    $        54,968
                                                                               ===============    ===============
   Liabilities and Stockholders' Equity

Deposits:
   Non-interest-bearing                                                        $           606    $           820
   Interest-bearing                                                                     39,829             41,432
                                                                               ---------------    ---------------
         Total deposits                                                                 40,435             42,252

Federal Home Loan Bank advances                                                            500              1,000
Advance payments by borrowers for taxes and insurance                                      220                222
Accrued expenses and other liabilities                                                     157                128
Income taxes:
   Current                                                                                   -                 18
   Deferred                                                                                101                129
                                                                               ---------------    ---------------
         Total liabilities                                                              41,413             43,749
                                                                               ---------------    ---------------
Stockholders' equity:
   Common stock ($.10 par value, 4,000,000 shares authorized;
     767,000 shares issued; 679,417 and 588,595 outstanding at                              77                 77
     December 31, 1999 and 2000, respectively)
   Paid-in capital                                                                       7,382              7,392
   Retained income, substantially restricted                                             6,165              6,539
   Treasury stock at cost (87,583 and 178,405 shares at December 31,
     1999 and 2000, respectively)                                                       (1,208)            (2,245)
   Accumulated other comprehensive income                                                  (45)               (57)
   Unearned compensation:
     Employee stock ownership plan                                                        (419)              (348)
     Restricted stock plan                                                                (236)              (139)
                                                                               ---------------    ---------------
         Total stockholders' equity                                                     11,716             11,219
                                                                               ---------------    ---------------
         Total liabilities and stockholders' equity                            $        53,129    $        54,968
                                                                               ===============    ===============
</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,
                                                                          ------------------------------------------
                                                                                  1999                 2000
                                                                                  ----                 ----
<S>                                                                       <C>                   <C>
Interest income:
   Loans                                                                    $         3,348       $         3,688
   Mortgage-backed securities                                                           147                   110
   Investments                                                                          209                   197
   Interest earning deposits                                                            109                    29
                                                                            ---------------       ---------------
         Total interest income                                                        3,813                 4,024
                                                                            ---------------       ---------------
Interest expense:
   Deposits                                                                           1,818                 2,034
   Federal Home Loan Bank advances                                                        -                    29
                                                                            ---------------       ---------------
         Total interest expense                                                       1,818                 2,063
                                                                            ---------------       ---------------
         Net interest income                                                          1,995                 1,961

Provision for loan losses                                                                36                    36
                                                                            ---------------       ---------------
         Net interest income after provision
           for loan losses                                                            1,959                 1,925
                                                                            ---------------       ---------------
Non-interest income:
   Loan fees and service charges                                                        173                   181
   Other                                                                                 11                    16
                                                                            ---------------       ---------------
         Total non-interest income                                                      184                   197
                                                                            ---------------       ---------------
Non-interest expenses:
   Compensation                                                                         630                   668
   Employee benefits                                                                    128                   126
   Net occupancy expense                                                                102                   124
   Deposit insurance premiums                                                            24                     8
   Data processing                                                                      104                   124
   Other                                                                                272                   272
                                                                            ---------------       ---------------
         Total non-interest expenses                                                  1,260                 1,322
                                                                            ---------------       ---------------
         Income before income taxes                                                     883                   800

Income tax expense                                                                      324                   315
                                                                            ---------------       ---------------
         Net income                                                         $           559       $           485
                                                                            ===============       ===============
Net income per common share:
   Basic                                                                    $           .87       $           .84
   Diluted                                                                              .87                   .84
                                                                            ===============       ===============
</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,
                                                                          ----------------------------
                                                                           1999                  2000
                                                                           ----                  ----

<S>                                                                     <C>                   <C>
Net income                                                                $ 559                 $ 485

Other comprehensive income:
   Net unrealized losses on securities available for
     sale, net of tax benefit of $(14) and $(8),
     respectively                                                           (21)                  (12)
                                                                          -----                 -----
Comprehensive income                                                      $ 538                 $ 473
                                                                          =====                 =====
</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>
                                                                                           Accumu-
                                                                                           lated
                                                                                           Other
                                                                                           Compre-   Unearned  Compensation
                                           Common     Paid-In    Retained     Treasury     hensive   ----------------------
                                            Stock     Capital     Income       Stock       Income    for ESOP    for RSP     Total
                                            -----     -------     ------       -----       ------    --------    -------   --------

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

Net income                                        -          -        559           -           -           -         -         559

Other comprehensive income                        -          -          -           -         (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

Net income                                        -          -        485           -           -           -         -         485

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

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

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

Compensation earned                               -         10          -           -           -          71        97         178
                                           --------   --------   --------    --------    --------    --------    ------    --------
Balance at December 31, 2000               $     77   $  7,392   $  6,539    $ (2,245)   $    (57)   $   (348)   $ (139)   $ 11,219
                                           ========   ========   ========    ========    ========    ========    ======    ========
</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,
                                                            ------------------------
                                                                 1999       2000
                                                              ---------    -------
<S>                                                         <C>        <C>
Operating activities:
   Net income                                                 $   559    $   485
   Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation                                                  79        100
     Provision for loan losses                                     36         36
     Loss on disposal of real estate owned                          -         21
     Deferred income taxes                                         34         36
     Net decrease in deferred loan fees                           (55)       (23)
     Accretion of discounts on investment securities, net         (24)       (24)
     Amortization of premiums on mortgage-backed securities         9          8
     Amortization of unearned compensation                        208        178
     FHLB stock dividends                                         (33)       (37)
     Net changes in:
       Other assets                                               (30)        62
       Accrued interest receivable                                (15)       (75)
       Accrued expenses and other liabilities                     (64)       (29)
       Income taxes--current                                      (56)        18
                                                              -------    -------
         Net cash provided by operating activities                648        756
                                                              -------    -------

Investing activities:
   Maturities of investment securities held to maturity           165        171
   Purchase of investment securities available for sale        (1,799)         -
   Maturities of investment securities available for sale       2,000        500
   Principal payments on mortgage-backed securities
     available for sale                                         1,310        466
   Proceeds from disposal of real estate owned                      -         76
   Net increase in loans                                       (3,321)    (3,135)
   Purchase of premises and equipment                            (241)       (46)
                                                              -------    -------
         Net cash used by investing activities                 (1,886)    (1,968)
                                                              -------    -------

</TABLE>

<PAGE>

                                SFB BANCORP, INC.
                                 AND SUBSIDIARY

                Consolidated Statements of Cash Flows, Continued
                                 (in thousands)

<TABLE>
<CAPTION>
                                                                                  Years Ended December 31,
                                                                                 -------------------------
                                                                                      1999       2000
                                                                                   --------   --------
<S>                                                                              <C>        <C>
Financing activities:
   Net increase in deposits                                                        $   329    $ 1,817
   Increase in advance payments by borrowers
     for taxes and insurance                                                            32          2
   Proceeds from FHLB advances                                                         500      3,400
   Repayments of FHLB advances                                                           -     (2,900)
   Treasury stock purchased                                                           (174)    (1,037)
   Dividends paid                                                                     (126)      (111)
                                                                                   -------    -------
         Net cash provided by financing activities                                     561      1,171
                                                                                   -------    -------

         Decrease in cash and cash equivalents                                        (677)       (41)

Cash and cash equivalents at beginning of year                                       2,839      2,162
                                                                                   -------    -------
Cash and cash equivalents at end of year                                           $ 2,162    $ 2,121
                                                                                   =======    =======

Supplemental  disclosures  of cash flow  information:
Cash paid during the year for:
     Interest                                                                      $ 1,823    $ 2,078
     Income taxes                                                                      346        197
                                                                                   =======    =======

Non-cash transactions:
   Loans to facilitate sale of real estate                                         $     -    $   152
   Foreclosed loans transferred to real estate                                         201        249
   Unrealized losses on securities and mortgage-backed
     securities available for sale, net of deferred taxes                          $   (21)   $   (12)
                                                                                   =======    =======
</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, 1999 and 2000
                         (Tabular amounts in thousands)

1.    Summary of Significant Accounting Policies
      ------------------------------------------

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

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

      Estimates - The preparation of financial statements in conformity with U.S
      ---------
      generally  accepted  accounting  principles  requires  management  to make
      estimates and assumptions  that effect the reported  amounts of assets and
      liabilities  and  disclosure of contingent  assets and  liabilities at the
      date of the consolidated  financial statements and the reported amounts of
      revenues  during the reporting  period.  Actual  results could differ from
      those estimates.

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

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

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

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

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

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

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

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

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

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


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


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

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

      Stock  Compensation  Plans - Statement of Financial  Accounting  Standards
      --------------------------
      (SFAS) No. 123, "Accounting for Stock-Based  Compensation," encourages all
      entities to adopt a fair value based  method of  accounting  for  employee
      stock  compensation  plans,  whereby  compensation cost is measured at the
      grant  date  based on the value of the award  and is  recognized  over the
      service  period,  which is usually the vesting  period.  However,  it also
      allows an entity to continue to measure  compensation cost for those plans
      using the  intrinsic  value  based  method  of  accounting  prescribed  by
      Accounting  Principles Board Opinion No. 25,  "Accounting for Stock Issued
      to Employees,"  whereby  compensation  cost is the excess,  if any, of the
      quoted  market price of the stock at the grant date (or other  measurement
      date) over the amount an  employee  must pay to acquire  the stock.  Stock
      options  issued  under the  Company's  stock option plan have no intrinsic
      value at the grant date, and under Opinion No. 25 no compensation  cost is
      recognized  for  them.  The  Company  has  elected  to  continue  with the
      accounting  methodology  in Opinion No. 25 and, as a result,  has provided
      pro forma  disclosures  of net  income  and  earnings  per share and other
      disclosures,  as if the fair value  based  method of  accounting  had been
      applied.  The pro forma  disclosures  include  the  effects  of all awards
      granted on or after January 1, 1995. (See Note 13.)

      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, 1999 and 2000,  net income  available to
      the common  stockholders  in both the basic and diluted  computations  was
      equal  to net  income.  For


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


      purposes  of  the  diluted  income  per  share  calculation,  there was no
      dilutive effect for the stock  options  for the years  ended  December 31,
      1999 and 2000.

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

                                                    Years Ended December 31,
                                                       1999        2000
                                                       ----        ----

Net income applicable to common stock                  $559        $485
                                                       ====        ====

Average number of common shares outstanding             642         575
Effect of dilutive options                                -           -
                                                       ----        ----
Average number of common shares outstanding
  used to calculate diluted earnings per common
  share                                                 642         575
                                                       ====        ====


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

Recent  Accounting  Pronouncements - 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  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.  Statement  No. 133, as amended by FASB No. 138, is not
expected to  materially  effect the Company's  financial  position or results of
operations.

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


2.    Investment Securities
      ---------------------

      The amortized cost and estimated fair values of investment  securities are
      summarized as follows:
<TABLE>
<CAPTION>
                                                                      Gross            Gross         Estimated
                                                    Amortized      Unrealized       Unrealized          Fair
                                                      Cost            Gains           Losses           Value
                                                      ----            -----           ------           -----
<S>                                              <C>              <C>             <C>              <C>
         Securities to be held to maturity:
           December 31, 1999:
             U.S. government security             $        464     $          -    $        106     $        358
             Municipal securities                          553                -               -              553
                                                  ------------     ------------    ------------     ------------
                                                  $      1,017     $          -    $        106     $        911
                                                  ============     ============    ============     ============
           December 31, 2000:
             U.S. government security             $        487     $          -    $         29     $        458
             Municipal securities                          383                -               -              383
                                                  ------------     ------------    ------------     ------------
                                                  $        870     $          -    $         29     $        841
                                                  ============     ============    ============     ============
         Securities available for sale:
           December 31, 1999:
             U.S. government and
               agency securities                  $      2,124     $          -    $         33     $      2,091
                                                  ============     ============    ============     ============
           December 31, 2000:
             U.S. government and
               agency securities                  $      1,625     $          -    $          4     $      1,621
                                                  ============     ============    ============     ============
</TABLE>

      The  amortized  cost and  estimated  market  values of debt  securities by
      contractual maturity are as follows:
<TABLE>
<CAPTION>
                                                            Amortized                           Estimated
                                                              Cost                             Fair Value
                                                 --------------------------------    --------------------------------
                                                      1999            2000                1999             2000
                                                      ----            ----                ----             ----
<S>                                             <C>             <C>                 <C>              <C>
         Securities to be held to maturity:
           Due in one year                        $          -    $         31        $          -     $         31
           Due  after  one  year  through
             five years                                    553             352                 553              352
           Due after ten years                             464             487                 358              458
                                                  ------------    ------------        ------------     ------------
                                                  $      1,017    $        870        $        911     $        841
                                                  ============    ============        ============     ============
         Securities available for sale:
           Due in one year                        $        500    $      1,125        $        495     $      1,123
           Due  after  one  year  through
             five years                                  1,624             500               1,596              498
                                                  ------------    ------------        ------------     ------------
                                                  $      2,124    $      1,625        $      2,091     $      1,621
                                                  ============    ============        ============     ============
</TABLE>

      The Bank had investment securities with an amortized cost of approximately
      $1,088,000 and $1,112,000  pledged  against  deposits at December 31, 1999
      and 2000, respectively.

      The Bank had no sales of  investment  securities to be held to maturity or
      available for sale for the years ended December 31, 1999 and 2000.

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


3.    Loans Receivable

      Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                                            --------------------------------------
                                                                                  1999                2000
                                                                                  ----                ----
<S>                                                                        <C>                <C>
         Real estate first mortgage loans:
           One-to-four-family                                                $        29,815    $        30,174
           Construction                                                                1,397              1,784
           Commercial real estate                                                      1,499              1,707
           Multi-family residential                                                    2,571              3,217
           Land                                                                        4,280              4,363
                                                                             ---------------    ---------------
               Total real estate loans                                                39,562             41,245
                                                                             ---------------    ---------------
         Consumer and commercial loans:
           Commercial business                                                           420              2,009
           Auto loans                                                                  3,608              3,488
           Share loans                                                                   433                217
           Other                                                                         640                747
                                                                             ---------------    ---------------
               Total consumer and commercial loans                                     5,101              6,461
                                                                             ---------------    ---------------
               Total loans                                                            44,663             47,706
                                                                             ---------------    ---------------
         Less:
           Undisbursed portion of loans in process                                       469                515
           Net deferred loan fees                                                         53                 30
           Allowance for loan losses                                                     352                347
                                                                             ---------------    ---------------
                                                                                         874                892
                                                                             ---------------    ---------------
                                                                             $        43,789    $        46,814
                                                                             ===============    ===============
</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.

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


      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,
                                                    -------------------------
                                                     1999                2000
                                                    -----               -----

        Beginning balance                           $ 326               $ 352
        Provision charged to income                    36                  36
        Charge-offs, net of recoveries                (10)                (41)
                                                    -----               -----

        Ending balance                              $ 352               $ 347
                                                    =====               =====

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

      Mortgage-backed securities are summarized as follows:
<TABLE>
<CAPTION>
                                                                      Gross            Gross         Estimated
                                                    Amortized       Unrealized      Unrealized         Market
                                                      Cost            Gains           Losses           Value
                                                 -------------    -------------   -------------    -------------
<S>                                            <C>                <C>             <C>              <C>
         Securities available for sale:
           December 31, 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
                                                 =============      ===========     ===========      ===========
</TABLE>

                                                                     (continued)

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


<TABLE>
<CAPTION>

                                                                      Gross            Gross         Estimated
                                                    Amortized       Unrealized      Unrealized         Market
                                                      Cost            Gains           Losses           Value
                                                   -----------      -----------     -----------      -----------
<S>                                              <C>              <C>             <C>              <C>
         Securities available for sale:
           December 31, 2000:
             GNMA                                  $       348      $         1     $         6      $       343
             FHLMC                                          35                -               -               35
             FHLMC REMIC's                                  28                -               -               28
             FNMA                                          370                -              12              358
             FNMA REMIC's                                  969                -              74              895
                                                   -----------      -----------     -----------      -----------
                                                   $     1,750      $         1     $        92      $     1,659
                                                   ===========      ===========     ===========      ===========
</TABLE>

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

      The  Bank  had  mortgage-backed  securities  with  an  amortized  cost  of
      approximately  $339,000 and $56,000 pledged against deposits and available
      FHLB advances at December 31, 1999 and 2000, respectively.

      There  were no sales of  mortgage-backed  securities  for the years  ended
      December 31, 1999 and 2000.

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

      Premises and equipment are summarized as follows:

                                                   December 31,
                                            -----------------------
                                              1999             2000
                                            ------           ------

Land and improvements                       $  237           $  237
Buildings                                    1,227            1,239
Vehicles                                        17               38
Furniture, fixtures and equipment              557              570
                                            ------           ------
                                             2,038            2,084
Less accumulated depreciation                1,027            1,127
                                            ------           ------
                                            $1,011           $  957
                                            ======           ======


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


6.    Deposits
      --------
      The  Bank  had  deposit  accounts  in  amounts  of  $100,000  or  more  of
      approximately  $10.1  million and $11.4  million at December  31, 1999 and
      2000, respectively. Contractual maturities of time deposits are summarized
      as follows:
                                            December 31,
                                     -------------------------
                                       1999              2000
                                     -------           -------

12 months or less                    $26,479           $26,605
After 1 but within 3 years             4,339             5,781
After 3 years                            152               373
                                     -------           -------

                                     $30,970           $32,759
                                     =======           =======

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

      The Bank had $500,000  and  $1,000,000  in advances  from the Federal Home
      Loan Bank (FHLB) outstanding at December 31, 1999 and 2000,  respectively.
      The advances have an interest rate of 6.75% and mature through March 2001.

      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 $2.6
      million.

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

      Income tax expense is summarized as follows:

                                Years Ended December 31,
                  -----------------------------------------------------
                            1999                         2000
                  ------------------------    -------------------------
                  Federal   State    Total     Federal   State   Total
                  -------   -----    -----     -------   -----   -----

    Current        $256     $ 34     $290       $249     $ 30     $279
    Deferred         13       21       34         14       22       36
                   ----     ----     ----       ----     ----     ----
           Total   $269     $ 55     $324       $263     $ 52     $315
                   ====     ====     ====       ====     ====     ====


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


      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,
                                                   ------------------------
                                                       1999         2000
                                                      -----        -----

    Computed income tax expense                       $ 300        $ 272
    Increase (decrease) resulting from:
       State income tax, net of federal tax benefit      35           34
       Non-taxable income                               (12)          (7)
       Non-deductible expenses                           14           16
       Other                                            (13)           -
                                                      -----        -----
    Actual income tax expense                         $ 324        $ 315
                                                      =====        =====

      The components of net deferred tax liabilities are as follows:

                                                              December 31,
                                                          -------------------
                                                            1999       2000
                                                            ----       ----
    Deferred tax liabilities:
       Bad debts                                            $ 16       $ 20
       Excess tax depreciation                                21         26
       FHLB stock dividends                                   67         81
       Deferred cost                                          52         76
       Purchased discounts on mortgage-backed securities      10          1
                                                            ----       ----
                                                             166        204
                                                            ----       ----
    Deferred tax assets:
       Accrued expenses                                       25         27
       Unrealized losses on securities available for sale     30         38
       Other                                                  10         10
                                                            ----       ----
                                                              65         75
                                                            ----       ----
           Net deferred tax liability                       $101       $129
                                                            ====       ====

      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, 1999 and 2000,  includes


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


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

9.    Regulatory Matters
      ------------------

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

      Quantitative measures established by regulation to ensure capital adequacy
      require the Bank to maintain  minimum amounts and ratios (set forth in the
      table below) of Tier I capital (as defined in the  regulations) to average
      total assets (as defined),  and of Tier I and total risk-based capital (as
      defined) to risk-weighted assets (as defined).  Management believes, as of
      December  31,  1999 and 2000,  that the Bank  meets all  capital  adequacy
      requirements to which it is subject.

      As of  December  31,  2000,  the  most  recent  notification  from the OTS
      categorized the Bank as well  capitalized  under the regulatory  framework
      for prompt  corrective  action.  To be categorized as well capitalized the
      Bank must  maintain  minimum (Tier I leverage,  Tier I  risk-based,  total
      risk-based  capital)  ratios  as set  forth  in the  table.  There  are no
      conditions or events since that notification that management believes have
      changed  the  institution's   category.  No  deduction  from  capital  for
      interest-rate risk was required.

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

<TABLE>
<CAPTION>
                                                                                                 To Be Well
                                                                                              Capitalized Under
                                                                     For Capital              Prompt Corrective
                                           Actual                 Adequacy Purposes           Action Provisions
                                   --------------------------  --------------------------  ----------------------
                                    Amount         Ratio        Amount         Ratio        Amount         Ratio
                                    ------         -----        ------         -----        ------         -----
<S>                              <C>             <C>         <C>              <C>        <C>              <C>
         As of December 31, 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>


                                                                     (continued)

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

<TABLE>
<CAPTION>
                                                                                                 To Be Well
                                                                                              Capitalized Under
                                                                     For Capital              Prompt Corrective
                                           Actual                 Adequacy Purposes           Action Provisions
                                   --------------------------  --------------------------  ----------------------
                                      Amount        Ratio         Amount        Ratio        Amount        Ratio
                                      ------        -----         ------        -----        ------        -----
<S>                                <C>             <C>         <C>              <C>        <C>              <C>
         As of December 31, 2000:
           Tier I Capital (to
             adjusted total
             assets                  $ 9,971         18.4%       $ 2,162         >4.0%       $ 2,702         >5.0%
                                                                                 -                           -
           Tier I Capital (to risk
             weighted assets)        $ 9,971         29.2%       $ 1,364         >4.0%       $ 2,046         >6.0%
                                                                                 -                           -
           Total Capital (to risk-
             weighted assets)        $ 10,318        30.3%       $ 2,727         >8.0%       $ 3,409        >10.0%
                                                                                 -                          -
</TABLE>

10.  Employee Stock Ownership Plan (ESOP)
     -----------------------------------

     The Bank has an Employee Stock  Ownership Plan (ESOP) for all employees who
     have  attained  the age of 21 and have been  credited  with at least  1,000
     hours of service during a 12-month period. The ESOP borrowed  approximately
     $614,000  from  Bancorp  and used the funds to  purchase  61,360  shares of
     common  stock of  Bancorp.  The loan  will be repaid  principally  from the
     Bank's  discretionary  contributions to the ESOP over a period of 10 years.
     On December 31, 2000, the loan had an outstanding  balance of approximately
     $339,000 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, 1999 and 2000,  compensation  related to
     the ESOP of approximately $86,000 and $81,000,  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, 2000, the ESOP had approximately 26,000 allocated
     shares and 35,000  unallocated  shares.  The fair value of unallocated ESOP
     shares at December 31, 2000 was approximately $409,000.

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

11.  Restricted Stock Plan
     ---------------------
     The Company has a restricted  stock plan  ("RSP")  which  approved  30,680
     shares of common stock for granting.  The shares can be granted to certain
     employees,  officers,  and  directors of the Company.  The initial  grants
     began  vesting on June 1, 1998,  and will be fully  vested by December 31,
     2002.  The Company  purchased  30,680  shares of common  stock in the open

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


      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, 1999 and 2000, approximately $122,000 and
      $97,000, respectively, have been recognized as compensation expense.

12.   Stock Option Plans
      ------------------

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

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

      Activity  under Bank's  plans during the years ended December 31, 1999 and
      2000, is summarized below:
<TABLE>
<CAPTION>
                                                           1999                                  2000
                                             ----------------------------------    ----------------------------------
                                                                  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               73,630    $       16.69
           Granted                                        -                -                    -                -
           Exercised                                      -                -                    -                -
           Forfeited                                      -                -                    -                -
                                              -------------    -------------        -------------    -------------
           Outstanding, December 31                  73,630    $       16.69               73,630    $       16.69
                                              =============    =============        =============    =============
           Exercisable, December 31                  32,903    $       16.69               44,178    $       16.69
                                              =============    =============        =============    =============
</TABLE>

<TABLE>
<CAPTION>
                                                 Options Outstanding                       Options Exercisable
      ----------------------------- ----------------------------------------------    -----------------------------
                                                      Weighted
                                                       Average        Weighted                           Weighted
                                        Number        Remaining        Average            Number         Average
      Range of                         Options       Contractual      Exercise           Options         Exercise
      Exercise Prices                Outstanding         Life           Price          Outstanding        Price
      ---------------                -----------         ----           -----          -----------        -----

<S>  <C>                                  <C>        <C>           <C>                      <C>      <C>
      $16.69                               73,630     7.42 years    $      16.69             44,178   $      16.69
                                     ============     ==========     ===========       ============    ===========
</TABLE>


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


      Pro forma information regarding the net income and net income per share is
      required  by SFAS No. 123 and has been  determined  as if the  Company had
      accounted  for its  stock  options  under  the fair  value  method of that
      statement.  The  Company  last  granted  stock  options  in the year ended
      December 31, 1998.  The fair value for these options was estimated at that
      date of the grant using the Black-Scholes option-pricing model.

      For purposes of pro forma  disclosures,  the  estimated  fair value of the
      options is  amortized to expense over the  options'  vesting  period.  The
      Company's pro forma net income (in thousands) and net income per share for
      the years ended December 31, 1999 and 2000, is as follows:
<TABLE>
<CAPTION>
                                                      1999                                      2000
                                      --------------------------------------    ----------------------------------
                                        As Reported          Pro forma            As Reported          Pro forma
                                       --------------     --------------         --------------     --------------
<S>                                  <C>                <C>                    <C>                <C>
         Net income                    $          559     $          545         $          485     $          471
                                       ==============     ==============         ==============     ==============
         Basic and diluted
           earnings per share          $          .87     $          .85         $          .84     $          .82
                                       ==============     ==============         ==============     ==============
</TABLE>

13.   Employment and Change of Control Agreement
      ------------------------------------------

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

14.   Commitments and Contingencies
      -----------------------------

      The Bank makes  commitments  to lend funds to  customers.  Commitments  to
      extend credit are  agreements to lend to a customer as long as there is no
      violation  of  any  condition  established  in the  contract.  Commitments
      generally have fixed expiration dates or other termination clauses and may
      require  payment of a fee. Since many of the  commitments  are expected to
      expire  without  being drawn  upon,  the total  commitment  amounts do not
      necessarily  represent

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


      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, 2000:

                                                                    Commitment
                                                                    ----------

        Consumer and other lines                                      $ 427
                                                                       ====

      The Bank had  outstanding  commitments to originate  mortgage and consumer
      loans of  approximately  $420,000 at December 31, 2000. The commitments to
      originate  mortgage and consumer loans at December 31, 2000, were composed
      of a variable  rate loan of $50,000 and fixed rate loans of $370,000.  The
      fixed rate loans had interest  rates ranging from 8.50% to 9.50% and terms
      ranging from one year to 15 years.

15.   Financial Instruments
      ---------------------

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

<TABLE>
<CAPTION>
                                                                            December 31,
                                                  ------------------------------------------------------------------
                                                               1999                               2000
                                                  -------------------------------    -------------------------------
                                                      Stated        Estimated            Stated        Estimated
                                                      Amount        Fair Value           Amount        Fair Value
                                                      ------        ----------           ------        ----------
<S>                                              <C>             <C>                <C>             <C>
         Financial assets:
           Cash and cash equivalents              $      2,162    $      2,162       $      2,121    $      2,121
           Investment and mortgage-
             backed securities                           5,291           5,185              4,150           4,121
           Loans receivable, net                        43,789          43,886             46,814          46,880
           Federal Home Loan Bank stock                    487             487                524             524
           Other assets                                    280             280                355             355

         Financial liabilities:
           Deposits:
             Demand accounts                             9,465           9,465              9,493           9,493
             Certificate accounts                       30,970          30,883             32,759          32,722
           Federal Home Loan Bank
             advances                                      500             500              1,000           1,000
           Other liabilities                               293             293                279             279
</TABLE>

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


      The Bank had off-balance sheet financial commitments at December 31, 2000,
      which include approximately  $847,000 of commitments to originate and fund
      loans and unused  consumer  lines of credit and  letters of credit.  Since
      these commitments are based on current market rates, the commitment amount
      is considered to be a reasonable estimate of fair market value.

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

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

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

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

      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

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


     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,  1999 and  2000.  Changes  in market
     interest rates and prepayment  assumptions  could change  significantly the
     estimated fair value.

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

16.  Condensed Parent Company Financial Information
     ----------------------------------------------

     The following condensed financial information for SFB Bancorp, Inc. (Parent
     Company Only) should be read in conjunction with the consolidated financial
     statements and the notes thereto.
<TABLE>
<CAPTION>
        Parent Company Only                                        December 31,
        Condensed Balance Sheets                            ---------------------------
        (in thousands)                                          1999            2000
                                                             ---------      ----------
<S>                                                       <C>           <C>
        Assets:
           Cash and cash equivalents                        $       94    $        389
           Investment securities available for sale                986             499
           ESOP loan receivable                                    409             339
           Due from subsidiary                                     885               -
           Equity in net assets of bank subsidiary               9,308           9,915
           Other assets                                             40              84
                                                             ---------      ----------
               Total assets                                 $   11,722    $     11,226
                                                             =========     ===========
</TABLE>

                                                                     (continued)

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



                                                                  December 31,
                                                               -----------------
                                                                  1999      2000
                                                               -------   -------
Liabilities
   Accrued liabilities                                         $     6   $     7
                                                               -------   -------

Stockholders' equity:
   Common stockholders' equity                                  11,716    11,219
                                                               -------   -------

       Total liabilities and stockholders' equity              $11,722   $11,226
                                                               =======   =======

Parent Company Only
Condensed Statements of Income                               For the Years Ended
                                                             -------------------
(in thousands)                                                   1999      2000
                                                                 ----      ----

Interest income                                                  $140      $ 94
Interest expense                                                    -         4
Non-interest expense                                               38        30
                                                                 ----      ----
       Income before taxes                                        102        60
Income tax expense                                                 41        23
                                                                 ----      ----
       Income before equity earnings                               61        37
Equity earnings of bank subsidiary                                498       448
                                                                 ----      ----
       Net income                                                $559      $485
                                                                 ====      ====

Parent Company Only
Condensed Statements of Cash Flows                           For the Years Ended
                                                             -------------------
(in thousands)                                                 1999     2000
                                                              -----    -----

Operating activities:
   Net income                                                 $ 559    $ 485
   Adjustments to reconcile net income to net
     cash provided by operating activities:
     Undistributed equity earnings of bank subsidiary          (498)    (448)
     Amortization (accretion) of premiums (discounts)
       on securities                                              1       (6)
     Increase in other assets                                   (18)     (44)
     Increase (decrease) in accrued liabilities                  (5)       1
                                                              -----    -----
       Net cash provided (used) by operating activities          39      (12)
                                                              -----    -----


                                                                     (continued)


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




                                                          For the Years Ended
                                                          -------------------
                                                             1999       2000
                                                          -------    -------
Investing activities:
   (Loan to) repayment from Bank subsidiary               $  (885)   $   885
   Principal repayment by ESOP                                 71         70
   Purchase of investment securities                         (499)         -
   Maturities of investment securities                      1,000        500
                                                          -------    -------
       Net cash provided (used) by investing activities      (313)     1,455
                                                          -------    -------
Financing activities:
   Purchase of treasury stock                                (174)    (1,037)
   Payment of cash dividends                                 (126)      (111)
                                                          -------    -------
       Net cash used by financing activities                 (300)    (1,148)
                                                          -------    -------

Net increase (decrease) in cash and cash equivalents         (574)       295

Cash and cash equivalents at beginning of year                668         94
                                                          -------    -------
Cash and cash equivalents at end of year                  $    94    $   389
                                                          =======    =======