SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934

       For the Fiscal Year Ended December 31, 1996

                                       OR

[  ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934


         For the transition period from ________________ to ________________
         Commission File Number 0-25994



                                SFS BANCORP, INC.
             (Exact Name of Registrant as Specified in its Charter)


         Delaware                                      22-3366295
(State or Other Jurisdiction of                   (I.R.S. Employer
Incorporation or Organization                     Identification Number)


251-263 State Street, Schenectady, New York               12305
(Address of Principal Executive Offices)                (Zip Code)

       Registrant's telephone number, including area code: (518) 395-2300


           Securities Registered Pursuant to Section 12(b) of the Act:
                                      None
           Securities Registered Pursuant to Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                                (Title of Class)


         Indicate  by check mark  whether the  Registrant  (1) filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934 during the  preceding  twelve  months (or for such shorter  period that the
Registrant was required to file such reports),  and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ].

         Indicate by check mark if disclosure of delinquent  filers  pursuant to
Item 405 of  Regulation  S-K (ss.  229.405  of this  chapter)  is not  contained
herein,  and will not be contained,  to the best of Registrant's  knowledge,  in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-KSB or any amendment to this Form 10-K. [X]

         The issuer's  revenues for the fiscal year ended December 31, 1996 were
$12,270,000.
<PAGE>

         The aggregate  market value of the voting stock held by  non-affiliates
of the  Registrant,  computed by  reference  to the average of the bid and asked
price of such stock as of March 1, 1997 was $18.6 million. (The  exclusion  from
such amount of the market  value of the shares  owned by any person shall not be
deemed an  admission by the  Registrant  that such person is an affiliate of the
Registrant.)

         As of March 1, 1997,  the  Registrant  had  1,270,997  shares of Common
Stock issued and outstanding.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part II of Form 10-KSB - Annual Report to  Stockholders  for the fiscal
year ended December 31, 1996.

         Part III of Form  10-KSB - Portions of The Proxy  Statement  for Annual
Meeting of Stockholders to be held in 1997.
<PAGE>

                                     PART I

Item 1 Description of Business

Forward Looking Statements

         When used in this Form 10-KSB or future filings by the Company with the
Securities  and Exchange  Commission,  in the Company's  press releases or other
public  or  shareholder  communications,  or in oral  statements  made  with the
approval of an authorized  executive  officer,  the words or phrases "would be",
"will  allow",  "intends to",  "will likely  result",  "are expected to",  "will
continue", "is anticipated",  "estimate",  "project", or similar expressions are
intended  to  identify  "forward-looking  statements"  within the meaning of the
Private Securities Litigation Reform Act of 1995.

         The Company  wishes to caution  readers not to place undue  reliance on
any such forward- looking statements,  which speak only as of the date made, and
to advise readers that various factors, including regional and national economic
conditions,  substantial  changes in levels of market interest rates, credit and
other risks of lending and investment  activities and competitive and regulatory
factors,  could affect the Company's  financial  performance and could cause the
Company's  actual  results for future  periods to differ  materially  from those
anticipated or projected.

         The  Company  does  not  undertake,   and  specifically  disclaims  any
obligation,  to update any forward-looking  statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.

General

         SFS Bancorp, Inc. (the "Holding Company" or "SFS Bancorp"),  a Delaware
corporation, was organized to act as the holding company for Schenectady Federal
Savings Bank ("Schenectady Federal" or the "Bank") upon completion of the Bank's
conversion from the mutual to the stock form of organization (the "Conversion").
Collectively,  these entities are referred to herein as the Company. The Holding
Company received  approval from the Office of Thrift  Supervision (the "OTS") to
acquire all of the common stock of the Bank to be outstanding upon completion of
the Conversion. The Conversion was completed on June 29, 1995. All references to
the Company, unless otherwise indicated, at or before June 29, 1995 refer to the
Bank and its subsidiary on a consolidated  basis.  The Holding  Company's Common
Stock is quoted on the National  Association  of  Securities  Dealers  Automated
Quotations ("Nasdaq") "National Market System under the symbol "SFED".

         At December 31, 1996,  the Company had total assets of $164.9  million,
deposits of $140.6 million, and stockholders' equity of $21.7 million.

         The  executive  offices of the  Company  are  located at 251-263  State
Street, Schenectady, New York 12305, and its telephone number at that address is
(518) 395-2300.

         The  Holding  Company  and  the  Bank  are  subject  to   comprehensive
regulation,  examination  and  supervision by the Office of Thrift  Supervision,
Department  of  the  Treasury  ("OTS")  and  by the  Federal  Deposit  Insurance
Corporation  ("FDIC").  The Bank is a  member  of the  Federal  Home  Loan  Bank
("FHLB")  System and its deposits are backed by the full faith and credit of the
United States  Government and are insured by the Savings  Association  Insurance
Fund ("SAIF") to the maximum extent permitted by the FDIC. See "Regulation."
<PAGE>
         The  Bank,  the  Holding  Company's  only  operating  subsidiary,   was
originally chartered in 1889 as a state-chartered financial institution. In 1981
the Bank converted to a federally chartered mutual savings and loan association.
Schenectady  Federal's  business involves  attracting  deposits from the general
public and using such deposits to fund one- to four-family residential mortgage,
home equity and, to a much lesser extent, consumer and other loans in its market
area. At December 31, 1996,  $114.1  million,  or 95.8% of the Bank's total loan
portfolio consisted of residential mortgage loans,  including home equity loans.
The Bank also  invests  in  mortgage-backed  securities,  investment  securities
(consisting  primarily  of U.S.  government  and agency  obligations)  and other
permissible  investments.  At December 31, 1996,  the Bank had $20.4  million of
mortgage-backed  securities,  representing  12.4% of  total  assets,  and  $17.7
million  of  investment   securities   (including  $2.0  million  of  securities
available-for-sale, at fair value), representing 10.8% of total assets.

         The Bank has sought to enhance its net income through the adoption of a
strategy  designed to  maintain  capital in excess of  regulatory  requirements,
limit loan  delinquencies  and manage  the  Bank's  vulnerability  to changes in
interest  rates.  This  strategy  involves  (i)  emphasizing,  subject to market
conditions,  the  acquisition of adjustable  rate one- to  four-family  mortgage
loans ("ARMs") and fixed rate one- to  four-family  mortgage loans with terms of
15 years or less, (ii) emphasizing the origination of home equity loans (most of
which  carry  floating  rates of  interest),  (iii)  maintaining  a  substantial
portfolio of  mortgage-backed  and  investment  securities  and other short- and
medium-term  investments,  and (iv) using customer service and marketing efforts
to build and maintain a substantial level of core deposits.

         Schenectady  Federal  is  a  community-oriented  financial  institution
offering a variety of financial services to meet the needs of the communities it
serves.  The Bank attracts  retail  deposits from the general public and invests
those funds primarily in first mortgages on  owner-occupied,  one-to-four family
residences, as well as in home equity loans generally secured by junior liens on
the borrower's home. To a lesser extent,  the Bank also originates  consumer and
other loans in its market area. See "Lending  Activities." The Bank also invests
in  mortgage-backed  securities,  investment  securities  and other  permissible
assets. See "Investment Activities."

Market Area

         Schenectady Federal conducts business in Schenectady County through its
main office  located at 251-263  State Street in  Schenectady,  New York and two
branch offices located in the Mayfair Shopping Center in Glenville, New York and
in the Bellevue area of Schenectady, New York. Schenectady County is part of the
four-county  Capital  District  Region  which  also  includes  the  counties  of
Saratoga,  Albany and Rensselaer.  Schenectady Federal's primary market area for
deposits consists of communities  within  Schenectady  County,  while the Bank's
primary  market  area for lending  extends to Albany,  Rensselaer  and  Saratoga
Counties and, to a lesser extent, Warren County.

         In 1996, the population of Schenectady County was approximately 150,000
essentially  unchanged from population levels in 1985. The unemployment rate for
Schenectady County was 4.5% at December 1996 and 1995.

         Primary  industries  in the Bank's  market area are  manufacturing  and
service  industries.  State and local  government and wholesale and retail trade
account for a noteworthy  percentage  of  employment.  Major  employers  include
General Electric, KAPL, Inc., a research laboratory,  the County of Schenectady,
Ellis and St. Clare's  Hospitals,  Union College and Schenectady  International,
Inc.
<PAGE>
Lending Activities

         General. Historically, the Bank originated 30-year, fixed-rate mortgage
loans secured by one- to four-family  residences.  During the 1990s, in order to
reduce its  vulnerability  to changes in interest rates, the Bank has emphasized
the acquisition and retention of mortgage loans having shorter terms to maturity
or  repricing  such  as  ARMs,  home  equity  loans,  and  15-year,   fixed-rate
residential  loans and the sale to the  secondary  market of  certain of its new
30-year, fixed-rate originations. The Bank also offers consumer and other loans.
The Bank did not sell loans during 1995 and 1996.

         Loan  Portfolio  Composition.  The  following  table sets forth certain
information  concerning  the  composition of the Bank's loan portfolio in dollar
amounts and in percentages  (before  deductions  for loans in process,  deferred
fees and discounts and allowances for losses) as of the dates indicated.
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                         -------------------------------------------------------------------------
                                                                   1996                      1995                     1994
                                                         -----------------------     ---------------------   ---------------------
                                                           Amount        Percent       Amount     Percent      Amount      Percent
                                                                                     (Dollars in Thousands)
<S>                                                       <C>            <C>        <C>           <C>        <C>          <C>
Real Estate Loans:
 One- to four-family............................           $91,161        76.53%     $72,219        71.14%   $63,835        67.48%
 Multi-family...................................             1,568         1.32        2,382         2.35      3,373         3.57
 Commercial.....................................             2,964         2.49        3,762         3.70      4,489         4.74
 Home equity....................................            22,904        19.23       22,723        22.38     22,394        23.67
                                                          --------       ------      -------        -----    -------       ------
    Total real estate loans.....................           118,597        99.57      101,086        99.57     94,091        99.46
                                                          --------       ------      -------        -----    -------       ------

Other Loans:
 Consumer:
  Deposit account...............................               478          .40          361          .35        376          .40
  Education.....................................                 4          ---           22          .02         31          .03
  Personal......................................                34          .03           41          .04         77          .08
  Automobile....................................               ---          ---          ---          ---         12          .01
  Home improvement..............................                 3          ---            5          .01         10          .01
                                                         ---------       ------     ---------      -------  ---------      ------
    Total consumer loans........................               519          .43          429          .42        506          .53
Commercial business loans.......................                 4          ---            5          .01          7          .01
                                                         ---------      -------    ---------      -------  ---------       ------
    Total other loans...........................               523          .43          434          .43        513          .54
                                                          --------      -------     --------      -------   --------       ------
    Total loans.................................           119,120       100.00%     101,520       100.00%    94,604       100.00%
                                                                         ======                    ======                  ======

Less:
 Deferred fees and discounts....................                23                        27                      40
 Allowance for losses...........................               642                       572                     861
                                                          --------                  ---------                --------
    Total loans receivable, net.................          $118,455                  $100,921                 $93,703
                                                          ========                  ========                 =======
</TABLE>
<PAGE>
         The following  table shows the composition of the Bank's loan portfolio
by fixed and adjustable or floating rate at the dates indicated.
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                         -------------------------------------------------------------------------
                                                                 1996                      1995                       1994
                                                         ------------------------    --------------------     --------------------
                                                           Amount       Percent      Amount       Percent      Amount     Percent
                                                           ------       -------      ------       -------      ------     -------
                                                                                   (Dollars in Thousands)
<S>                                                       <C>             <C>       <C>          <C>           <C>          <C>
Fixed-Rate Loans:
 Real estate:
  One- to four-family............................          $20,615         17.31%    $22,797       22.45%       $22,494      23.78%
  Multi-family...................................              631           .53       1,046        1.03          2,089       2.21
  Commercial.....................................            1,545          1.30       3,133        3.09          2,754       2.91
  Home equity....................................            4,334          3.64       4,433        4.37          3,331       3.51
                                                           -------        ------     -------      ------        -------     ------
     Total fixed-rate real estate loans..........           27,125         22.78      31,409       30.94         30,668      32.41
 Consumer........................................              515           .43         407         .40            475        .50
 Commercial business.............................                4         ---             5         .01              7        .01
                                                           -------        ------     -------       -----        -------     ------
     Total fixed-rate loans......................           27,644         23.21      31,821       31.35         31,150      32.92
                                                           -------        ------     -------       -----        -------     ------

Adjustable-Rate Loans
 Real estate:
  One- to four-family............................           70,546         59.22      49,422       48.68         41,341      43.70
  Multi-family...................................              937           .79       1,336        1.31          1,284       1.36
  Commercial.....................................            1,419          1.19         629         .62          1,735       1.84
  Home equity....................................           18,570         15.59      18,290       18.02         19,063      20.15
                                                           -------        ------     -------       ------       -------     ------
     Total adjustable-rate real estate loans.....           91,472         76.79      69,677       68.63         63,423      67.05
 Consumer........................................                4         ---            22         .02             31        .03
 Commercial business.............................              ---         ---           ---       ---              ---         --
                                                           -------       -------    --------      -------       -------     ------
     Total adjustable-rate loans.................           91,476         76.79      69,699       68.65         63,454      67.08
                                                           -------       ------     --------       ------       -------     ------
     Total loans.................................          119,120        100.00%    101,520      100.00%        94,604     100.00%
                                                                          ======                  ======                    ======

Less:
 Deferred fees and discounts.....................               23                        27                         40
 Allowance for loan losses.......................              642                       572                        861
                                                          --------                 ---------                    -------
    Total loans receivable, net..................         $118,455                  $100,921                    $93,703
                                                          ========                 =========                    =======

</TABLE>
<PAGE>
         The following schedule illustrates the interest rate sensitivity of the
Bank's loan  portfolio  at December  31, 1996.  Loans which have  adjustable  or
renegotiable interest rates are shown as maturing in the period during which the
contract  is due.  The  schedule  does  not  reflect  the  effects  of  possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
                                                                 Real Estate
                                                              Multi-family and
                                 One- to four-family             Commercial              Home Equity               Consumer
                                            Weighted                  Weighted                   Weighted                  Weighted
                                             Average                   Average                    Average                   Average
                                Amount        Rate         Amount       Rate        Amount         Rate         Amount       Rate
                               -------   ----------      --------   ----------      --------    ----------     --------    ---------
                                                                (Dollars in Thousands)
<S>                            <C>            <C>       <C>            <C>       <C>               <C>       <C>             <C>
Due During Years
 Ending December 31,

1997....................            76        6.94%        863          1.17%         22           8.58%       393           7.91%
1998....................           171        7.35         253          8.55          42           8.41        113           9.03
1999....................           674        7.71          91          8.75       1,457           9.47          9           9.95
2000 to 2001............         1,573        7.75         150          9.07       5,706           9.32          4           7.00
2002 to 2021............        34,022        8.12       3,175          9.36      15,677           8.74        ---          ---
2022 and
 following..............        54,645        7.25         ---         ---           ---          ---          ---          ---
                               -------                  ------                   -------                      ----
                               $91,161                  $4,532                   $22,904                      $519
                               =======                  ======                   =======                      ====

<CAPTION>
                                      Commercial
                                      Business                           Total
                                            Weighted                    Weighted
                                            Average                     Average
                               Amount        Rate        Amount         Rate
                              --------     ----------    --------      -------
<S>                            <C>            <C>      <C>               <C>
Due During Years
 Ending December 31,

1997....................        ---           ---        1,354            3.57%
1998....................        ---           ---          579            8.28
1999....................          4            7.50      2,235            8.91
2000 to 2001............        ---           ---        7,433            8.98
2002 to 2021............        ---           ---       52,873            8.38
2022 and
 following..............        ---           ---       54,646            7.25
                               ----                   --------
                               $  4                   $119,120
                               ====                   ========

</TABLE>
<PAGE>
         The total  amount  of loans due after  December  31,  1996  which  have
predetermined  interest rates is $27.6 million,  while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $91.5
million.

         Pursuant to Federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally  limited to 15% of unimpaired
capital  and  surplus  (25%  if  the  security  for  such  loan  has a  "readily
ascertainable"  value or 30% for  certain  residential  development  loans).  At
December 31, 1996,  based on the above, the Bank's  loans-to-one  borrower limit
was approximately $2.7 million. On the same date, the Bank had no borrowers with
outstanding  balances  in excess of this  amount.  The  Bank's  largest  lending
relationship  at  December  31,  1996 was two  loans to one  borrower  totalling
$813,000.  One loan in the amount of  $562,000  was on a five  building  20 unit
apartment complex located in Saratoga Springs,  New York. The second loan in the
amount of $251,000 was on a commercial  property used in the borrower's business
in  Schenectady,  New York.  Both loans were performing in accordance with their
terms at December 31, 1996.

         The Bank's lending is subject to its written underwriting standards and
to loan origination  procedures.  Decisions on loan applications are made on the
basis of detailed  applications  and property  valuations  (consistent  with the
Bank's  appraisal  policy)  by  the  Bank's  independent  appraisers.  The  loan
applications are designed primarily to determine the borrower's ability to repay
and the more  significant  items on the application are verified  through use of
credit reports, financial statements, tax returns and/or confirmations.

         Under the Bank's loan policy, the individual  processing an application
is  responsible  for ensuring that all  documentation  is obtained  prior to the
submission of the application to a loan officer for approval.  In addition,  the
loan  officer  verifies  that the  application  meets  the  Bank's  underwriting
guidelines  described  below.  Also, each application is assigned to a reviewing
officer who reviews the file to assure its accuracy and completeness.

         All secured loans over $500,000, or unsecured loans over $100,000, must
be  approved  by the  Bank's  Board of  Directors.  The Bank's  Loan  Committee,
consisting  of  officers  Giaquinto,  Schlansker,  Ammian,  and  Krywinski,  has
authority  to approve  secured  loans up to $500,000 and  unsecured  loans up to
$100,000.  Any three of these  individuals  acting as a group can approve a loan
within the authority of the Loan  Committee.  Various  officers of the Bank have
individual  secured loan  approval  authority  ranging from $10,000 to $300,000.
Authorization for unsecured loans range from $1,000 to $5,000.

         Generally,  the Bank  requires  title  insurance  or  abstracts  on its
mortgage  loans as well as fire and  extended  coverage  casualty  insurance  in
amounts  at least  equal to the  principal  amount  of the loan or the  value of
improvements  on the  property,  depending  on the type of loan.  The Bank  also
requires flood insurance to protect the property  securing its interest when the
property is located in a flood plain.

         One- to Four-Family Residential Real Estate Lending. The cornerstone of
the Bank's lending  program is the  origination of loans secured by mortgages on
owner-occupied  one- to  four-family  residences.  At December 31, 1996,  $114.1
million,  or 95.8% of the Bank's loan  portfolio  consisted  of  mortgage  loans
(including home equity loans) on one- to four-family  residences.  Substantially
<PAGE>
all of the residential  loans  originated by Schenectady  Federal are secured by
properties located in the Bank's primary lending area.  Included in the mortgage
loan  portfolio  at December 31,  1996,  was $9.4  million of purchased  one- to
four-family loans serviced by others, which were primarily secured by properties
located outside its market area. A majority of the mortgage loans  originated by
the Bank are retained  and  serviced by it. No loans have been  purchased by the
Bank and serviced by others since 1990.

         The Bank offers conventional  fixed-rate loans with maximum terms of up
to 30 years,  although the Bank generally emphasizes  originations of fixed rate
loans  with  terms  of 15  years or less.  The  interest  rate on such  loans is
generally based on the FHLMC delivery rates as well as competitive factors.

         In  addition to fixed rate loans,  the Bank offers  one-year  ARMs at a
margin  (generally  300 basis points) over the yield on the Average  Monthly One
Year U.S.  Treasury Constant Maturity Index for terms of up to 30 years. The ARM
loans  currently  offered by the Bank  generally  provide  for a 200 basis point
annual  interest rate change cap and a lifetime cap of 600 basis points over the
initial rate. The Bank's loans typically do not contain floors. Initial interest
rates  offered on the Bank's ARMs may be 100 to 350 basis points below the fully
indexed  rate,  and  borrowers are qualified at that initial rate plus 200 basis
points. As a result, the risk of default on these loans may increase as interest
rates increase. See "Asset Quality-Non-Performing  Assets." The Bank also offers
five year/one year and three  year/one year ARM products where the rate is fixed
for the first three or five years.  After the initial  fixed term,  the mortgage
has the same  characteristics  as a one-year  ARM. The Bank's ARMs do not permit
negative amortization of principal,  do not contain prepayment penalties and are
not convertible  into fixed-rate  loans. In the past, the Bank offered  one-year
ARMs with a margin 200 to 300 basis points over a specified index and an average
annual cap of 600 basis points.  At December 31, 1996, one- to four-family  ARMs
totaled $70.5 million, or 59.2% of the Bank's total loan portfolio.

         In underwriting one- to four-family  residential real estate loans, the
Bank  evaluates  both the  borrower's  ability to make  principal,  interest and
escrow payments, the value of the property that will secure the loan and debt to
income ratios.  Schenectady Federal originates  residential  mortgage loans with
loan-to-value  ratios  of up to 95% for  owner-occupied  homes and up to 75% for
non-owner  occupied homes;  however,  private mortgage  insurance is required to
reduce  the  Bank's  exposure  to 80% or  less.  The  Bank  generally  seeks  to
underwrite its loans in accordance with secondary market standards.

         The Bank's residential  mortgage loans customarily  include due-on-sale
clauses  giving  the Bank the  right to  declare  the loan  immediately  due and
payable in the event that,  among other things,  the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.

         The Bank also  originates home equity loans and lines of credit secured
by a lien  on the  borrower's  residence.  The  Bank's  home  equity  loans  are
generally limited to $100,000. The Bank uses the same underwriting standards for
home equity loans as it uses for one- to four-family residential mortgage loans.
The Bank's home equity loans are originated in amounts which,  together with the
amount of the first mortgage, generally do not exceed 80% of the appraised value
of the property  securing the loan. The interest rates for home equity loans and
lines of  credit  float  with the prime  rate or, in the case of loans  (but not
lines of credit),  are fixed.  The Bank writes home equity loans for terms of up
to 25 years.  At December  31, 1996,  the Bank had $22.9  million of home equity
loans and an  additional  $10.3  million  of  additional  funds  committed,  but
undrawn, under home equity lines of credit.
<PAGE>
         Commercial  Real Estate and  Multi-Family  Lending.  Prior to 1991, the
Bank actively  originated  and purchased  permanent  commercial  real estate and
multi-family  loans.  At  December  31,  1996,  the  Bank had  $3.0  million  in
commercial  real  estate  loans,  representing  2.5% of the  Bank's  total  loan
portfolio,  and $1.6 million in multi-family  loans, or 1.3% of the Bank's total
loan portfolio.

         The Bank's  commercial  real  estate and  multi-family  loan  portfolio
includes loans secured by motels,  apartment buildings,  small office buildings,
and  other  non-residential  building  properties,   as  well  as  participation
interests therein.

         The Bank's  permanent  commercial  real estate and  multi-family  loans
generally carried a maximum term of 25 years. These loans were generally written
in amounts of up to 75% of the lesser of the appraised  value of the property or
the purchase price and had a projected  debt service  coverage ratio of at least
1.2%.

         Multi-family  and  commercial  real estate  loans  generally  present a
higher level of risk than loans secured by one- to four-family residences.  This
greater risk is due to several factors, including the concentration of principal
in a limited  number of loans and  borrowers,  the  effects of general  economic
conditions  on income  producing  properties  and the  increased  difficulty  of
evaluating and monitoring  these types of loans.  Furthermore,  the repayment of
loans secured by multi-family and commercial real estate is typically  dependent
upon the successful  operation of the related real estate  project.  If the cash
flow from the project is reduced  (for  example,  if leases are not  obtained or
renewed),  the borrower's ability to repay the loan may be impaired. At December
31, 1996, the Bank had two commercial real estate loans to one borrower totaling
over  $500,000  that  are  non-performing.   See  "Asset  Quality-Non-Performing
Assets." In 1991, the Bank determined to limit future commercial real estate and
multi-family lending and focus its efforts on residential lending.

         Consumer  Lending.  The Bank  originates  a variety of consumer  loans,
including  automobile,  home  improvement,  deposit  account and other loans for
household and personal  purposes.  At December 31, 1996,  consumer loans totaled
$519,000 or .4% of total loans outstanding.

         Consumer  loan  terms vary  according  to the type of loan and value of
collateral,  length of contract and creditworthiness of the borrower. The Bank's
consumer  loans are made at fixed interest  rates,  with terms of up to 20 years
for secured loans and on a demand basis for unsecured loans.

         The  underwriting  standards  employed by the Bank for  consumer  loans
include a determination  of the  applicant's  payment history on other debts and
the ability to meet  existing  obligations  and payments on the  proposed  loan.
Although  creditworthiness  of the  applicant is of primary  consideration,  the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.  Consumer loans may entail greater
credit risk than do  residential  mortgage  loans,  particularly  in the case of
consumer loans which are unsecured or are secured by rapidly depreciable assets,
such as automobiles.  In such cases, any repossessed  collateral for a defaulted
consumer loan may not provide an adequate source of repayment of the outstanding
loan  balance  as a  result  of  the  greater  likelihood  of  damage,  loss  or
depreciation.  In  addition,  consumer  loan  collections  are  dependent on the
borrower's  continuing  financial  stability,  and thus are  more  likely  to be
affected by adverse  personal  circumstances.  Furthermore,  the  application of
<PAGE>
various federal and state laws,  including  bankruptcy and insolvency  laws, may
limit the amount which can be recovered on such loans. Although the Bank has, in
the past,  experienced  significant  losses in the consumer loan  portfolio,  at
December  31,  1996,   loans  in  the  consumer   loan   portfolio   which  were
non-performing  totaled  approximately  $2,000.  There can be no assurance  that
delinquencies will not develop in the future.

Originations, Purchases and Sales of Loans and Mortgage-Backed Securities

         Loan  applications  are taken and  processed in all branch  offices and
approved  in the main  office of the Bank.  Prior to 1994,  most of  Schenectady
Federal's  originated  loans were  generated by Schenectady  Federal's  staff of
salaried  loan  officers.  Beginning  in 1994,  the Bank  began to  originate  a
significant  amount of loans through  local  mortgage  brokers  which  generally
retained a 100 basis point  origination fee as their  compensation.  Also during
1994,  the Bank  purchased  loans  on a  servicing  released  basis  which  were
originated by a mortgage  banker for the Bank. All such loans were originated in
accordance with the Bank's normal underwriting standards. The Bank believes that
its  utilization  of  mortgage  brokers  has  had a  favorable  impact  on  loan
originations.  However, in the event the Bank's relationship with these mortgage
brokers  were  terminated  in the  future,  loan  originations  and  results  of
operations could be adversely affected.

         In the past,  in order to  supplement  loan demand in the Bank's market
area and  geographically  diversify  the  Bank's  loan  portfolio,  the Bank has
purchased a limited  amount of real estate  loans from other  lenders.  The Bank
reviews  all  loans  prior to  purchase  to ensure  that  they  meet the  Bank's
underwriting standards. The seller usually continues to service purchased loans.
Although the Bank purchased  participation  in multi-family  and commercial real
estate loans in the past,  the Bank  anticipates  that any such purchases in the
future will be strictly limited.

         While the Bank originates  both fixed and  adjustable-rate  loans,  its
ability to originate  loans is dependent upon the relative  customer  demand for
loans in its market. Demand is affected by the interest rate environment. During
1994,  1995 and 1996,  the Bank's volume of ARMs greatly  exceeded its volume of
fixed rate loans.

         Historically,  the  Bank  retained  most  of the  fixed  rate  one-  to
four-family  residential  loans  in  its  portfolio.  In  order  to  reduce  its
vulnerability to changes in interest rates, commencing in 1992 through 1994, the
Bank sold most of the fixed rate  residential  loans it  originated or otherwise
acquired with  maturities in excess of 15 years,  except where the interest rate
equaled  or  exceeded  a  specified  rate (as  designated  from  time to time by
management)  based  on  its  portfolio  objectives  and  alternative  investment
opportunities.   When  loans  are  sold,   the  Bank   typically   retains   the
responsibility  for collecting and remitting loan payments,  making certain that
real  estate  tax  payments  are made on  behalf  of  borrowers,  and  otherwise
servicing the loans.  The servicing fee is recognized as income over the life of
the loans.  At December 31,  1996,  the Bank  serviced  $4.2 million of mortgage
loans for others. The Bank did not sell any loans during 1995 and 1996.
<PAGE>
         The  following  table  shows  the loan and  mortgage-backed  securities
origination, purchase, sale and repayment activities of the Bank for the periods
indicated.
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                            -----------------------------------------
                                                                 1996          1995          1994
                                                             ---------        -------      -------
                                                                         (In Thousands)
<S>                                                           <C>              <C>         <C>
LOANS:
 Originations by type:
  Adjustable rate:
   Real estate - one- to four-family.................          $20,894(1)      $8,219(1)   $ 8,206(1)
                 - home equity.......................            5,174          5,474        7,226
   Non-real estate - consumer........................              ---            ---          113
                                                             ---------        -------      -------
         Total adjustable-rate.......................           26,068         13,693       15,545
  Fixed rate:
   Real estate - one- to four-family.................            1,606(2)       2,966(2)     1,718(2)
                 - home equity.......................              737          1,713        1,321
                 - commercial........................              198            ---          ---
   Non-real estate - consumer........................               16            ---           17
                                                              --------       --------     --------
         Total fixed-rate............................            2,557          4,679        3,056
         Total loans originated......................           28,625         18,372       18,601

 Purchases:
   Real estate - one- to four-family.................            6,973          5,245        3,305
                                                                ------         ------      -------

 Sales and Repayments:
   Real estate - one- to four-family.................              ---            ---          281
   Non-real estate - consumer........................              ---            ---          642
                                                               -------        -------     --------
         Total sales.................................              ---            ---          923
   Principal repayments..............................           17,998         16,701       19,827
                                                               -------         ------      -------
         Total reductions............................           17,998         16,701       20,750
                                                               -------         ------      -------
         Net increase................................          $17,600        $ 6,916      $ 1,156
                                                               =======        =======      =======

MORTGAGE-BACKED SECURITIES:
 Purchases:
  Mortgage-backed securities.........................        $     ---        $ 5,381    $     ---

 Principal repayments................................            3,984          2,954        3,406
                                                               -------         ------      -------
     Net increase (decrease).........................          $ 3,984         $2,427     $(3,406)
                                                               =======         ======     =======

(1)Includes $19,573,  $8,138 and $5,971 of loans  originated  through brokers in
     1996, 1995 and 1994, respectively.

(2)  Includes $162, $1,930 and $218 of loans originated through brokers in 1996,
     1995 and 1994, respectively.
</TABLE>
<PAGE>
Asset Quality

         Delinquency  Procedures.  When a  borrower  fails  to  make a  required
payment on a loan,  the Bank attempts to cure the  delinquency by contacting the
borrower. A late notice is sent on all loans over 16 days delinquent. Additional
written and verbal contacts may be made with the borrower between 30 and 60 days
after the due date. If the loan is  contractually  delinquent 90 days,  the Bank
usually  sends a 30-day  demand  letter to the borrower  and,  after the loan is
contractually delinquent 120 days, institutes appropriate action to foreclose on
the  property.  If  foreclosed,  the  property  is  sold at  auction  and may be
purchased by the Bank.  Delinquent  consumer  loans are  generally  handled in a
similar  manner.  The Bank's  procedures for  repossession  and sale of consumer
collateral  are  subject  to  various   requirements  under  New  York  consumer
protection laws.

         Real estate acquired by Schenectady  Federal as a result of foreclosure
or by deed in lieu of foreclosure is classified as real estate owned until it is
sold.  When  property is acquired or expected to be acquired by  foreclosure  or
deed in lieu of  foreclosure,  it is recorded at the lower of cost or  estimated
fair value, less the estimated cost of disposition. After acquisition, all costs
incurred  in  maintaining  the  property  are  expensed.  Costs  relating to the
development  and  improvement of the property,  however,  are capitalized to the
extent of fair value less disposition cost.

         The following table sets forth the Bank's loan  delinquencies  by type,
by amount and by percentage of type at December 31, 1996.
<TABLE>
<CAPTION>
                                                    Loans Delinquent For:
                           ----------------------------------------------------------------------
                                       60-89 Days                      90 Days and Over                 Total Delinquent Loans
                           ---------------------------------------------------------------------- ----------------------------
                                                    Percent                            Percent                             Percent
                                                    of Loan                            of Loan                             of Loan
                             Number     Amount     Category     Number     Amount     Category      Number     Amount     Category
                             ------     ------     --------     ------     ------     --------      ------     ------     --------
<S>                           <C>       <C>          <C>        <C>        <C>           <C>       <C>      <C>             <C>
                                                                     (Dollars in Thousands)
Real Estate:
  One- to four-family......     8       $540         .59%          4       $ 57            .06%      12       $597             .65%
  Multi-family.............   ---        ---          ---        ---        ---          ---        ---        ---           ---
  Commercial...............   ---        ---          ---          3        756          25.51        3        756           25.51
  Home equity..............     1         19          .08          1         18            .08        2         37             .16

Consumer...................     1          1          .19          2          2            .39        3          3             .58
Commercial business........   ---        ---          ---        ---        ---          ---        ---        ---           ---
                              ---     ------                  ------     ------                    ----   --------

     Total.................    10       $560         .47%         10       $833            .70%      20     $1,393            1.17%
                              ===       ====                   =====       ====                     ===     ======

</TABLE>
<PAGE>
         Classification of Assets. Federal regulations require that each savings
institution  classify its assets on a regular basis. In addition,  in connection
with examinations of savings institutions, OTS and FDIC examiners have authority
to identify  problem assets and, if appropriate,  require them to be classified.
There are three classifications for problem assets: substandard, doubtful
and  loss.  Substandard  assets  have  one or more  defined  weaknesses  and are
characterized  by the distinct  possibility that the bank will sustain some loss
if the  deficiencies  are not corrected.  Doubtful assets have the weaknesses of
substandard assets, with the additional characteristics that the weaknesses make
collection  or  liquidation  in full on the basis of currently  existing  facts,
conditions and values questionable,  and there is a high possibility of loss. An
asset classified loss is considered  uncollectible and of such little value that
continuance  as an  asset  on  the  balance  sheet  of  the  institution  is not
warranted.  Assets classified as substandard or doubtful require the institution
to establish prudent general  allowances for loan losses. If an asset or portion
thereof is classified as loss, the institution  must either  establish  specific
allowances  for loan  losses in the  amount of 100% of the  portion of the asset
classified  loss, or charge off such amount.  If an  institution  does not agree
with an examiner's  classification of an asset, it may appeal this determination
to the District Director of the OTS. On the basis of management's  review of its
assets, at December 31, 1996, the Bank had classified a total of $1.0 million of
its loans and other assets as follows:
<TABLE>
<CAPTION>
                                                         Commercial Real
                                    One- to Four-           Estate and        Consumer
                                        Family             Multi-Family      and Other      Total
                                        ------             ------------      ---------      -----
                                                          (In Thousands)
<S>                                      <C>                   <C>            <C>         <C>

Substandard....................          $151                  $841           $ 19        $1,011
Doubtful.......................           ---                   ---            ---           ---
Loss...........................           ---                   ---            ---           ---
                                         ----                  ----           ----        ------
    Total......................          $151                  $841           $ 19        $1,011
                                         ====                  ====           ====        ======

</TABLE>

         Schenectady  Federal's  classified assets consist of the non-performing
loans and loans and other  assets of concern  discussed  herein.  As of the date
hereof,  these asset  classifications are generally consistent with those of the
OTS and FDIC.

         Non-Performing  Assets.  The table  below  sets forth the  amounts  and
categories  of  non-performing  assets in the Bank's loan  portfolio.  Loans are
placed on non-accrual  status when the collection of principal  and/or  interest
become  doubtful.  Restructured  loans consist of troubled  debt  restructurings
(which  involve  forgiving a portion of interest  or  principal  on any loans or
making loans at a rate  materially  less than that of market rates).  Foreclosed
assets include assets acquired in settlement of loans.
<PAGE>
<TABLE>
<CAPTION>


                                                                            December 31,
                                                                  -------------------------------
                                                                  1996          1995         1994
                                                                  ----          ----         ----
                                                                       (Dollars in Thousands)
<S>                                                               <C>           <C>         <C>
Non-accruing loans:
  One- to four-family.....................................        $  25         $  54       $  238
  Home equity.............................................           18           ---          ---
  Multi-family............................................          ---           ---           57
  Commercial real estate..................................          756           744          978
  Consumer................................................            2           ---          ---
  Commercial business.....................................          ---           ---          ---
                                                                  -----         -----        -----
     Total................................................          801           798        1,273
                                                                  -----         ------       -----
Accruing loans delinquent 90 days or more:
  One- to four-family.....................................           32            41          113
  Home equity.............................................          ---           ---          ---
  Multi-family............................................          ---           ---          ---
  Commercial real estate..................................          ---           ---          581
  Consumer................................................          ---           ---           10
Commercial business.......................................          ---           ---          ---
                                                                  -----         ------      ------
     Total................................................           32            41          704
                                                                  -----         ------      ------
Restructured loans:
  One- to four-family.....................................          ---           ---          ---
  Home equity.............................................          ---           ---          ---
  Multi-family............................................          ---           ---          731
  Commercial real estate..................................          ---           ---          ---
  Consumer................................................          ---           ---          ---
  Commercial business.....................................          ---           ---          ---
                                                                  -----         ------      ------
     Total................................................          ---           ---          731
                                                                  -----         ------      ------
Foreclosed assets:
  One- to four-family.....................................           94           ---          204
  Home equity.............................................          ---           ---          ---
  Multi-family............................................          ---           200          ---
  Commercial real estate..................................           84           ---          ---
  Consumer................................................          ---           ---          ---
  Commercial business.....................................          ---           ---          ---
                                                                  -----         ------      ------
     Total................................................          178           200          204
                                                                  -----         ------      ------

Total non-performing assets...............................      $ 1,011        $1,039       $2,912
                                                                =======        ======       ======
Total as a percentage of total assets.....................         .61%          .62%        1.93%
                                                                   ===           ===         ====
Total non-performing loans................................      $   833        $  839       $2,708
                                                                =======        ======       ======
Total as a percentage of total loans receivable, net......         .70%          .83%        2.89%
                                                                   ===           ===         ====
</TABLE>
<PAGE>
         For the year ended December 31, 1996 gross interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their  original  terms  amounted to $81,000.  The amounts that were  included in
interest income on such loans were $74,000.

         As of December 31, 1996, the Bank's non-performing assets having a book
value of $500,000 or more included the following:

         Motel loans.  In 1988, the Bank purchased a  participation  interest in
two loans secured by three Travelers Motor Inns having an aggregate of 315 units
and located in Albany,  Plattsburg  and Syracuse,  New York. As a result of cash
flow and other  problems,  the loans  have been  delinquent  since  1992.  As of
December 31, 1996, the borrower was in  bankruptcy.  Beginning in February 1996,
the Bank began receiving adequate  protection  payments in an amount established
by the Bankruptcy  Court. At December 31, 1996, the book value of this asset was
$744,000.

         Other Loans of Concern.  In addition to the  non-performing  assets set
forth in the table  above,  as of  December  31,  1996  there were no loans with
respect to which known  information  about the possible  credit  problems of the
borrowers or the cash flows of the security properties have caused management to
have  concerns as to the ability of the  borrowers  to comply with  present loan
repayment  terms and which may result in the future  inclusion  of such items in
the non-performing asset categories.

         Management has considered  the Bank's  non-performing  and "of concern"
assets in establishing its allowance for loan losses.
<PAGE>
         Allowance for Loan Losses.  The following  table sets forth an analysis
of the Bank's allowance for loan losses.
<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
                                                                      -------------------------------
                                                                      1996          1995         1994
                                                                      ----          ----         ----
                                                                          (Dollars in Thousands)
<S>                                                                  <C>           <C>          <C>

Balance at beginning of period................................         $572          $861         $804

Charge-offs:
  One- to four-family.........................................           44            88           94
  Home equity.................................................           41           ---          ---
  Multi-family................................................          ---           419          ---
  Commercial real estate......................................          ---           202          ---
  Consumer....................................................            2             9            7
  Commercial business.........................................          ---           ---          ---
                                                                       ----           ---       ------
                                                                         87           718          101
                                                                        ---           ---        -----

Recoveries:
  One- to four-family.........................................          ---             7          ---
  Home equity.................................................          ---           ---          ---
  Multi-family................................................          ---           ---            1
  Commercial real estate......................................          ---           ---          ---
  Consumer....................................................           37            52           37
  Commercial business.........................................          ---           ---          ---
                                                                      -----          ----       ------
                                                                         37            59           38
                                                                       ----          ----        -----

Net charge-offs...............................................           50           659           63
Additions charged to operations...............................          120           370          120
                                                                      -----          ----        -----
Balance at end of period......................................         $642          $572         $861
                                                                       ====          ====         ====

Ratio of net charge-offs to average loans outstanding.........         .04%          .68%         .07%
                                                                       ===           ===        =====
Ratio of net charge-offs to non-performing loans..............        6.00%        78.55%        2.33%
                                                                      ====         =====        =====
Allowance for loan losses to non-performing loans.............       77.07%        68.18%       31.79%
                                                                     =====         =====        =====
Allowance for loan losses to total loans at end of period.....         .54%          .56%         .91%
                                                                       ===           ===        =====
</TABLE>
<PAGE>
         The  distribution of the Bank's  allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
                                                                               December 31,
                                               ----------------------------------------------------------------------------
                                                          1996                     1995                       1994
                                               ----------------------    ----------------------     -----------------------
                                                             Percent                    Percent                    Percent
                                                            of Loans                   of Loans                   of Loans
                                                             in Each                    in Each                    in Each
                                                            Category                   Category                   Category
                                                            to Total                   to Total                   to Total
                                                Amount        Loans        Amount        Loans        Amount        Loans
                                                ------        -----        ------        -----        ------        -----
                                                                              (In Thousands)
<S>                                              <C>          <C>          <C>           <C>           <C>          <C>

One- to four-family.........................     $141          76.53%      $117           71.14%       $130          67.48%
Multi-family................................       16           1.32         24            2.35         172           3.57
Commercial real estate......................      143           2.49        104            3.70         130           4.74
Home equity.................................       60          19.23         34           22.38          34          23.67
Consumer....................................        5            .43          4             .42           8            .53
Commercial business.........................      ---            ---        ---             .01         ---            .01
Unallocated.................................      277            ---        289             ---         387            ---
                                                 ----         ------        ---          ------        ----           ----
     Total..................................     $642         100.00%      $572          100.00%       $861         100.00%
                                                 ====         ======       ====          ======        ====         ======
</TABLE>
         The  allowance for loan losses is  established  through a provision for
loan losses  charged to earnings  based on  management's  evaluation of the risk
inherent in the loan  portfolio.  The allowance is established as an amount that
management believes will be adequate to absorb losses on existing loans that may
become  uncollectible,  based on evaluations of the  collectibility of loans and
prior loan loss  experience.  Management's  evaluation  of the  adequacy  of the
allowance  takes into  consideration  such factors as the  historical  loan loss
experience,  changes in the nature  and  volume of the loan  portfolio,  overall
portfolio  quality,  review  of  specific  problem  loans and  current  economic
conditions that may affect borrowers' ability to pay.

         While management  believes that it uses the best information  available
to determine the allowance for loan losses,  unforeseen  market conditions could
result in adjustments  to the allowance for loan losses,  and net earnings could
be  significantly  affected,  if  circumstances  differ  substantially  from the
assumptions used in making the final determination.

Investment Activities

         The  Bank  utilizes  investment  and   mortgage-backed   securities  in
virtually  all aspects of its  asset/liability  management  strategy.  In making
investment  decisions,  the Investment Committee considers,  among other things,
the Bank's yield and interest rate objectives, its interest rate and credit risk
position and its liquidity and cash flow.
<PAGE>
         Schenectady  Federal must maintain  minimum levels of investments  that
qualify as liquid  assets  under OTS  regulations.  Liquidity  may  increase  or
decrease  depending upon the  availability  of funds and  comparative  yields on
investments  in  relation  to the  return on loans.  Cash flow  projections  are
regularly  reviewed and updated to assure that adequate liquidity is maintained.
The  Bank's  level of  liquidity  is a result  of  management's  asset/liability
strategy.

         Investment  Securities.  Federally chartered savings  institutions have
the  authority to invest in various  types of liquid  assets,  including  United
States Treasury  obligations,  securities of various federal  agencies,  certain
certificates  of deposit  of insured  banks and  savings  institutions,  certain
bankers'  acceptances,  repurchase  agreements  and  federal  funds.  Subject to
various  restrictions,  federally chartered savings institutions may also invest
their assets in commercial paper, investment grade corporate debt securities and
mutual funds whose assets conform to the investments that a federally  chartered
savings institution is otherwise authorized to make directly.

         To date,  the  Bank's  investment  strategy  has been  directed  toward
high-quality assets (primarily government and agency obligations) with short and
intermediate  terms (five years or less) to maturity.  At December 31, 1996, the
Bank did not own any investment securities of a single issuer which exceeded 10%
of the Bank's equity, other than U.S. government or federal agency obligations.

         The Bank  invests  its  liquid  assets  primarily  in  interest-earning
overnight  deposits and various  money market mutual  funds.  Other  investments
include high grade  medium-term (up to five years) corporate debt securities and
a  variety  of other  types of mutual  funds  which  invest in  adjustable-rate,
mortgage-backed securities,  asset-backed securities,  repurchase agreements and
U.S. Treasury and agency obligations.  For the year ended December 31, 1996, the
Bank  had  an  average  outstanding  balance  of  $21.9  million  in  securities
(including $5.2 million of securities  available for sale) with an average yield
of 6.25%.
<PAGE>
         The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                                        December 31,
                                                        -------------------------------------------------------------------------
                                                                 1996                       1995                       1994
                                                        ------------------------   ----------------------    --------------------
                                                          Book         % of          Book         % of          Book        % of
                                                          Value        Total         Value        Total         Value       Total
                                                                                    (Dollars in Thousands)
<S>                                                    <C>             <C>        <C>          <C>          <C>            <C>

Securities available for sale:
  Mutual funds.......................................    $1,990           9.68%     $7,976       21.65%       $ 7,776       25.33%
Investment securities:
  U.S. government obligations........................     3,980          19.37       5,968        16.20         7,934       25.84
  Federal agency obligations.........................     9,481          46.13       9,692        26.30         4,891       15.93
  Municipal bonds....................................        84            .41          93          .25           101         .33
  Collateralized mortgage obligations................       ---          ---           ---          ---           874        2.85
  Corporate bonds....................................     2,201          10.71       2,905         7.88         3,102       10.10
  Mutual funds.......................................       ---          ---           ---          ---           ---         ---
                                                       --------         ------     -------       ------      --------         ---
     Subtotal........................................    17,736          86.30      26,634        72.28        24,678       80.38
FHLB stock...........................................     1,215           5.91       1,117         3.03         1,123        3.66
                                                        -------         ------     -------       ------      --------      ------
     Total investment securities and FHLB stock......   $18,951          92.21%    $27,751        75.31%      $25,801       84.04%
                                                        =======         ======     =======       ======       =======      ======
Average remaining life of securities excluding
 FHLB stock and mutual funds.........................   3.6 years                  3.2 years                  3.2 years

Other interest-earning assets:
  Federal funds sold.................................     1,600           7.79       9,100        24.69         4,900       15.96
                                                       --------        -------    --------       ------      --------      ------
     Total...........................................   $20,551         100.00%    $36,851      100.00%       $30,701      100.00%
                                                        =======         ======     =======      ======        =======      ======

Average remaining life or term to repricing of
 securities and other interest-earning assets,
 excluding FHLB stock and mutual funds...............   3.3 years                  2.2 years                  2.5 years

</TABLE>
<PAGE>
         The composition and maturities of the securities  portfolio,  excluding
FHLB stock and federal funds sold, are indicated in the following table.
<TABLE>
<CAPTION>
                                                                               December 31, 1996
                                          ------------------------------------------------------------------------------------------
                                          Less Than      1 to 5       5 to 10       Over        No Stated
                                           1 Year        Years         Years      10 Years      Maturity         Total Securities
                                          Book Value   Book Value    Book Value   Book Value    Book Value   Book Value Market Value
                                          ----------   ----------    ----------   ----------    ----------   -----------------------
                                                                           (Dollars in Thousands)
<S>                                          <C>          <C>           <C>          <C>           <C>          <C>         <C>
Securities available for sale:
  Mutual funds.......................        $  ---       $  ---        $  ---       $  ---        $1,990       $1,990      $1,990
Investment securities:
  U.S. government securities.........         2,003        1,977           ---          ---           ---        3,980       3,981
  Federal agency obligations.........            47        8,239           ---        1,195           ---        9,481       9,383
  Municipal bonds....................           ---          ---            84          ---           ---           84          84
  Corporate bonds....................         2,201          ---           ---          ---           ---        2,201       2,194
  Collateralized mortgage
    obligation.......................           ---          ---           ---          ---           ---          ---         ---
                                           --------    ---------        ------     --------        ------     --------     -------
    Total investment securities......         4,251       10,216            84        1,195           ---       15,746      15,642
                                             ------      -------         -----      -------        ------       ------      ------

Total securities.....................        $4,251      $10,216          $ 84       $1,195        $1,990      $17,736     $17,632
                                             ======      =======          ====       ======        ======      =======     =======

Weighted average yield...............         6.20%        6.18%         7.50%        8.35%         6.38%        6.36%
</TABLE>


         Mortgage-Backed  Securities. In order to supplement loan production and
achieve   its   asset/liability   management   goals,   the  Bank   invests   in
mortgage-backed  securities.  All of the mortgage-backed securities owned by the
Bank are  issued,  insured or  guaranteed  either  directly or  indirectly  by a
federal  agency or are rated "AA" or higher.  At December 31, 1996,  Schenectady
Federal had $20.4 million of mortgage-backed  securities,  all of which are held
for investment purposes.

         Consistent with its  asset/liability  management strategy over the last
several years, a majority of the mortgage-backed securities acquired by the Bank
have had  short or  intermediate  effective  terms to  maturity  or, to a lesser
extent,  adjustable  interest  rates.  In  particular,   virtually  all  of  the
mortgage-backed  securities  purchased  by the Bank since 1992 have carried five
and seven year balloon terms.
<PAGE>
         The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at December 31, 1996.
<TABLE>
<CAPTION>

                                                                                  December 31, 1996
                                                   --------------------------------------------------------------------------------
                                                     5 Years       5 to 10     10 to 20        Over         Total Mortgage-Backed
                                                   or Less(1)       Years        Years       20 Years            Securities
                                                   Book Value    Book Value   Book Value    Book Value   Book Value    Market Value
                                                   ----------    ----------   ----------    ----------   ----------    ------------
                                                                                (Dollars in Thousands)
<S>                                                  <C>            <C>         <C>         <C>          <C>             <C>

Securities - Held for Investment:
 Government National Mortgage Association.........   $     18       $ 236       $2,284      $    ---     $  2,538        $  2,720
 Federal National Mortgage Association............      3,762         ---          ---         1,739        5,501           5,446
 Federal Home Loan Mortgage Corporation...........     10,586         ---          167         1,642       12,395          12,156
                                                      -------     -------      -------        ------      -------        --------

Total mortgage-backed securities..................    $14,366       $ 236       $2,451        $3,381      $20,434         $20,322
                                                      =======       =====       ======        ======      =======         =======

Weighted average yield............................      5.89%       7.48%        9.22%         6.87%        6.47%
                                                        ====        ====         ====          ====         ====


         (1) At December 31, 1996, the Bank held no  mortgage-backed  securities
with contractual maturities of one year or less.
</TABLE>
Sources of Funds

         General.  The Bank's  primary  sources of funds are deposits,  payments
(including  prepayments)  of  loan  principal,  interest  earned  on  loans  and
securities,  repayments  of  securities,  borrowings  and  funds  provided  from
operations.

         Deposits.  Schenectady  Federal  offers a variety of deposits  accounts
having a wide range of interest rates and terms.  The Bank's deposits consist of
passbook,  NOW,  money  market,  noninterest  bearing  checking and  certificate
accounts. The Bank relies primarily on competitive pricing policies and customer
service to attract and retain these deposits.

         The variety of deposit  accounts  offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with  flexibility to changes in
consumer demand. As customers have become more interest rate conscious, the Bank
has become more  susceptible to short-term  fluctuations  in deposit flows.  The
Bank  manages the pricing of its  deposits in keeping  with its  asset/liability
management, profitability and growth objectives.

         Based on its experience,  the Bank believes that a substantial  portion
of its passbook and NOW accounts are  relatively  stable sources of deposits and
has used customer service and marketing initiatives in an effort to increase the
volume  of such  deposits.  However,  the  ability  of the Bank to  attract  and
maintain these  accounts (as well as certificate  accounts) has been and will be
<PAGE>
affected by market  conditions.  Subsequent  to the 1994 fiscal  year,  the Bank
experienced a decline in the balance of non-certificate  accounts (much of which
is  believed  to have  transferred  into  certificate  accounts)  as a result of
continued interest rate increases and the rates paid on these deposits. The Bank
has been and will continue to be significantly affected by market conditions.

         The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
                                                 Year Ended December 31,
                                  -----------------------------------------------------
                                     1996                 1995                   1994
                                  ---------             --------              ---------
                                                 (Dollars in Thousands)
<S>                               <C>                  <C>                    <C>
Opening balance................    $139,671            $ 138,299              $ 134,653
Deposits.......................     237,180              231,591                195,214
Withdrawals....................   (242,412)             (236,426)              (196,620)
Interest credited..............       6,177                6,207                  5,052
                                  ---------             --------              ---------

Ending balance.................    $140,616            $ 139,671              $ 138,299
                                   ========            =========              =========

Net increase...................   $     945            $   1,372              $   3,646
                                  =========           ==========              =========

Percent increase ..............        .68%                  .99%                  2.71%
                                       ===                 =====                   ====

</TABLE>
<PAGE>
         The  following  table sets forth the dollar  amount of  deposits in the
various types of deposit programs offered by the Bank for the periods indicated.
<TABLE>
<CAPTION>
                                                                                 Year Ended December 31,
                                                      -----------------------------------------------------------------------------
                                                               1996                       1995                       1994
                                                      -----------------------    ----------------------    ------------------------
                                                                     Percent                    Percent                   Percent
                                                       Amount       of Total      Amount       of Total      Amount       of Total
                                                       ------       --------      ------       --------      ------       --------
                                                                                   (Dollars in Thousands)
<S>                                                    <C>           <C>         <C>           <C>         <C>             <C>
Transaction and Savings Deposits:(1)

Noninterest-bearing Checking Accounts...............   $ 1,392          .99      $ 2,077          1.49%     $  1,390         1.01%
Savings Accounts 3.00%..............................    37,152        26.42       40,745         29.17        52,582        38.02
NOW Accounts 1.75%..................................     9,104         6.47        7,913          5.67         7,753         5.60
Money Market Accounts 2.76%-4.41%...................     6,074         4.32        4,237          3.03         5,584         4.04
                                                       -------       ------      -------         ------     --------       ------

Total Non-Certificate Accounts......................    53,722        38.20       54,972         39.36        67,309        48.67
                                                       -------        -----      -------         ------     --------        -----

Certificates of Deposit:

2.00 -  2.99%.......................................       ---          ---           --           ---          265          .19
3.00 -  3.99%.......................................       ---          ---        1,124           .80       14,200        10.27
4.00 -  4.99%.......................................    23,244        16.53        2,691          1.93       14,019        10.14
5.00 -  5.99%.......................................    50,815        36.14       51,996         37.23       31,001        22.41
6.00 -  6.99%.......................................    12,835         9.13       28,119         20.13        8,889         6.43
7.00 -  7.99%.......................................       ---          ---          618           .44          910          .66
8.00 -  8.99%.......................................       ---          ---          151           .11        1,706         1.23
                                                     ---------         ----      -------        ------      -------       -------

Total Certificates of Deposit.......................    86,894        61.80       84,699         60.64       70,990        51.33
                                                      --------       ------     --------        ------      -------       ------
Total Deposits......................................  $140,616       100.00%    $139,671        100.00%    $138,299       100.00%
                                                      ========       ======     ========        ======     ========       ======

         (1) Reflects rates paid on transaction and savings deposits at December
31, 1996.
</TABLE>
<PAGE>
         The following table shows rate and maturity  information for the Bank's
certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
                                          4.00-         6.00-                     Percent
                                          5.99%         9.99%        Total       of Total
                                        --------      --------      -------         -------
<S>                                      <C>           <C>          <C>             <C>

Certificates of deposit
maturing in quarter ending:

March 31, 1997.....................      $10,437        $  805      $11,242           12.94%
June 30, 1997......................       16,431         1,162       17,593           20.25
September 30, 1997.................       17,628           976       18,604           21.41
December 31, 1997..................       10,263         2,212       12,475           14.36
March 31, 1998.....................        3,246         2,457        5,703            6.56
June 30, 1998......................        4,755         1,260        6,015            6.92
September 30, 1998.................        2,473            57        2,530            2.91
December 31, 1998..................        1,758            34        1,792            2.06
March 31, 1999.....................          793           385        1,178            1.36
June 30, 1999......................        2,762         1,516        4,278            4.92
September 30, 1999.................        1,022           183        1,205            1.39
December 31, 1999..................          344           523          867            1.00
Thereafter.........................        2,147         1,265        3,412            3.92
                                        --------      --------      -------         -------

   Total...........................      $74,059       $12,835      $86,894          100.00%
                                         =======       =======      =======          ======

   Percent of total................       85.23%        14.77%
                                          =====         =====

</TABLE>
         The  following  table  indicates  the amount of the Bank's  "jumbo" and
other certificates of deposit as of December 31, 1996.
<TABLE>
<CAPTION>
                                                                             Maturity
                                                      --------------------------------------------------------------
                                                                        Over         Over
                                                      3 Months        3 to 6      6 to 12          Over
                                                      or Less         Months       Months      12 months      Total
                                                                           (In Thousands)
<S>                                                   <C>           <C>          <C>           <C>          <C>

Certificates of deposit less than $100,000.......     $ 10,590      $ 16,963     $ 28,172      $ 24,942     $ 80,667

Certificates of deposit of $100,000 or more......          652           630        2,907         2,038        6,227
                                                     ---------     ---------    ---------     ---------     --------

Total certificates of deposit....................      $11,242       $17,593      $31,079       $26,980      $86,894
                                                       =======       =======      =======       =======      =======

</TABLE>
<PAGE>
         Borrowings.  Schenectady  Federal's  other  available  sources of funds
include advances from the FHLB of New York and other borrowings.  As a member of
the FHLB of New York,  the Bank is required to own capital  stock in the FHLB of
New York and is authorized to apply for advances from the FHLB of New York. Each
FHLB credit program has its own interest  rate,  which may be fixed or variable,
and range of maturities.  The FHLB of New York may prescribe the acceptable uses
for these  advances,  as well as  limitations  on the size of the  advances  and
repayment  provisions.  At  December  31,  1996,  the Bank had no FHLB  advances
outstanding.  On such date, the Bank had a collateral  pledge  arrangement  with
FHLB of New York  pursuant to which the Bank may borrow up to $49.8  million for
liquidity purposes.

         During the fiscal year ended  December 31, 1996, the Bank had less than
$1,000 of average  FHLB  advances or other  borrowings  outstanding.  During the
fiscal year ended  December  31, 1995 and 1994 the Bank had no FHLB  advances or
other borrowings.

Competition

         Schenectady  Federal faces strong  competition both in originating real
estate loans and in attracting deposits.  Competition in originating loans comes
primarily  from  mortgage  bankers,  commercial  banks  which  have  received  a
reduction  in  deposit  insurance  premiums,  credit  unions  and other  savings
institutions, which also make loans secured by real estate located in the Bank's
market  area.  The Bank  competes  for  loans  principally  on the  basis of the
interest  rates and loan fees it charges,  the types of loans it originates  and
the quality of services it provides to borrowers.

         Competition  for deposits is  principally  from money market and mutual
funds,  securities  firms,  commercial  banks,  credit  unions and other savings
institutions located in the same communities. The ability of the Bank to attract
and retain deposits depends on its ability to provide an investment  opportunity
that satisfies the  requirements  of investors as to rate of return,  liquidity,
risk,  convenient  locations  and other  factors.  The Bank  competes  for these
deposits  by  offering a variety  of  deposit  accounts  at  competitive  rates,
convenient business hours and a customer oriented staff.

Employees

         At  December  31,  1996,  the Bank had a total  of 57  full-time  and 9
part-time  employees.  None  of the  Bank's  employees  are  represented  by any
collective bargaining. Management considers its employee relations to be good.

Subsidiary Activities

         As a  federally  chartered  savings and loan  association,  Schenectady
Federal is permitted by OTS  regulations to invest up to 2% of its assets in the
stock of, or loans  to,  service  corporation  subsidiaries,  and may  invest an
additional 1% of its assets in service  corporations where such additional funds
are used for inner-city or community  development purposes. At December 31, 1996
Schenectady  Federal's investment in its service corporation totaled $16,000. In
addition  to  investments  in service  corporations,  federal  institutions  are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal savings association may engage in directly.
<PAGE>
         At December 31, 1996,  Schenectady Federal had one wholly owned service
corporation, SSLA Services Corp. ("SSLA"). The corporation was formed in 1983 to
sell insurance products.  In 1994, SSLA was authorized to sell mutual funds. For
the year ended December 31, 1996, SSLA sold mutual funds totaling  $248,000.  No
assurance can be made that a material  amount of mutual fund sales will occur in
the future.  For the fiscal year ended December 31, 1996, SSLA had net income of
$8,000.  For the fiscal years  ending  December 31, 1995 and 1994 SSLA had a net
loss of $10,000, and $15,000, respectively.


                                   REGULATION

General

         Schenectady Federal is currently a federally chartered savings and loan
association,  the deposits of which are federally insured and backed by the full
faith and  credit of the  United  States  Government.  Accordingly,  Schenectady
Federal is subject to broad federal  regulation  and oversight  extending to all
its operations.  Schenectady  Federal is a member of the FHLB of New York and is
subject to certain  limited  regulation  by the Federal  Reserve  Board.  As the
savings and loan holding  company of Schenectady  Federal,  the Holding  Company
also is  subject  to  federal  regulation  and  oversight.  The  purpose  of the
regulation  of the Holding  Company and other  holding  companies  is to protect
subsidiary savings associations. Schenectady Federal is a member of the SAIF and
the deposits of  Schenectady  Federal are insured by the FDIC. As a result,  the
FDIC has certain regulatory and examination authority over Schenectady Federal.

         Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.

Federal Regulation of Savings Associations

         The  OTS  has  extensive  authority  over  the  operations  of  savings
associations. As part of this authority, Schenectady Federal is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS examination of Schenectady  Federal was as of
September 1996. Under agency  scheduling  guidelines,  it is likely that another
examination  will be initiated in the near future.  When these  examinations are
conducted by the OTS and the FDIC, the examiners may require Schenectady Federal
to provide  for higher  general or  specific  loan loss  reserves.  All  savings
associations  are subject to a  semi-annual  assessment,  based upon the savings
association's  total  assets,  to fund the  operations  of the OTS.  Schenectady
Federal's  OTS  assessment  for the fiscal  year  ended  December  31,  1996 was
$50,000.

         The OTS also  has  extensive  enforcement  authority  over all  savings
institutions and their holding companies,  including Schenectady Federal and the
Holding Company.  This enforcement  authority includes,  among other things, the
ability to assess civil money penalties,  to issue cease-  and-desist or removal
orders and to initiate injunctive actions. In general, these enforcement actions
may be initiated for  violations of laws and  regulations  and unsafe or unsound
practices.  Other  actions or  inactions  may provide the basis for  enforcement
action,  including  misleading or untimely  reports  filed with the OTS.  Except
under certain  circumstances,  public disclosure of final enforcement actions by
the OTS is required.
<PAGE>
         In  addition,  the  investment,  lending  and  branching  authority  of
Schenectady  Federal is  prescribed by federal laws and  regulations,  and it is
prohibited  from  engaging  in any  activities  not  permitted  by such laws and
regulations.  For instance,  no savings institution may invest in non-investment
grade  corporate  debt  securities.   In  addition,  the  permissible  level  of
investment  by federal  associations  in loans secured by  non-residential  real
property may not exceed 400% of total capital,  except with approval of the OTS.
Federal savings associations are also generally authorized to branch nationwide.
Schenectady Federal is in compliance with the noted restrictions.

         Schenectady   Federal's   general   permissible   lending   limit   for
loans-to-one-borrower  is equal to the greater of $500,000 or 15% of  unimpaired
capital  and  surplus  (except  for  loans  fully  secured  by  certain  readily
marketable  collateral,  in  which  case  this  limit  is  increased  to  25% of
unimpaired  capital and surplus).  At December 31, 1996,  Schenectady  Federal's
lending limit under this restriction was $2.7 million. Schenectady Federal is in
compliance with the loans-to-one borrower limitation.

         The OTS, as well as the other  federal  banking  agencies,  has adopted
guidelines  establishing  safety and soundness standards on matters such as loan
underwriting and  documentation,  internal controls and audit systems,  interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these  standards  must submit a  compliance  plan.  A
failure to submit a plan or to comply  with an  approved  plan will  subject the
institution to further  enforcement  action.  The OTS and other federal  banking
agencies have also proposed additional  guidelines on asset quality and earnings
standards.  No  assurance  can be given as whether or in what form the  proposed
regulations will be adopted.

Insurance of Accounts and Regulation by the FDIC

         Schenectady  Federal is a member of the SAIF,  which is administered by
the FDIC.  Deposits  are  insured up to  applicable  limits by the FDIC and such
insurance  is  backed  by  the  full  faith  and  credit  of the  United  States
Government.  As insurer,  the FDIC  imposes  deposit  insurance  premiums and is
authorized to conduct  examinations of and to require  reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the FDIC.  The FDIC also has the  authority to initiate  enforcement  actions
against savings  associations,  after giving the OTS an opportunity to take such
action,  and may  terminate  the deposit  insurance  if it  determines  that the
institution  has engaged or is engaging in unsafe or unsound  practices or is in
an unsafe or unsound condition.

         The FDIC's deposit insurance premiums are assessed through a risk-based
system,  under which all insured depository  institutions are placed into one of
nine categories and assessed  insurance  premiums,  ranging from .23% to .31% of
deposits,  based upon their level of capital and supervisory  evaluation.  Under
the system,  institutions  classified as well capitalized  (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted  assets
("Tier 1 risk-based  capital") of at least 6% and a risk-based  capital ratio of
at least 10%) and considered  healthy pay the lowest premium while  institutions
that are less  than  adequately  capitalized  (i.e.,  core or Tier 1  risk-based
capital  ratios of less than 4% or a risk-based  capital  ratio of less than 8%)
and considered of substantial  supervisory concern pay the highest premium. Risk
classification  of all  insured  institutions  will be made by the FDIC for each
semi-annual assessment period.
<PAGE>
         The FDIC is authorized to increase  assessment  rates,  on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated  reserve  ratio of 1.25% of SAIF insured  deposits.  In setting these
increased  assessments,  the FDIC must seek to restore the reserve ratio to that
designated  reserve  level,  or such higher  reserve ratio as established by the
FDIC.  The FDIC may also impose  special  assessments  on SAIF  members to repay
amounts  borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.

         For the  first six  months of 1995,  the  assessment  schedule  for BIF
members and SAIF members  ranged from .23% to .31% of  deposits.  As is the case
with the SAIF, the FDIC is authorized to adjust the insurance  premium rates for
banks that are insured by the BIF of the FDIC in order to  maintain  the reserve
ratio of the BIF at  1.25%  of BIF  insured  deposits.  As a  result  of the BIF
reaching its statutory  reserve ratio the FDIC revised the premium  schedule for
BIF insured  institutions  to provide a range of .04% to .31% of  deposits.  The
revisions  became  effective in the third quarter of 1995. In addition,  the BIF
rates were further revised,  effective January 1996, to provide a range of 0% to
 .27%. The SAIF rates,  however,  were not adjusted. At the time the FDIC revised
the BIF premium schedule, it noted that, absent legislative action (as discussed
below),  the SAIF would not attain its  designated  reserve ratio until the year
2002. As a result,  SAIF insured members would continue to be generally  subject
to higher deposit insurance  premiums than BIF insured  institutions  until, all
things being equal, the SAIF attained its required reserve ratio.

         In order to eliminate this disparity and any  competitive  disadvantage
between  BIF and SAIF  member  institutions  with  respect to deposit  insurance
premiums,  legislation to  recapitalize  the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to  recapitalize  the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings  associations  then exist.  The special  assessment  rate has been
established  at .657% of deposits by the FDIC and the  resulting  assessment  of
$930,000 was paid in November 1996.

         Prior  to the  enactment  of the  legislation,  a  portion  of the SAIF
assessment imposed on savings  associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift  crisis in the 1980s.  Although the FDIC has  proposed  that the SAIF
assessment be equalized with the BIF assessment  schedule,  effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing  obligation.  Although the  legislation  also now
requires  assessments  to be made on  BIF-assessable  deposits for this purpose,
effective  January 1, 1997,  that  assessment will be limited to 20% of the rate
imposed on SAIF  assessable  deposits  until the earlier of December 31, 1999 or
when no  savings  association  continues  to exist,  thereby  imposing a greater
burden on SAIF member  institutions  such as  Schenectady  Federal.  Thereafter,
however,  assessments on BIF-member  institutions will be made on the same basis
as  SAIF-member  institutions.  The  rates  to be  established  by the  FDIC  to
implement this  requirement  for all FDIC- insured  institutions is uncertain at
this time, but are anticipated to be about a 6.5 basis points assessment on SAIF
deposits  and 1.5 basis points on BIF  deposits  until BIF insured  institutions
participate fully in the assessment.
<PAGE>
Regulatory Capital Requirements

         Federally insured savings  associations,  such as Schenectady  Federal,
are  required to maintain a minimum  level of  regulatory  capital.  The OTS has
established  capital  standards,  including a tangible  capital  requirement,  a
leverage  ratio  (or  core  capital)  requirement  and  a  risk-  based  capital
requirement applicable to such savings associations.  These capital requirements
must be  generally  as  stringent as the  comparable  capital  requirements  for
national  banks.  The OTS is also  authorized to impose capital  requirements in
excess of these standards on individual associations on a case-by-case basis.

         The capital  regulations  require  tangible capital of at least 1.5% of
adjusted total assets (as defined by  regulation).  Tangible  capital  generally
includes   common   stockholders'   equity  and  retained   income  and  certain
noncumulative  perpetual  preferred stock and related income.  In addition,  all
intangible  assets,  other than a limited amount of purchased mortgage servicing
rights,  must be deducted from tangible capital for calculating  compliance with
the  requirement.  At December 31, 1996,  Schenectady  Federal had no intangible
assets which were required to be deducted from tangible capital.

         The OTS regulations establish special  capitalization  requirements for
savings associations that own subsidiaries.  In determining  compliance with the
capital requirements,  all subsidiaries engaged solely in activities permissible
for national  banks or engaged in certain other  activities  solely as agent for
its customers are  "includable"  subsidiaries  that are consolidated for capital
purposes in proportion to the association's  level of ownership.  For excludable
subsidiaries the debt and equity  investments in such  subsidiaries are deducted
from assets and capital.  The subsidiaries of Schenectady Federal are includable
subsidiaries.

         At December 31, 1996, Schenectady Federal had tangible capital of $17.8
million,  or 10.77% of  adjusted  total  assets,  which is  approximately  $15.3
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date.

         The capital  standards also require core capital equal to at least 3.0%
of adjusted  total assets (as defined by  regulation).  Core  capital  generally
consists of tangible capital plus certain intangible assets, including a limited
amount  of  purchased  credit  card  relationships.  As a result  of the  prompt
corrective  action  provisions of FDICIA  discussed  below,  however,  a savings
association must maintain a core capital ratio of at least 4.0% to be considered
adequately  capitalized unless its supervisory  condition is such to allow it to
maintain  a 3.0%  ratio.  At  December  31,  1996,  Schenectady  Federal  had no
intangibles which were subject to these tests.

         At December 31,  1996,  Schenectady  Federal had core capital  equal to
$17.8 million, or 10.77% of adjusted total assets,  which is $12.8 million above
the minimum leverage ratio requirement of 3.0% as in effect on that date.

          The OTS risk-based  requirement  requires savings associations to have
total capital of at least 8% of risk-weighted  assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain  permanent  and  maturing  capital  instruments  that do not
qualify as core capital and general  valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based  requirement  only to the extent of core capital.  The
<PAGE>
OTS is  also  authorized  to  require  a  savings  association  to  maintain  an
additional  amount of total capital to account for  concentration of credit risk
and the risk of non-traditional  activities.  At December 31, 1996,  Schenectady
Federal had  $642,000  of general  loss  reserves,  which was less than 1.25% of
risk-weighted assets and was included in capital.

         Certain  exclusions from capital and assets are required to be made for
the purpose of calculating  total  capital.  Such  exclusions  consist of equity
investments  (as  defined  by  regulation)  and that  portion  of land loans and
nonresidential  construction  loans in excess of an 80% loan-to-value  ratio and
reciprocal holdings of qualifying capital  instruments.  Schenectady Federal had
no such exclusions from capital and assets at December 31, 1996.

         In  determining  the  amount  of  risk-weighted   assets,  all  assets,
including certain  off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%,  based on the risk  inherent in the type of asset.  For
example,  the OTS has assigned a risk weight of 50% for  prudently  underwritten
permanent  one- to  four-family  first lien mortgage loans not more than 90 days
delinquent  and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or the FHLMC.

         The  OTS  has  adopted  a  final  rule  that  requires   every  savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement,  an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets.  This exposure is a measure of the potential decline in the
net  portfolio  value of a savings  association,  greater than 2% of the present
value of its  assets,  based upon a  hypothetical  200 basis  point  increase or
decrease  in  interest  rates  (whichever  results  in a greater  decline).  Net
portfolio  value is the  present  value of  expected  cash  flows  from  assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between  calculating  interest rate risk and  recognizing any deduction from
capital.  The rule will not become effective until the OTS evaluates the process
by which  savings  associations  may  appeal an  interest  rate  risk  deduction
determination.  It is  uncertain  when this  evaluation  may be  completed.  Any
savings  association  with less than $300 million in assets and a total  capital
ratio in excess of 12% is exempt from this requirement unless the OTS determines
otherwise.

         On December 31, 1996,  Schenectady  Federal had total  capital of $17.1
million  (including  $17.8  million in core capital and  $642,000 in  qualifying
supplementary  capital)  and  risk-weighted  assets of $88.0  million;  or total
capital of 20.9% of  risk-weighted  assets.  This amount was $10.6 million above
the 8.0% requirement in effect on that date.

         The OTS and the FDIC are authorized  and,  under certain  circumstances
required, to take certain actions against savings associations that fail to meet
capital  requirements.  The OTS is generally required to take action to restrict
the activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core ratio, a 4% Tier 1 risked-based capital ratio or
an 8% risk-based  capital  ratio).  Any such  association  must submit a capital
restoration plan and until such plan is approved by the OTS may not increase its
assets,  acquire  another  institution,  establish a branch or engage in any new
activities,  and  generally  may  not  make  capital  distributions.  The OTS is
authorized  to  impose  the  additional  restrictions  that  are  applicable  to
significantly undercapitalized associations.
<PAGE>
          As a condition to the approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  association  must agree that it will
enter  into  a  limited  capital  maintenance  guarantee  with  respect  to  the
institution's achievement of its capital requirements.

         Any savings  association  that fails to comply with its capital plan or
is  "significantly  undercapitalized"  (i.e.,  Tier 1 risk-based or core capital
ratios of less than 3% or a  risk-based  capital  ratio of less than 6%) must be
made  subject  to one or more of  additional  specified  actions  and  operating
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   association.   An  association  that  becomes
"critically  undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly  undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  association,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  association is also
subject to the general enforcement  authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.

         The OTS is also generally  authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound  practices or is in an unsafe
or unsound condition.

         The  imposition  by the OTS or the  FDIC of any of  these  measures  on
Schenectady  Federal  may  have a  substantial  adverse  effect  on  Schenectady
Federal's operations and profitability. Holding Company shareholders do not have
preemptive  rights,  and therefore if the Holding Company is directed by the OTS
or the FDIC to issue additional shares of Common Stock, such issuance may result
in the dilution in the percentage of ownership of the Holding Company.

Limitations on Dividends and Other Capital Distributions

         OTS  regulations   impose  various   restrictions  or  requirements  on
associations  with  respect  to their  ability  to pay  dividends  or make other
distributions  of  capital  which  include   dividends,   stock  redemptions  or
repurchases  cash-out  mergers  and other  transactions  charged to the  capital
account.  OTS regulations  prohibit an association  from declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  association  would be reduced  below the amount  required  to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.

         Generally,  savings  associations,  such as Schenectady  Federal,  that
before and after the proposed distribution meet their capital requirements,  may
make capital distributions during any calendar year equal to the greater of 100%
of net income for the year-to-date plus 50% of the amount by which the lesser of
the  association's  tangible,  core or  risk-based  capital  exceeds its capital
requirement  for such  capital  component,  as measured at the  beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However,  an association deemed to be in need of more than normal supervision by
the OTS may have  its  dividend  authority  restricted  by the OTS.  Schenectady
Federal may pay dividends in accordance with this general authority.
<PAGE>
         The OTS has proposed  regulations that would revise the current capital
distribution  restrictions.  Under the proposal a savings association may make a
capital  distribution  without notice to the OTS (unless it is a subsidiary of a
holding  company)  provided  that  it  has a  CAMEL  1 or 2  rating,  is  not of
supervisory  concern  (as defined by  regulation)  and would  remain  adequately
capitalized  (as  defined  in the  OTS  prompt  corrective  action  regulations)
following  the proposed  distribution.  Savings  associations  that would remain
adequately  capitalized  following the proposed distribution but do not meet the
other  noted  requirements  must  notify  the OTS 30 days prior to  declaring  a
capital  distribution.  The OTS stated it will  generally  regard as permissible
that amount of capital distributions that do not exceed 50% of the institution's
excess  regulatory  capital plus net income to date during the calendar  year. A
savings association may not make a capital  distribution  without prior approval
of the OTS and the FDIC if it is  undercapitalized  before,  or as a result  of,
such a distribution.  As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice.  No assurance
may be given as to whether or in what form the regulations may be adopted.

         Savings  associations  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  associations  that do not,  or would  not meet  their  current  minimum
capital requirements  following a proposed capital  distribution,  however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution  during  the 30-day  notice  period  based on safety and  soundness
concerns. See "Regulatory Capital Requirements."

Liquidity

         All savings  associations,  including Schenectady Federal, are required
to  maintain  an  average  daily  balance  of liquid  assets  equal to a certain
percentage of the sum of its average daily balance of net  withdrawable  deposit
accounts and  borrowings  payable in one year or less.  For a discussion of what
Schenectady Federal includes in liquid assets, see "Management's  Discussion and
Analysis of Financial  Condition and Results of Operation  Liquidity and Capital
Resources."  This  liquid  asset  ratio  requirement  may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.

         In  addition,  short-term  liquid  assets  (e.g.,  cash,  certain  time
deposits,  certain  bankers  acceptances  and short-term  United States Treasury
obligations)  currently must constitute at least 1% of the association's average
daily  balance of net  withdrawable  deposit  accounts  and current  borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. For the year ended December 31, 1996, Schenectady Federal was
in compliance with both requirements, with an overall average daily liquid asset
ratio of 26.1% and a short-term liquid assets ratio of 5.7%.

Accounting

         An  OTS  policy  statement   applicable  to  all  savings  associations
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
association  must be in  compliance  with  approved  and  documented  investment
policies and  strategies,  and must be accounted  for in  accordance  with GAAP.
Under the policy  statement,  management must support its  classification of and
accounting for loans and securities (i.e., whether held for investment,  sale or
trading) with appropriate  documentation.  Schenectady  Federal is in compliance
with these amended rules.
<PAGE>
         The OTS has adopted an amendment to its accounting  regulations,  which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying  economic substance and
inherent risk and that financial  reports must  incorporate any other accounting
regulations or orders prescribed by the OTS.

Qualified Thrift Lender Test

         All savings  associations,  including Schenectady Federal, are required
to meet a qualified thrift lender ("QTL") test to avoid certain  restrictions on
their operations.  This test requires a savings association to have at least 65%
of  its  portfolio  assets  (as  defined  by  regulation)  in  qualified  thrift
investments  on a monthly  average  for nine out of every 12 months on a rolling
basis.  Such assets primarily  consist of residential  housing related loans and
investments.  At December  31,  1996,  Schenectady  Federal met the test and has
always met the test since its effectiveness.

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the Bank  Insurance  Fund. If such an  association  has not yet  requalified  or
converted to a national bank, its new  investments and activities are limited to
those permissible for both a savings  association and a national bank, and it is
limited to national bank branching  rights in its home state.  In addition,  the
association is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  association
has not requalified or converted to a national bank within three years after the
failure,  it must  divest  of all  investments  and  cease  all  activities  not
permissible  for a  national  bank.  In  addition,  it must repay  promptly  any
outstanding FHLB borrowings,  which may result in prepayment  penalties.  If any
association  that fails the QTL test is  controlled by a holding  company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

Community Reinvestment Act

         Under the  Community  Reinvestment  Act  ("CRA"),  every  FDIC  insured
institution has a continuing and affirmative obligation consistent with safe and
sound banking  practices to help meet the credit needs of its entire  community,
including  low and moderate  income  neighborhoods.  The CRA does not  establish
specific lending requirements or programs for financial institutions nor does it
limit an institution's  discretion to develop the types of products and services
that it believes are best suited to its particular  community,  consistent  with
the CRA.  The CRA  requires  the OTS,  in  connection  with the  examination  of
Schenectady  Federal,  to assess the institution's  record of meeting the credit
needs of its community and to take such record into account in its evaluation of
certain applications,  such as a merger or the establishment of a branch, by the
Bank.  An  unsatisfactory  rating  may be used as the basis for the denial of an
application by the OTS.

         The federal banking agencies,  including the OTS, have recently revised
the CRA  regulations  and  the  methodology  for  determining  an  institution's
compliance with the CRA. Due to the heightened  attention being given to the CRA
in the past few years,  the Bank may be required to devote  additional funds for
investment  and lending in its local  community.  The Bank was  examined for CRA
compliance in July 1995 and received a rating of satisfactory.
<PAGE>
Transactions with Affiliates

         Generally,   transactions   between  a  savings   association   or  its
subsidiaries  and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates.  In addition,  certain of these
transactions,  such as loans to an affiliate,  are restricted to a percentage of
the association's capital. Affiliates of Schenectady Federal include the Holding
Company and any company which is under common control with Schenectady  Federal.
In addition,  a savings  association  may not lend to any  affiliate  engaged in
activities not  permissible for a bank holding company or acquire the securities
of  most  affiliates.   Schenectady   Federal's   subsidiaries  are  not  deemed
affiliates, however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.

         Certain  transactions with directors,  officers or controlling  persons
are also subject to conflict of interest  regulations enforced by the OTS. These
conflict of interest  regulations and other statutes also impose restrictions on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.

Holding Company Regulation

         The  Holding  Company is a unitary  savings  and loan  holding  company
subject to  regulatory  oversight  by the OTS. As such,  the Holding  Company is
required  to  register  and  file  reports  and is  subject  to  regulation  and
examination by the OTS. In addition,  the OTS has enforcement authority over the
Holding Company and its non-savings association  subsidiaries which also permits
the OTS to restrict or prohibit  activities  that are determined to be a serious
risk to the subsidiary savings association.

         As a unitary  savings and loan  holding  company,  the Holding  Company
generally  is not  subject to  activity  restrictions.  If the  Holding  Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the Holding Company and any of its subsidiaries  (other than Schenectady Federal
or any other  SAIF-insured  savings  association)  would become  subject to such
restrictions  unless  such  other  associations  each  qualify as a QTL and were
acquired in a supervisory acquisition.

         If  Schenectady  Federal fails the QTL test,  the Holding  Company must
obtain the approval of the OTS prior to continuing after such failure,  directly
or  through  its other  subsidiaries,  any  business  activity  other than those
approved for multiple savings and loan holding companies or their  subsidiaries.
In addition,  within one year of such failure the Holding  Company must register
as, and will become  subject to, the  restrictions  applicable  to bank  holding
companies. The activities authorized for a bank holding company are more limited
than are the activities  authorized  for a unitary or multiple  savings and loan
holding company. See "Qualified Thrift Lender Test."

         The Holding Company must obtain approval from the OTS before  acquiring
control of any other SAIF-insured  association.  Such acquisitions are generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.
<PAGE>
Federal Securities Law

         The stock of the Holding  Company is registered  with the SEC under the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act").  The Holding
Company is subject  to the  information,  proxy  solicitation,  insider  trading
restrictions and other requirements of the SEC under the Exchange Act.

         Holding  Company  stock held by persons who are  affiliates  (generally
officers,  directors and principal  stockholders) of the Holding Company may not
be resold without  registration or unless sold in accordance with certain resale
restrictions.  If the Holding Company meets specified current public information
requirements,  each  affiliate  of the  Holding  Company  is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

Federal Reserve System

         The Federal  Reserve  Board  requires all  depository  institutions  to
maintain  non-interest  bearing  reserves  at  specified  levels  against  their
transaction accounts (primarily checking,  NOW and Super NOW checking accounts).
At December 31, 1996,  Schenectady  Federal was in compliance with these reserve
requirements.  The balances maintained to meet the reserve  requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity  requirements that
may be imposed by the OTS. See "- Liquidity."

         Savings  associations are authorized to borrow from the Federal Reserve
Bank  "discount   window,"  but  Federal  Reserve  Board   regulations   require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.

Federal Home Loan Bank System

         Schenectady  Federal is a member of the FHLB of New York,  which is one
of 12 regional FHLBs,  that  administers  the home financing  credit function of
savings  associations.  Each FHLB  serves as a reserve or  central  bank for its
members within its assigned region. It is funded primarily from proceeds derived
from the sale of consolidated  obligations of the FHLB System. It makes loans to
members (i.e.,  advances) in accordance with policies and procedures established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal  Housing  Finance  Board.  All advances from the FHLB are required to be
fully secured by  sufficient  collateral as determined by the FHLB. In addition,
all  long-term  advances  are  required to provide  funds for  residential  home
financing.

         As a member,  Schenectady  Federal is required to purchase and maintain
stock in the FHLB of New York.  At December  31, 1996,  Schenectady  Federal had
$1.2 million in FHLB stock,  which was in compliance with this  requirement.  In
past years,  Schenectady Federal has received substantial  dividends on its FHLB
stock.  Over the past five calendar  years such dividends have averaged 8.2% and
were 6.5% in 1996. For the year ended  December 31, 1996,  dividends paid by the
FHLB of New York to Schenectady  Federal  totaled  $78,000,  which  constitute a
$8,000  decrease  from the amount of  dividends  received  in 1995.  The $20,000
dividend received for the quarter ended December 31, 1996 reflects an annualized
rate of 6.6%.
<PAGE>
         Under  federal  law the FHLBs are  required  to  provide  funds for the
resolution  of  troubled  savings  associations  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income  housing
projects.  These  contributions  have  affected  adversely  the  level  of  FHLB
dividends  paid and could continue to do so in the future.  These  contributions
could also have an adverse  effect on the value of FHLB stock in the  future.  A
reduction  in  value  of  Schenectady  Federal's  FHLB  stock  may  result  in a
corresponding reduction in Schenectady Federal's capital.

Federal and State Taxation

         Federal  Taxation.  Savings  associations  such as the Bank  that  meet
certain  definitional  tests  relating  to the  composition  of assets and other
conditions  prescribed  by the Internal  Revenue  Code of 1986,  as amended (the
"Code"),  are  permitted to establish  reserves for bad debts and to make annual
additions  thereto which may, within  specified  formula  limits,  be taken as a
deduction in  computing  taxable  income for federal  income tax  purposes.  The
amount of the bad debt  reserve  deduction  is  computed  under  the  experience
method. Under the experience method, the bad debt reserve deduction is an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.

         In August 1996, federal legislation was enacted that changed the manner
in which the bad debt reduction is calculated by thrift institutions,  including
the Bank.  Formerly the Bank had been allowed to calculate its  deduction  under
the  experience or percentage  of taxable  income  methods and deduct the higher
amount.  The percentage of taxable income method was repealed  effective for the
1996 tax year. The legislation  effectively  requires thrifts to account for bad
debts for federal income tax purposes on the same basis as commercial  banks for
tax years beginning after December 31, 1995.

         In addition to the regular income tax, corporations,  including savings
associations  such as the Bank,  generally  are  subject  to a minimum  tax.  An
alternative  minimum tax is imposed at a minimum tax rate of 20% on  alternative
minimum  taxable  income,  which is the sum of a  corporation's  regular taxable
income (with certain  adjustments) and tax preference  items, less any available
exemption.  The alternative  minimum tax is imposed to the extent it exceeds the
corporation's  regular  income tax and net  operating  losses can offset no more
than 90% of alternative  minimum  taxable  income.  For taxable years  beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental  tax equal to 0.12% of the excess
of alternative  minimum taxable income for the taxable year (determined  without
regard to net operating losses and the deduction for the environmental tax) over
$2 million.

         To  the  extent  prior  years  earnings   appropriated   to  a  savings
association's  bad debt  reserves  for  "qualifying  real  property  loans"  and
deducted for federal  income tax purposes  exceed the  allowable  amount of such
reserves  computed  under  the  experience  method  and  to  the  extent  of the
association's supplemental reserves for losses on loans ("Excess"),  such Excess
may not, without adverse tax  consequences,  be utilized for the payment of cash
dividends or other  distributions to a shareholder  (including  distributions on
redemption,  dissolution  or  liquidation)  or for any other purpose  (except to
absorb bad debt  losses).  As of December  31, 1996,  the Bank's  Excess for tax
purposes totaled approximately $4.6 million.
<PAGE>
         The Bank and its  subsidiaries  file  consolidated  federal  income tax
returns on a fiscal  year basis  using the  accrual  method of  accounting.  The
Holding Company intends to file consolidated federal income tax returns with the
Bank and its subsidiaries.

         The Bank and its consolidated subsidiaries have been audited by the IRS
with respect to  consolidated  federal income tax returns  through  December 31,
1985.  With respect to years examined by the IRS, either all  deficiencies  have
been satisfied or sufficient  reserves have been established to satisfy asserted
deficiencies.  In the  opinion  of  management,  any  examination  of still open
returns  (including  returns of subsidiaries  and  predecessors  of, or entities
merged  into,  the Bank)  would not result in a  deficiency  which  could have a
material  adverse  effect  on the  financial  condition  of  the  Bank  and  its
consolidated subsidiaries.

         New York Taxation.  The Bank and its  subsidiaries  that operate in New
York are subject to New York state taxation. The Bank is subject to the New York
State  Franchise  Tax on Banking  Corporations  in an annual amount equal to the
greater of (i) 9% of the Bank's "entire net income"  allocable to New York State
during the taxable year,  or (ii) the  applicable  alternative  minimum tax. The
alternative  minimum tax is  generally  the greater of (a) 0.01% of the value of
the Bank's assets allocable to New York State with certain modifications, (b) 3%
of the Bank's  "alternative  entire net income"  allocable to New York State, or
(c) $250. In addition, New York also imposes a surtax of approximately 3% on the
applicable  tax  described  above.  The surtax is  scheduled  to expire in 1996.
Entire  net income is similar  to  federal  taxable  income,  subject to certain
modifications  (including  the fact that net operating  losses cannot be carried
back or carried  forward) and  alternative  entire net income is equal to entire
net income without certain modifications.

         Delaware Taxation.  As a Delaware holding company,  the Holding Company
is exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware.  The Holding Company
is also subject to an annual franchise tax imposed by the State of Delaware.

Executive Officers of the Company

         The  executive  officers of the  Company,  each of whom is currently an
executive officer of the Bank, are identified  below. The executive  officers of
the Company are elected annually by the Company's Board of Directors.
<TABLE>
<CAPTION>

         Name                     Age(1)            Position With Company
         ----                     ------            ---------------------
<S>                                 <C>       <C>
Joseph H. Giaquinto                 57        Chairman of the Board, President and
                                              Chief Executive Officer

David J. Jurczynski                 37        Vice President, Treasurer and Chief Financial Officer

Richard D. Ammian                   49        Senior Vice President and Corporate Secretary

(1)  As of December 31, 1996
</TABLE>
<PAGE>
Executive Officers of the Company

     Joseph H.  Giaquinto.  Mr.  Giaquinto,  age 57, is  Chairman  of the Board,
President and Chief Executive  Officer of the Bank and the Holding Company.  Mr.
Giaquinto began his career with Schenectady  Federal in 1961 and has served in a
variety of positions including his current positions since 1984.

     Richard  D.  Ammian.  Mr.  Ammian,  age 49, is  Senior  Vice  President  of
Administration  and Marketing and Corporate  Secretary.  In that  capacity,  Mr.
Ammian is responsible  for human  resources,  employee  benefits,  marketing and
property  management  functions of the Bank.  Mr. Ammian joined the Bank in 1978
and held  various  positions  with the Bank until his  promotion  to his current
positions in 1988.

     David J. Jurczynski. Mr. Jurczynski, age 37, is Vice President,  Treasurer,
and Chief  Financial  Officer of the Bank.  Mr.  Jurczynski was appointed to the
position in October 1996.  From 1990 to 1996, Mr.  Jurczynski was Vice President
and Treasurer of Cohoes  Savings  Bank.  Mr.  Jurczynski  is a certified  public
accountant.

Item 2.  Properties

Properties

    The following  table sets forth  information  concerning the main office and
each branch office of the Bank at December 31, 1996.  At December 31, 1996,  the
Bank's premises had an aggregate net book value of approximately $1.1 million.
<TABLE>
<CAPTION>
                                   Year            Owned or            Net Book Value at
      Location                  Acquired           Leased             December 31, 1996
      --------                  --------           ------             -----------------
                                               (In Thousands)
<S>                               <C>              <C>                       <C>
Main Office:
251-263 State Street              1959             Owned                     $679
Schenectady, New York
Full Service Branches:
262 Saratoga Road                 1981             Leased                    $ 52
Scotia, New York                                   (expires
                                                   2006)
2526-2528 Broadway                1977             Owned                     $380
Schenectady, New York
</TABLE>

         The Bank believes that its current  facilities are adequate to meet the
present and foreseeable  future needs of the Bank and the Holding  Company.  The
Bank may look to open new branches when and if the prospective  market is deemed
to provide an opportunity to the Bank.

         The Bank's  depositor and borrower  customer files are maintained by an
independent data processing  company.  The net book value of the data processing
and  computer   equipment  utilized  by  the  Bank  at  December  31,  1996  was
approximately $245,000.
<PAGE>
Item 3.  Legal Proceedings

    The Holding  Company and the Bank are  involved as plaintiff or defendant in
various  legal actions  arising in the normal course of its business.  While the
ultimate outcome of these proceedings cannot be predicted with certainty,  it is
the opinion of management,  after  consultation  with counsel  representing  the
Holding  Company and the Bank in the  proceedings,  that the resolution of these
proceedings  should  not  have  a  material  effect  on  Company's  consolidated
financial position, results of operations or liquidity.


Item 4.  Submission of Matters to a Vote of Securities Holders

    No  matters  were  submitted  to a vote of  security  holders,  through  the
solicitation  of proxies or  otherwise,  during the quarter  ended  December 31,
1996.

                                     PART II

Item 5.  Market for Common Equity and Related
                             Stockholder Matters

    Page 51 of the  Company's  1996  Annual  Report  to  Stockholders  is herein
incorporated by reference.


Item 6.  Management's Discussion and Analysis of Financial
                             Condition and Results of Operations

    Pages 4 through 16 of the Company's  1996 Annual Report to  Stockholders  is
herein incorporated by reference.

<PAGE>

Item 7.  Financial Statements

    The  following  information  appearing  in the  Company's  Annual  Report to
Stockholders  for the year ended December 31, 1996, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.

      Annual Report Section

      Selected Consolidated Financial Information

      Management's Discussion and Analysis of Financial Condition
         and Results of Operation

      Independent Auditors' Report

      Consolidated Balance Sheets as of
         December 31, 1996 and 1995

      Consolidated Statements of Income for the Years
         Ended December 31, 1996, 1995 and 1994

      Consolidated Statements of Changes in Stockholders' Equity
         for the Years Ended December 31, 1996, 1995 and 1994

      Consolidated Statements of Cash Flows for the
         Years Ended December 31, 1996, 1995 and 1994

      Notes to Consolidated Financial Statements

         With the  exception of the  aforementioned  information,  the Company's
Annual  Report to  Stockholders  for the year ended  December 31,  1996,  is not
deemed filed as part of this Annual Report on Form 10-KSB.


Item 8.  Changes In and Disagreements With Accountants on
                             Accounting and Financial Disclosure

         There has been no  current  report  on Form 8-K filed  within 24 months
prior to the date of the most recent financial  statements reporting a change in
accountants and/or reporting disagreements on any matter of accounting principle
or financial  statement  disclosure  nor has there been a change of  accountants
within the past 24 months.


                                    PART III


Item 9.   Directors, Promoters and Control Persons; Compliance With
                               Section 16(a) of the Exchange Act

Directors

         Information  concerning directors of the Company is incorporated herein
by  reference  from the  Company's  definitive  Proxy  Statement  for the Annual
Meeting of  Stockholders  for the fiscal year ended  December 31, 1996 a copy of
which will be filed not later than 120 days after the close of the fiscal year.
<PAGE>
Executive Officers

         Information regarding the business experience of the executive officers
of the Company and the Bank  contained in Part I of this 10-KSB is  incorporated
herein by reference.

Item 10.  Executive Compensation

         Information concerning executive compensation is incorporated herein by
reference  from the  Company's  definitive  Proxy  Statement for the fiscal year
ended  December  31, 1996, a copy of which will be filed not later than 120 days
after the close of the fiscal year.

Item 11.  Security Ownership of Certain Beneficial Owners and Management

         Information  concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the Company's definitive
Proxy  Statement  for the fiscal year ended  December  31, 1996, a copy of which
will be filed not later than 120 days after the close of the fiscal year.

Item 12.  Certain Relationships and Related Transactions

         Information   concerning  certain  relationships  and  transactions  is
incorporated  herein by reference from the Company's  definitive Proxy Statement
for the Annual  Meeting of  Stockholders  for the fiscal year ended December 31,
1996,  a copy of which  will be filed not later than 120 days after the close of
the fiscal year.
<PAGE>
Item 13.  Exhibits and Reports on Form 8-K

         (a) Exhibits:
<TABLE>
<CAPTION>
                                                                                Reference to
                                                                                Prior Filing
                                                                                 or Exhibit
Regulation                                                                         Number
S-B Exhibit                                                                       Attached
  Number                           Document                                        Hereto
  ------                           --------                                        ------
<S>                 <C>                                                             <C>
     2              Plan of acquisition, reorganization
                     arrangement, liquidation or succession.....................    None
     3              Articles of Incorporation and Bylaws........................      *
     4              Instruments defining the rights of
                     security holders, including indentures:
                       Common Stock Certificate.................................      *
     9              Voting trust agreement......................................    None
    10              Material Contracts
    10.1               1996 Stock Option and Incentive Plan.....................    None
    10.2               1996 Management Recognition Plan.........................    None
    11              Statement re: computation of per
                     share earnings.............................................    None
    12              Statement re: computation of ratios.........................    None
    13              Annual Report to Security Holders...........................     13
    16              Letter on change in certifying
                     accountant.................................................    None
    18              Letter on change in accounting
                     principles.................................................    None
    21              Subsidiaries of Registrant..................................     21
    22              Published report regarding matters
                     submitted to vote of security holders......................    None
    23              Consent of Experts and Counsel..............................    None
    24              Power of Attorney...........................................    None
    27              Financial Data Schedule.....................................    None
    28              Information from reports furnished to
                     state insurance regulatory authorities.....................    None
    99              Additional exhibits.........................................    None
--------------------

        * Filed as exhibits to the Company's S-1 registration statement filed on
March 17, 1995, (File  No.33-90422)  pursuant to Section 5 of the Securities Act
of 1933. All of such previously filed documents are hereby  incorporated  herein
by reference in accordance with Item 601 of Regulation S-B.
</TABLE>

      (b)  Reports on Form 8-K:

           None
<PAGE>

                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                                      SFS BANCORP, INC.



Date:  March 31, 1997                         By:    /s/Joseph H. Giaquinto
                                                     ----------------------
                                                     Joseph H. Giaquinto (Duly
                                                     Authorized Representative)

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.


By:   /s/Joseph H. Giaquinto                   By:/s/John F. Assini
--------------------------                     ----------------------
      Joseph H. Giaquinto, Chairman of the        John F. Assini, M.D.
      Board, President and Chief Executive        Vice Chairman of the Board
      Officer (Principal Executive and
      Operating Officer)


Date: March 31, 1997                            Date: March 31, 1997




By:  /s/Richard A. Ammian                      By:/s/Gerald I. Klein
------------------------                        -----------------------
      Richard A. Ammian, Director                 Gerald I. Klein, Director



Date:  March 31, 1997                          Date:  March 31, 1997




By:  /s/Robert A. Schlansker                   By:/s/David J. Jurczynski
----------------------------                       ----------------------
     Robert A. Schlansker                         David J. Jurczynski
     Director                                     Vice President, Treasurer and
                                                  Chief Financial Officer
                                                  (Principal Financial and
                                                  Accounting Officer)

Date: March 31, 1997                           Date:  March 31, 1997