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, 1998

                                       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                             (I.R.S. Employer
of 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, 1998 were
$15,213,000.
<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 5, 1999 was $19.0  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, 1999, the Registrant had 1,208,472 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, 1998.

    Part III of Form 10-KSB - Portions of The Proxy Statement for Annual Meeting
of Stockholders to be held in 1999.

<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, 1998,  the Company had total assets of $178.2  million,
deposits of $150.6 million, and stockholders' equity of $23.6 million.

                                        1

<PAGE>
         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."

         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, 1998,  $135.6 million,  or 96.0%
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.  agency
obligations) and other permissible  investments.  At December 31, 1998, the Bank
had $9.8  million  of  mortgage-backed  securities,  representing  5.5% of total
assets,  and $18.8  million  of other  investment  securities  (including  $17.0
million of securities available-for-sale,  at fair value), representing 10.6% 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,  (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."


                                        2
<PAGE>
Market Area

         Schenectady Federal conducts business in Schenectady County through its
main office located at 251-263 State Street in  Schenectady,  New York and three
branch offices located in the Mayfair Shopping Center in Glenville, New York and
in the  Bellevue  and  Upper  Union  Street  areas  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 and Washington
Counties.

         In 1998, the population of Schenectady County was approximately 150,000
essentially  unchanged from population levels in 1985. The unemployment rate for
Schenectady County was 3.1% and 4.2% in December 1998 and 1997, respectively.

         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, Schenectady International,  Inc.
and Golub Corporation.

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,  origination  and retention of mortgage  loans and home equity
loans with  periodic  repricing.  The Bank also offers  consumer  loans and to a
lesser extent commercial real estate mortgage loans.

                                        3
<PAGE>
         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,
                                                     ------------------------------------------------------------------------------
                                                              1998                       1997                               1996
                                                     -----------------------    -----------------------     -----------------------
                                                     Amount       Percent        Amount      Percent         Amount       Percent
                                                     ------------ ----------    -----------   ---------     ----------   ----------
                                                                                 (Dollars in Thousands)
<S>                                                 <C>            <C>          <C>             <C>        <C>             <C>    
Real Estate Loans:
 One- to four-family ..........................     $116,033       82.12%       $105,077        78.07%     $ 91,161        76.53% 
  Multi-family ................................        1,363        0.97           1,981         1.47         1,568         1.32  
  Commercial ..................................        3,551        2.51           4,149         3.08         2,964         2.49  
 Home Equity ..................................       19,570       13.85          22,658        16.84        22,904        19.23  
                                                    --------      ------        --------      -------      --------       ------  
    Total real estate loans ...................      140,517       99.45         133,865        99.46       118,597        99.57  
                                                     --------     ------        --------      ------       --------       ------  
                                                                                                                                  
Other Loans:                                                                                                                      
 Consumer:                                                                                                                        
  Loans on savings accounts ...................          473         .34             573          .43           478          .40  
  Education ...................................            2          --               3           --             4           --  
  Personal ....................................           40         .03              33          .03            34          .03  
  Automobile ..................................          241         .17             110          .08            --           --  
  Home improvement ............................           --         --                2           --             3           --  
                                                    --------      ------        --------       ------      --------       ------  
    Total consumer loans ......................          756         .54             721          .54           519          .43  
Commercial business loans .....................           20         .01              --           --            4            --
                                                    --------      ------        --------       ------      --------       ------   
    Total other loans .........................          776         .55             721          .54           523          .43  
                                                    --------      ------       ----------      ------      --------       ------ 
    Total loans ...............................      141,293      100.00%        134,586       100.00%      119,120       100.00% 
                                                                  ======                       ======                     ====== 
Less:                                                                                                                             
 Deferred fees and discounts ..................          130                          22                         23   
 Allowance for losses .........................          953                         778                        642   
                                                 -----------                   ---------                   --------   
    Total loans receivable,  net .............   $   140,210                    $133,786                   $118,455   
                                                 ===========                   =========                   ========   
</TABLE>                                                                       
                                                                               
                                        4
<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,
                                                  ------------------------------------------------------------------------------ 
                                                           1998                       1997                         1996
                                                  ----------------------     ---------------------       ----------------------- 
                                                  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 .......................     $ 51,556        36.49%     $ 31,454        23.37%      $ 20,615         17.31%  
  Multi-family ..............................          323          .23           213          .16            242           .20   
  Commercial ................................        2,395         1.69         2,335         1.73          1,533          1.29   
   Home equity ..............................        4,176         2.96         4,656         3.46          4,334          3.64 
                                                  --------       ------      --------       ------       --------        ------   
     Total fixed-rate real estate loans .....       58,450        41.37        38,658        28.72         26,724         22.44   
 Consumer ...................................          756          .54           721          .54            515           .43   
 Commercial business ........................         --             --            --           --              4           -- 
                                                  --------       ------      --------       ------       --------        ------   
     Total fixed-rate loans .................       59,206        41.91        39,379        29.26         27,243         22.87   
                                                  --------       ------      --------       ------       --------        ------   
                                                                                                                                  
Adjustable-Rate Loans:                                                                                                             
 Real estate:                                                                                                                     
  One- to four-family .......................       64,477        45.63        73,623        54.70         70,546         59.22   
  Multi-family ..............................        1,040          .74         1,768         1.31          1,326          1.11   
  Commercial ................................        1,156          .82         1,814         1.35          1,431          1.20   
  Home equity ...............................       15,394        10.89        18,002        13.38         18,570         15.59  
                                                  --------       ------      --------       ------       --------        ------   
     Total adjustable-rate real estate loans        82,067        58.08        95,207        70.74         91,873         77.13   
 Consumer ...................................           --           --            --           --              4            --   
 Commercial business ........................           20          .01            --           --             --            --  
                                                  --------       ------      --------       ------       --------        ------   
     Total adjustable-rate loans ............       82,087        58.09        95,207        70.74         91,877         77.13
                                                  --------       ------      --------       ------       --------        ------   
     Total  loans ...........................      141,293       100.00%      134,586       100.00%       119,120        100.00%  
                                                                 ======                     ======                       =======  
Less:                                                                                                               
 Deferred fees and discounts ................          130                         22                          23        
 Allowance for loan losses ..................          953                        778                         642   
                                                  --------                  ---------                    --------
   
    Total loans receivable, net .............     $140,210                  $ 133,786                    $118,455        
                                                  ========                  =========                    ========     
</TABLE>                                                                       
                                        5

<PAGE>
         The following schedule illustrates the interest rate sensitivity of the
Bank's loan  portfolio  at December  31, 1998.  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,
1999 .............      $     34       7.53%     $     115      8.61%      $    228        9.18%     $    282       8.98%  
2000 .............            75       8.11             --        --          1,591        8.88           198       7.56   
2001 .............           270       7.93             66      9.50          2,164        8.67            84       7.49   
2002 to 2003 .....         1,419       7.53          1,581      9.48          3,260        8.73           192       7.94   
2004 to 2023 .....        42,376       7.51          3,152      9.62         12,327        8.18            --         --   
2024 and following        71,859       7.19             --        --             --          --            --         --   
                        --------                 ---------                 --------                   -------
                        $116,033                 $   4,914                 $ 19,570                   $   756              
                        ========                 =========                 ========                   =======              

<CAPTION>
                            Commercial                                    
                              Business                          Total             
                         ------------------------- -------------------------  
                                      Weighted                     Weighted          
                                       Average                      Average           
                         Amount          Rate       Amount            Rate             
                         ------------ ------------ ------------ ------------  
<S>                     <C>                      <C>                  <C>                                 
Due During Years      
  Ending December 31, 
1999  ...........       $   --             --    $       659          8.91%      
2000  ...........           20           8.75          1,884          8.71       
2001  ...........           --             --          2,584          8.58       
2002 to 2003 .....          --             --          6,452          8.62       
2004 to 2023 .....          --             --         57,855          7.77  
2024 and following          --             --         71,859          7.19  
                        ------                   -----------                                                     
                        $   20                   $   141,293                              
                        ======                   ===========                             
</TABLE>
                 The total  amount of loans due after  December  31, 1998 which
        have  predetermined  interest  rates is $59.2  million,  while the total
        amount of loans due after such date which have  floating  or  adjustable
        interest rates is $82.1 million.


                                       6
<PAGE>
         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, 1998,  based on the above, the Bank's  loans-to-one  borrower limit
was approximately $3.1 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,  1998  was two  loans to one  borrower  totaling
$760,000.  One loan in the amount of $532,000 was secured by a five building, 20
unit apartment complex located in Saratoga Springs, New York. The second loan in
the  amount  of  $228,000  was  secured  by a  commercial  property  located  in
Schenectady, New York. Both loans were performing in accordance with their terms
at December 31, 1998.

         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.

         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 $500 to $5,000.

         Generally,  the Bank requires title  insurance or updated  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.

                                        7
<PAGE>
         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, 1998,  $135.6
million,  or 96.0% of the Bank's loan  portfolio  consisted  of  mortgage  loans
(including home equity loans) on one- to four-family  residences.  Substantially
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, 1998, the Bank also had $4.0 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  terms  ranging
between 10 and 30 years.  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 Bankalso 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, 1998, one- to four-family  ARMs
totaled $64.5 million, or 45.6% 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.  However,  private
mortgage insurance is required on loans with  loan-to-value  ratios greater than
80% to reduce the Bank's  exposure.  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.

                                        8
<PAGE>
         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,  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, 1998, the Bank had $19.6 million of home equity loans and
an additional $9.7 million of additional  funds  committed,  but undrawn,  under
home equity lines of credit.

         Commercial  Real Estate and  Multi-Family  Lending.  The Bank  actively
originates  and  purchases  permanent  commercial  real estate and  multi-family
loans. At December 31, 1998, the Bank had $3.6 million in commercial real estate
loans, representing 2.5% of the Bank's total loan portfolio, and $1.4 million in
multi-family loans, or 1.0% 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%. Commercial real estate loans originated during 1998 possess maturity dates
between  five and ten  years.  Those  loans  maturing  in ten  years  have  been
originated to reprice in five years.

         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. On December
31, 1998,  the Bank had one commercial  real estate loan totaling  $185,000 that
was non-performing.  See "Asset Quality-Non-Performing  Assets." Since 1991, the
Bank has focused its primary 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, 1998,  consumer loans totaled
$756,000 or .5% 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.

                                        9
<PAGE>
         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
various federal and state laws,  including  bankruptcy and insolvency  laws, may
limit the amount  which can be recovered  on such loans.  During 1998,  the Bank
recovered  $20,000 on consumer  loans  previously  charged off.  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 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.

         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
1996 and 1997,  the  Bank's  volume of ARMs  exceeded  its  volume of fixed rate
loans. During 1998, the Bank's volume of fixed rate loans exceeded its volume of
ARMs.

 
         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 and ending 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,  1998,  the Bank  serviced  $2.4 million of mortgage
loans for others.  The Bank did not sell loans during 1996,  1997 and 1998.  The
bank may consider selling fixed rate loans in the future.

                                       10
<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,
                                         -------------------------------------------
                                           1998             1997             1996
                                         --------         --------         --------
                                                        (In Thousands)
<S>                                      <C>              <C>              <C>      <C>
LOANS:
Originations by type:
---------------------
  Adjustable rate:
   Real estate - one- to-four-family     $ 10,706(1)      $ 13,186(1)      $ 20,894 (1)
               - home equity .......        5,036            5,705            5,174
               - commercial ........          333              927               --
   Non-real estate - consumer ......          170               --               --
                                         --------         --------         --------
         Total adjustable-rate......       16,245           19,818           26,068

Fixed rate:
   Real estate - one- to-four-family       16,785(2)         9,930(2)         1,606(2)
               - home equity ......          1010              515              737
               - commercial .......           320            1,318              198
   Non-real estate - consumer ......          748              293               16
                                         --------         --------         --------
          Total fixed-rate .........       18,863           12,056            2,557
                                         --------         --------         --------
         Total loans originated.....       35,108           31,874           28,625

Purchases:
----------
   Real estate - one-to-four-family         2,365            3,550            6,973
                                         --------         --------         --------
Sales and Repayments:
---------------------
   Real estate - one- to-four-family         --               --               --
   Non-real estate - consumer ......         --               --               --
                                         --------         --------         --------
         Total sales ...............         --               --               --
   Principal repayments ............       30,766           19,958           17,998
                                         --------         --------         --------
         Total reductions ..........       30,766           19,958           17,998
                                         --------         --------         --------
          Net increase .............     $  6,707         $ 15,466         $ 17,600
                                         ========         ========         ========

MORTGAGE-BACKED SECURITIES:
---------------------------
Purchases:
  Mortgage-backed securities .......     $     --         $     --         $     --
  Principal repayments .............        7,157            3,468            3,984
                                         --------         --------         --------
     Net increase (decrease) .......     $ (7,157)        $ (3,468)        $ (3,984)
                                         ========         ========         ========
 </TABLE>
<PAGE>
         (1) Includes $10,124,  $12,672 and $19,573 of loans originated  through
brokers in 1998, 1997 and 1996, respectively.

         (2)  Includes  $12,007,  $8,511  and $162 of loans  originated  through
brokers in 1998, 1997 and 1996, respectively.

                                       11
<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,
by deed in lieu of foreclosure or by  in-substance  foreclosure is classified as
real estate owned until it is sold.  When property is acquired or expected to be
acquired  by  foreclosure,  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, 1998.
<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
                              ------    ------    --------    ------   ------    -------    ------     ------    --------
                                                                (Dollars in Thousands)
<S>                            <C>     <C>         <C>       <C>      <C>         <C>        <C>     <C>           <C>  
  Real Estate:
    One- to four-family          9     $  745        .64%      10     $  440         .38%      19     $1,185        1.02%
                                                                                                                     .38
    Multi-family ......         --         --         --       --         --          --       --         --

    Commercial ........         --         --         --        1        185        5.21        1        185        5.21

    Home equity .......         --         --         --        6        235        1.20        6        235        1.20


  Consumer ............         --         --         --       --         --          --       --         --          --

  Commercial business .         --         --         --       --         --          --       --         --          --
                                                     

                               ---     ------       ----      ---     ------        ----      ---     ------        ----
  Total ...............          9     $  745        .53%      17     $  860         .61%      26     $1,566        1.11%
                               ===     ======       ====      ===     ======        ====      ===     ======        ====
</TABLE>

                                       12
<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, 1998, the Bank had classified a total of $1.1 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   .............          $632              $390                 $109              $1,131
         Doubtful ..................           ---               ---                  ---                 ---
         Loss ......................           ---               ---                  ---                 ---
                                              ----              ----                 ----              ------
             Total .................          $632              $390                 $109              $1,131
                                              ====              ====                 ====              ====== 
</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.

                                       13
<PAGE>
         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.
<TABLE>
<CAPTION>
                                                                    December 31,
                                                            ----------------------------- 
                                                            1998         1997        1996
                                                            ----         ----       ----- 
                                                                (Dollars in Thousands)
<S>                                                         <C>         <C>         <C>   
Non-accruing loans:
  One- to four-family ...................................   $  431      $  472      $   25
  Home equity ...........................................      109         165          18
   Multi-family .........................................     --          --          --
  Commercial real estate ................................      185         691         756
   Consumer .............................................     --          --             2
   Commercial business ..................................     --          --          --
                                                            ------      ------      ------
Total ...................................................      725       1,328         801
                                                            ------      ------      ------
Accruing loans delinquent 90 days or more:
  One- to four-family ...................................      135          19          32
  Home equity ...........................................     --          --          --
  Multi-family ..........................................     --          --          --
  Commercial real estate ................................     --          --          --
  Consumer ..............................................     --          --          --
  Commercial business ...................................     --          --          --
                                                            ------      ------      ------
Total ...................................................      135          19          32
                                                            ------      ------      ------
Restructured loans:
  One- to four-family ...................................     --          --          --
   Home equity ..........................................     --          --          --
   Multi-family .........................................     --          --          --
   Commercial real estate ...............................     --          --          --
   Consumer .............................................     --          --          --
   Commercial business ..................................     --          --          --
                                                            ------      ------      ------
Total ...................................................     --          --          --
                                                            ------      ------      ------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                                                         <C>         <C>         <C>   
Foreclosed assets:
  One- to four-family ...................................       67        --            94
  Home equity ...........................................     --            27        --
  Multi-family ..........................................     --          --          --
  Commercial real estate ................................      204          84          84
  Consumer ..............................................     --          --          --
  Commercial business ...................................     --          --          --
                                                            ------      ------      ------
   Total ................................................      271         111         178
                                                            ------      ------      ------

Total non-performing assets .............................   $1,131      $1,458      $1,011
                                                            ======      ======      ======
Total as a percentage of total assets ...................      .64%        .84%        .61%
                                                            ======      ======      ======
Total non-performing loans ..............................   $  860      $1,347      $  833
                                                            ======      ======      ======
Total as a percentage of total loans receivable, net ....      .61%       1.01%        .70%
                                                            ======      ======      ======
</TABLE>
                                       14
<PAGE>
    For the year ended December 31, 1998 gross interest  income which would have
been recorded had the  non-accruing  loans been current in accordance with their
original  terms  amounted to $36,000.  The amount that was  included in interest
income on such loans was approximately $51,000.

    Other Loans of Concern.  In addition to the non-performing  assets set forth
in the table above,  as of December 31, 1998 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.

                                       15
<PAGE>
    Management has considered the Bank's  non-performing and "of concern" assets
in establishing its allowance for loan losses.

         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,
                                                               ---------------------------- 
                                                               1998         1997       1996
                                                               -----       -----       ---- 
                                                                  (Dollars in Thousands)
<S>                                                            <C>         <C>         <C>  
Balance at beginning of period ...........................     $ 778       $ 642       $ 572
 Charge-offs:
  One- to four-family ....................................        21          16          44
   Home equity ...........................................        --           7          41
   Multi-family ..........................................        24          --          --
   Commercial real estate ................................        --          --          --
   Consumer ..............................................        --           3           2
   Commercial business ...................................        --          --          --
                                                              ------       -----       -----
       Total .............................................        45          26          87
                                                              ------       -----       -----

Recoveries:
   One- to four-family ...................................        --          --          --
   Home equity ...........................................        --          --          --   
   Multi-family ..........................................        --          --          --
   Commercial real estate ................................        80          --          --
   Consumer ..............................................        20          42          37
   Commercial business ...................................        --          --          --
                                                               -----       -----       -----
        Total ............................................       100          42          37
                                                               -----       -----       -----

Net charge-offs (recoveries) .............................       (55)        (16)         50
 Additions charged to operations .........................       120         120         120
                                                               =====       =====       =====
Balance at end of period .................................     $ 953       $ 778       $ 642
                                                               ======      =====       =====
Ratio of net charge-offs (recoveries) to average
loans  outstanding .......................................      (.04)%     (.01)%        .04%
                                                               =====       =====       =====
Ratio of net charge-offs
(recoveries)  to non-performing loans ....................     (6.40)%    (1.19)%       6.00%
                                                               ======     ======       ===== 

Allowance for loan losses to non-performing loans ........     110.76%     57.76%      77.07%
                                                               ======     ======      ======
Allowance for loan losses to total loans at end of period        .67%       .58%        .54%
                                                               ======     ======      ======

</TABLE>
                                       16
<PAGE>
         The  distribution of the Bank's  allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
                                                                  December 31,
                                  -----------------------------------------------------------------------------
                                          1998                       1997                        1996
                                  ---------------------  --------------------------  --------------------------
                                               Percent                     Percent                     Percent
                                               of Loans                    of Loans                    of Loans
                                               in Each                     in Each                     in Each
                                              Category                    Category                    Category
                                              of Total                    of Total                    of Total
                                  Amount       Loans          Amount        Loans        Amount         Loans
                                  ------       -----          ------        -----        ------         -----
                                                                  (In Thousands)
<S>                                <C>          <C>            <C>          <C>            <C>          <C>           
One-to-four  family ..             $274         82.12          $239         78.07          $141         76.53         
                                                                                                                      
Multi-family .........               14           .97            20          1.47            16          1.32         
                                                                                                                      
Commercial real estate               61          2.51           143          3.08           143          2.49         
                                                                                                                      
Home equity ..........               84         13.85            68         16.84            60         19.23         
                                                                                                                      
Consumer .............                8           .54             7           .54             5           .43         
                                                                                                                      
Commercial business ..               --           .01            --            --            --            --              
                                                                                                                      
Unallocated ..........              512            --           301            --           277            --
                                   ----        ------          ----        ------          ----        ------          
          Total ......             $953        100.00%         $778        100.00%         $642        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,  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.  No portion of the allowance
is  restricted  to any loan or group  of  loans,  and the  entire  allowance  is
available to absorb  realized  losses.  The amount and timing of realized losses
and future allowance allocations may vary from current estimates.

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.

                                       17
<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  investment  securities,  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 varying
terms to maturity.  At December 31,  1998,  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.  Other investments include primarily high grade medium-term
(up to five years) U.S. government  securities and agency  obligations.  For the
year ended  December 31, 1998,  the Bank had an average  outstanding  balance of
$13.7 million in  investment  securities  (including  $9.0 million of securities
available for sale) with an average yield of 6.53%.

                                       18
<PAGE>
         The following table sets forth the composition of the Bank's securities
portfolio at the dates indicated.
<TABLE>
<CAPTION>
                                                                                         December 31,
                                                      ------------------------------------------------------------------------------
                                                                 1998                       1997                         1996
                                                      ---------------------------   --------------------------   -------------------
                                                         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 (at fair value):
  Federal agency obligations .....................     $12,874         57.88%     $   4,067      $ 22.96%            --          --%
   Corporate bonds ...............................       4,080         18.34             --           --             --          --
   Mutual funds ..................................          --            --             --           --          1,990        9.68
Investment securities (at amortized cost):
  U.S. government obligations ....................          --            --          1,992        11.24          3,980       19.37
  Federal agency obligations......................       1,086          4.88          9,945        56.13          9,481       46.13
  Time deposits at other bank ....................         699          3.14             --           --             --          --
  Municipal bonds ................................          67           .30             76          .43             84         .41
  Corporate bonds ................................          --            --             --           --          2,201       10.71
  Mutual funds ...................................          --            --             --           --             --          --
                                                       -------        ------      ----------       ------     ----------     ------ 
Subtotal .........................................      18,806         84.54         16,080        90.76         17,736       86.30
FHLB stock .......................................       1,338          6.02          1,338         7.55          1,215        5.91 
                                                       -------        ------      ----------       ------     ----------     ------ 
                                                              
  Total investment securities and FHLB stock .....     $20,144         90.56%     $   17,418        98.31%    $   18,951      92.21%
                                                       =======        ======      ==========       ======     ==========     ====== 
Average remaining life of securities excluding
 FHLB stock and mutual funds .....................     5.0 years                  5.1 years                   3.6 years

Other interest-earning assets:
  Federal funds sold .............................       2,100          9.44            300          1.69          1,600       7.79
                                                       -------        ------      ----------       ------     ----------     ------ 
      Total ......................................     $22,244        100.00%     $   17,718       100.00%    $   20,551     100.00%
                                                       =======        ======      ==========       ======     ==========     ====== 
                                                                   

Average remaining life or term to repricing of
 securities and other interest-earning assets,
 excluding FHLB stock and mutual funds ...........     4.5 years                  5.0 years                   3.3 years
</TABLE>

                                       19
<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, 1998
                                          ------------------------------------------------------------------------------------------
                                           Less Than      1 to 5       5 to 10        Over        No Stated
                                            1 Year        Years         Years       10 Years      Maturity       Total    Securities
                                           ---------      ------       -------      --------      --------       -----    ----------
                                             Book         Book          Book          Book         Book          Book        Market 
                                            Value         Value         Value         Value        Value         Value       Value  
                                            -----         -----         -----         -----        -----         -----       -----  
                                                                         (Dollars in Thousands)    
<S>                                         <C>          <C>          <C>              <C>           <C>        <C>         <C>     
Securities available for sale:                                                                                                      
  Federal agency obligations ..........     $  --        $10,875      $ 1,999          $  --         $  --      $12,874     $ 12,874
  Corporate bonds .....................        --          3,040        1,040             --            --        4,080        4,080
                                            -----        -------      -------          -----         -----       -------    --------
    Total securities available for sale        --         13,915        3,039             --            --       16,954       16,954
                                            -----       -------      -------          -----         -----       -------    --------
Investment securities:                                                                                                              
  U.S. government securities ..........        --             --           --             --            --           --          -- 
  Federal agency obligations ..........        --             38        1,048             --            --        1,086       1,086 
   Time deposits at other banks .......        99            600           --             --            --          699         699 
   Municipal bonds ....................        --             --           67             --            --           67          67 
   Corporate bonds ....................        --             --           --             --            --           --          -- 
                                            -----        -------      -------          -----         -----      -------    -------- 
   Total investment securities ........        99            638        1,115             --            --        1,852       1,852 
                                            -----        -------      -------          -----         -----      -------    -------- 
                                                                                                                                    
Total securities ......................     $  99        $14,553      $ 4,154          $             $          $18,806    $ 18,806 
                                            =====        =======      =======          =====         =====      =======    ======== 
                                                                                                                                    
Weighted average yield ................      5.35%          6.00%        6.65%            --            ---%       6.14%            
                                                                                                                                    
</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, 1998,  Schenectady
Federal had $9.8 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.


                                       20
<PAGE>
                     The following table sets forth the  contractual  maturities
of the Bank's mortgage-backed securities at December 31, 1998.
<TABLE>
<CAPTION>
                                                                  December 31, 1998
                                   -----------------------------------------------------------------------------------
                                   Less Than     1 to 5    5 to 10      10 to 20      Over       Total Mortgage-Backed
                                     1 Year       Years      Years       Years      20 Years            Securities
                                   ---------     ------    -------      --------    --------     --------------------- 
                                      Book        Book       Book         Book        Book       Book        Market
                                      Value       Value      Value        Value       Value      Value       Value
                                      -----       -----      -----        -----       -----      -----       -----
                                                              (Dollars in Thousands)
<S>                                  <C>         <C>         <C>         <C>         <C>         <C>         <C>      
Mortgage Backed Securities
  Held for
Investment:
Government National Mortgage
   Association .................     $   --      $   59      $  542      $  927      $   --      $1,528      $1,623   
Federal National Mortgage
   Association .................         --       2,056          --          94         514       2,664       2,661
Federal Home Loan Mortgage
   Corporation .................        962       3,329         103         190       1,033       5,617      5,622
                                     ------      ------      ------      ------      ------      ------     ------

Total mortgage-backed securities     $  962      $5,444      $  645      $1,211      $1,547      $9,809     $9,906
                                     ======      ======      ======      ======      ======      ======     ======

Weighted average yield .........       6.50%       5.78%       8.29%       9.02%       6.60%      6.55%
                                     ======      ======      ======      ======      ======     ======
</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.

                                       21
<PAGE>
         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
affected by market  conditions.  During 1998, the Bank  experienced a decline in
the  balance  of  certificate  accounts  (much  of  which  is  believed  to have
transferred into non-certificate  accounts) as a result of local competition 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,
                             ------------------------------------------------- 
                               1998                  1997                1996
                             --------             --------           --------- 
                                          (Dollars in Thousands)
<S>                        <C>                   <C>                <C>      
Opening Balance            $  150,469            $ 140,616           $ 139,671
Deposits                      266,140              249,343             237,180
Withdrawals                  (272,926)            (246,113)           (242,412)
Interest credited               6,895                6,623               6,177
                           ----------            ---------           --------- 

Ending balance             $  150,578            $ 150,469           $ 140,616
                           ==========            =========           ========= 

Net increase               $      109            $   9,853           $     945
                           ==========            =========           ========== 

Percent increase                  .07%                7.01%                .68%
                           ==========           ==========           ========= 
</TABLE>
                                       22
<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,
                                           ----------------------------------------------------------------------------------
                                                   1998                           1997                           1996
                                           ----------------------      -------------------------       ---------------------- 
                                                         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     $  2,103          1.39%      $  2,265             1.51%      $  1,392          .99% 
Savings Accounts 2.50% ..............       36,394         24.17         36,681            24.38         37,152        26.42  
NOW Accounts 1.25% ..................       10,867          7.22          9,163             6.09          9,104         6.47  
Money Market Accounts 2.60%-4.30% ...        8,263          5.49          7,619             5.06          6,074         4.32  
                                          --------        ------       --------          -------       --------       ------  
Total Non-Certificate Accounts ......       57,627         38.27         55,728            37.04         53,722        38.20  
                                          --------        ------       --------          -------       --------       ------  
                                                                                                                              
Certificates of Deposit:                                                                                                      
                                                                                                                              
3.00 -  3.99% .......................        1,047           .70             --              --             --            --  
4.00 -  4.99% .......................       20,367         13.53            801             .53         23,244         16.53  
5.00 -  5.99% .......................       66,818         44.37         84,451           56.12         50,815         36.14  
6.00 -  6.99% .......................        4,719          3.13          9,489            6.31         12,835          9.13  
                                          --------       -------       --------          ------        -------       -------  
Total Certificates of  Deposit ......       92,951         61.73         94,741           62.96         86,894         61.80  
                                          --------       -------       --------          ------       --------       -------  
                                                                                                                              
Total Deposits ......................     $150,578        100.00%      $150,469          100.00%      $140,616       100.00%  
                                          ========        ======       ========          ======       ========       ======   
</TABLE>                                                          
------------------------
(1)  Reflects  rates paid on  transaction  and savings  deposits at December 31,
     1998. 23

                                       23
<PAGE>
         The following table shows rate and maturity  information for the Bank's
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
                                                    3.00-          5.00-                       Percent
                                                    4.99%          6.99%         Total         of Total
                                                 ---------      ---------      ---------      ----------
                                                                     (In Thousands)
<S>                                                 <C>           <C>            <C>             <C>   
      Certificates of deposit
      maturing in quarter ending:
      ---------------------------

       March 31, 1999    . . . . . . . . . . .      $1,509        $17,187        $18,696         20.11%
       June 30, 1999   . . . . . . . . . . . .       6,668         15,561         22,229         23.91
       September 30, 1999    . . . . . . . . .         244         14,735         14,979         16.12
       December 31, 1999     . . . . . . . . .       7,073          5,120         12,194         13.12
       March 31, 2000    . . . . . . . . . . .         756          4,862          5,618          6.04
       June 30, 2000   . . . . . . . . . . . .       3,807          1,750          5,556          5.98
       September 30, 2000    . . . . . . . . .         493          1,650          2,143          2.31
       December 31, 2000     . . . . . . . . .         154          1,658          1,812          1.95
       March 31, 2001    . . . . . . . . . . .         ---          1,196          1,196          1.29
       June 30, 2001   . . . . . . . . . . . .         256            658            914          0.98
       September 30, 2001    . . . . . . . . .         ---            634            634          0.68
       December 31, 2001     . . . . . . . . .         290            569            859          0.92
       Thereafter  . . . . . . . . . . . . . .         164          5,957          6,121          6.59
                                                  --------      ---------        ------         ------ 

         Total  . . . . . . . . . . . . . . .     $ 21,414      $  71,537        $92,951        100.00%
                                                   =======      =========        =======        ====== 

         Percent of total . . . . . . . . . .       23.04%          79.96%
                                                  ========      =========
</TABLE>
         The  following  table  indicates  the amount of the Bank's  "jumbo" and
other certificates of deposit as of December 31, 1998.
<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       $16,483      $20,390       $23,903       $23,292       $84,068
Certificates of deposit of $100,000 or more        2,213        1,839         3,270         1,561         8,883    
                                                 -------      -------       -------       -------       ------- 

Total certificates of deposit                    $18,696      $22,229       $27,173       $24,853       $92,951
                                                 =======      =======       =======       =======       ======= 
</TABLE>
         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,


                                       24
<PAGE>
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,  1998,  the Bank had  $700,000 of 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 $53.4 million
for liquidity purposes.

         During the fiscal years ended  December 31,  1998,  1997 and 1996,  the
Bank  had  average  FHLB  advances  or  other  borrowings  outstanding  totaling
approximately $139,000, $16,000 and $1,000, respectively.

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,  1998,  the Bank had a total  of 49  full-time  and 8
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, 1998
Schenectady  Federal's investment in its service corporation totaled $27,000. 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.


                                       25
<PAGE>
         At December 31, 1998,  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, 1998,  SSLA sold mutual funds totaling  $892,000 and
annuities totaling $1.7 million. No assurance can be made that a material amount
of mutual fund  and/or  annuity  sales will occur in the future.  For the fiscal
year ended  December  31, 1998,  SSLA had net income of $19,000.  For the fiscal
year ended December 31, 1997, SSLA had a net loss of $9,000. For the fiscal year
ending December 31, 1996, SSLA had net income of $8,000.


                                   REGULATION

General

         Schenectady  Federal is currently a federally  chartered  savings bank,
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 the
subsidiary  savings  bank.  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 Bank

         The OTS has extensive  authority  over the operations of savings banks.
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 May
1998. 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 banks are subject
to a semi-annual assessment, based upon the savings bank's total assets, to fund
the operations of the OTS.  Schenectady  Federal's OTS assessment for the fiscal
year ended December 31, 1998 was $52,000.

         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.


                                       26
<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  savings banks in loans  secured by  non-residential  real
property may not exceed 400% of total capital,  except with approval of the OTS.
Federal  savings  banks 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, 1998,  Schenectady  Federal's
lending limit under this restriction was $3.1 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  institutions,  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 0% 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



                                       27
<PAGE>
("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.

         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.

         Prior to the enactment of legislation, a portion of the SAIF assessment
imposed  on  savings  institutions  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  legislation  also  now
requires  assessments  to be made on  BIF-assessable  deposits for this purpose,
effective  January  1,  1997,  that  assessment  was  limited to 20% of the rate
imposed on SAIF  assessable  deposits  until the earlier of December 31, 1999 or
when no  savings  institution  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.

Regulatory Capital Requirements

         Federally  insured  savings  banks,  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 institutions.  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 institutions 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 retained 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, 1998,  Schenectady  Federal had no intangible
assets which were required to be deducted from tangible capital.


                                       28
<PAGE>
         The OTS regulations establish special  capitalization  requirements for
savings institutions 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 institution'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, 1998, Schenectady Federal had tangible capital of $20.5
million,  or 11.50% of  adjusted  total  assets,  which is  approximately  $17.8
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
institution 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,  1998,  Schenectady  Federal  had no
intangibles which were subject to these tests.

         At December 31,  1998,  Schenectady  Federal had core capital  equal to
$20.5 million, or 11.50% of adjusted total assets,  which is $15.2 million above
the minimum leverage ratio requirement of 3.0% as in effect on that date.

         The OTS risk-based  requirement  requires savings  institutions 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
OTS is  also  authorized  to  require  a  savings  institution  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, 1998,  Schenectady
Federal had  $953,000  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, 1998.


                                       29
<PAGE>
         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
institution 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  institution,  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  institutions  may  appeal an  interest  rate  risk  deduction
determination.  It is  uncertain  when this  evaluation  may be  completed.  Any
savings  institution  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, 1998,  Schenectady  Federal had total  capital of $21.4
million  (including  $20.5  million in core capital and  $953,000 in  qualifying
supplementary  capital)  and  risk-weighted  assets of $94.7  million;  or total
capital of 22.6% of  risk-weighted  assets.  This amount was $13.9 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 institutions 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  institution  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 institutions.

         As a condition to the  approval of the capital  restoration  plan,  any
company  controlling  an  undercapitalized  institution  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  institution  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



                                       30
<PAGE>
restrictions  which may cover all aspects of its operations and include a forced
merger  or  acquisition  of  the   institution.   An  institution  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 institutions. In addition, the OTS
must appoint a receiver (or conservator  with the concurrence of the FDIC) for a
savings  institution,  with certain limited exceptions,  within 90 days after it
becomes critically  undercapitalized.  Any undercapitalized  institution 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 institution 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
institutions  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 institution  from declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  institution  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 banks, 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  institution'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 institution 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.

         The OTS has proposed  regulations that would revise the current capital
distribution  restrictions.  Under the proposal a savings institution 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)



                                       31
<PAGE>
following the proposed distribution.  Savings banks 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
institution  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  institutions  proposing to make any capital  distribution need
only  submit  written  notice  to the OTS 30 days  prior  to such  distribution.
Savings  institutions  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  banks,  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
institutions. At the present time, the minimum liquid asset ratio is 4%. For the
year ended December 31, 1998,  Schenectady  Federal was in compliance  with this
requirement, with an overall average daily liquid asset ratio of 20.9%.

Accounting

         An  OTS  policy  statement   applicable  to  all  savings  institutions
clarifies  and  re-emphasizes  that  the  investment  activities  of  a  savings
institutions  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.

         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.

                                       32
<PAGE>
Qualified Thrift Lender Test

         All savings banks,  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 institution 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, 1998,  Schenectady Federal met the test and has always met the test
since its effectiveness.

         Any savings institution 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  institution  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  institution  has not yet  requalified  or
converted to a national bank, its new  investments and activities are limited to
those permissible for both a savings  institution and a national bank, and it is
limited to national bank branching  rights in its home state.  In addition,  the
institution is immediately  ineligible to receive any new FHLB borrowings and is
subject to national  bank limits for payment of dividends.  If such  institution
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
institution  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 September 1997 and received a rating of satisfactory.

                                       33
<PAGE>
Transactions with Affiliates

         Generally,   transactions   between  a  savings   institutions  or  its
subsidiaries  and its affiliates are required to be on terms as favorable to the
institution as transactions with non-affiliates.  In addition,  certain of these
transactions,  such as loans to an affiliate,  are restricted to a percentage of
the institution'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  institution  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
institutions 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 institutions.

         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  institution 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  institution.  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 institution.


                                       34
<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, 1998,  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  institutions are authorized to borrow from the Federal Reserve
Bank  "discount   window,"  but  Federal  Reserve  Board   regulations   require
institutions 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  institutions.  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, 1998,  Schenectady  Federal had
$1.3 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 7.1% and
7.25% in 1998. For the year ended December 31, 1998,  dividends paid by the FHLB
of New York to Schenectady  Federal totaled $97,000,  which constitute a $10,000
increase from the amount of dividends received in 1997.

         Under  federal  law the FHLBs are  required  to  provide  funds for the
resolution  of  troubled  savings  institutions  and to  contribute  to low- and
moderately priced housing programs through direct loans or interest subsidies on



                                       36
<PAGE>
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  institutions  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 institution over a period of years.
       
         In August 1996, federal legislation was enacted that changed the manner
in which the bad debt deduction 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 an alternative  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
institutions  such as the Bank, were 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, 1998,  the Bank's  Excess for tax
purposes totaled approximately $4.6 million.

         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.


                                       37
<PAGE>
         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.  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.





                                       37
<PAGE>
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            59       Chairman of the Board, President and Chief Executive Officer

David J. Jurczynski            39       Senior Vice President, Treasurer and Chief Financial Officer

Richard D. Ammian              51       Senior Vice President and Corporate Secretary
</TABLE>

(1)  As of December 31, 1998



Executive Officers of the Company

     Joseph H.  Giaquinto.  Mr.  Giaquinto,  age 59, 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 51, 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.  Mr.  Ammian serves as a director of the Bank and the Holding
Company.

     David J.  Jurczynski.  Mr.  Jurczynski,  age 39, is Senior 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.

                                       38
<PAGE>
Item 2.  Properties
         ----------

    The following  table sets forth  information  concerning the main office and
each branch office of the Bank at December 31, 1998.  At December 31, 1998,  the
Bank's premises had an aggregate net book value of approximately $1.6 million.
<TABLE>
<CAPTION>

                                       Year                   Owned or               Net Book Value
    Location                         Acquired                  Leased               December 31, 1998
    --------                         --------                  ------               -----------------
                                                                                      (In thousands)
<S>                                    <C>                      <C>                          <C>    
Main Office:
251-263 State Street                   1959                     Owned                        $685
Schenectady, New York

Full Service Branches:
262 Saratoga Road                      1981                     Leased                       $ 14
Scotia, New York                                                (expires 2006)

2526-2528 Broadway                     1977                      Owned                       $352
Schenectady, New York

1624 Union Street                      1997                      Owned                       $542
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,  1998  was
approximately $179,000.

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,
1998.


                                       39
<PAGE>
                                     PART II


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

    Page 56 of the  Company's  1998  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 19 of the Company's  1998 Annual Report to  Stockholders  is
herein incorporated by reference.


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

    The  following  information  appearing  in the  Company's  Annual  Report to
Stockholders  for the year ended December 31, 1998, is incorporated by reference
in this Annual Report on Form 10-KSB as Exhibit 13.
                                                                      Pages in
Annual Report Section                                              Annual Report
--------------------------------------------------------------------------------
Selected Consolidated Financial Information....................         2 - 3

Management's Discussion and Analysis of Financial Condition
   and Results of Operation....................................        4 - 19

Independent Auditors' Report...................................            20

Consolidated Balance Sheets as of
   December 31, 1998 and 1997..................................            21

Consolidated Statements of Income for the Years
   Ended December 31, 1998, 1997 and 1996......................            22

Consolidated Statements of Changes in Stockholders' Equity
   for the Years Ended December 31, 1998, 1997 and 1996........            23

Consolidated Statements of Cash Flows for the
   Years Ended December 31, 1998, 1997 and 1996................       24 - 25

Notes to Consolidated Financial Statements ....................       26 - 55



                                       40
<PAGE>


         With the  exception of the  aforementioned  information,  the Company's
Annual  Report to  Stockholders  for the year ended  December 31,  1998,  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
              -----------------------------------


         None.


                                       41
<PAGE>
                                    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, 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.

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, 1998, 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, 1998, 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,
1998,  a copy of which  will be filed not later than 120 days after the close of
the fiscal year.


                                       42
<PAGE>
      Item 13.  Exhibits and Reports on Form 8-K

           (a) Exhibits:
                                                                    Reference to
                                                                    Prior Filing
                                                                     or Exhibit
  Regulation                                                          Number
 S-B Exhibit                                                          Attached
   Number                      Document                                Hereto
   ------                      --------                                ------

      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    . . . . . . . .    *
   10.2        1996 Management Recognition Plan       . . . . . . . .     *
   10.3        Employment Agreement with Joseph H. Giaquinto      . .    **
   10.4        Employment Agreement with Richard D. Ammian        . .    **
   10.5        Employment Agreement with David J. Jurczynski      . .    **
   10.6        Severance Agreement with Michael J. Krywinski      . .    **
   10.7        Severance Agreement with William Pezzula     . . . . .    **
   10.8        Change of Control Benefit Plan   . . . . . . . . . . .    **
   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     . . . . . .  . . . . .    23
   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.

     ** Filed as  exhibits  to the  Company's  Annual  Report on 10-KSB  for the
fiscal year ended December 31, 1997 under the  Securities  Exchange Act of 1934,
filed with the SEC on March 31, 1998,  and  incorporated  herein by reference in
accordance with Item 601 of Regulation S-B.

                                       43
<PAGE>
(b)  Reports on Form 8-K:

         On  October  29,  1998,  Form  8-K was  filed  in  connection  with the
announced  execution of a termination  agreement  between SFS Bancorp,  Inc. and
Cohoes Savings Bank. On October 23, 1998,  SFS Bancorp,  Inc. and Cohoes Savings
Bank jointly  announced the execution of a Termination  Agreement  dated October
23,  1998  (the  "Termination  Agreement"),   which  terminated  the  definitive
agreement  dated as of July 31,  1998 by and between the Company and Cohoes (the
"Merger Agreement"). Under the terms of the Merger Agreement, the Company was to
have merged into a  newly-formed  holding  company of Cohoes to be  organized in
connection  with Cohoes'  conversion from a mutual to a stock  institution  (the
"Merger").  The Merger was terminated  after Cohoes  determined  that due to the
recent  significant  decline  in the  market  values  of  publicly  held  thrift
institutions,  including institutions undertaking  mutual-to-stock  conversions,
and  regulatory  concerns  regarding the amount of stock that SFS Bancorp,  Inc.
shareholders would receive in the Merger, that the Merger was no longer feasible
and could adversely  affect the Cohoes  conversion.  Pursuant to the Termination
Agreement,  Cohoes has paid the  Company a  termination  fee of $2  million.  No
financial statements were required to be filed with the Form 8-K.

                                       44


<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, 1999                        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, M.D.
      -----------------------                        ------------------------
      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, 1999                        Date:   March 31, 1999
        --------------                                -------------- 



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

Date:   March 31, 1999                        Date:   March 31, 1999
        --------------                                -------------- 



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

Date:   March 31, 1999                        Date:   March 31, 1999
        --------------                                --------------