1996 ANNUAL REPORT















                                 [GRAPHIC-LOGO]










                                SFS BANCORP, INC.
                              Schenectady, New York










<PAGE>





                               TABLE OF CONTENTS








            President's Message

            Selected Consolidated Financial Information

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

            Independent Auditors' Report

            Consolidated Financial Statements

            Corporate Information
<PAGE>
                               PRESIDENT'S MESSAGE


President's Message to Our Stockholders:

     On behalf of the Board of Directors, Officers and Employees of SFS Bancorp,
Inc.  (the  "Company")  and its wholly  owned  subsidiary,  Schenectady  Federal
Savings Bank (the "Bank"),  we are pleased to submit our second Annual Report as
a public company.

     We are proud to report that the annualized equivalent total return (defined
as market  appreciation  plus dividends) on your investment in our Company since
we converted to a public  entity in 1995 has been  approximately  18.6%.  During
1996, the Company  deployed  several  strategies  which we feel will continue to
enhance  shareholder value. First, the Company repurchased 269,750 shares of our
stock,  or 18.0% of the shares  originally  issued.  These treasury  shares were
purchased on the open market at an average price of $12.67 per share or 74.3% of
the  December  31,  1996,  book value.  Second,  the Company  declared its first
dividend in July 1996 of $0.06 per share.  For the year,  the  Company  declared
dividends  of  $0.12  per  share.  It is our  plan  to  continue  rewarding  our
shareholders with dividends.  Finally, the strategic direction of the Bank is to
expand our retail  franchise.  I am pleased to announce that our expansion  will
begin March 1, 1997 with the opening of a new branch location on Union Street in
Schenectady.  We  also  have  begun  to  implement  a  "sales-oriented"  culture
throughout  the  organization  to  add  valuable  customer  relationship.   This
expansion is considered vital in our efforts to capture market share and provide
growth opportunities to the Company.

     As a result of the  repurchase  of our shares,  total assets of the Company
declined slightly for the year with a noticeable change in its composition.  The
Bank was extremely successful in growing the loan portfolio due in great part to
our ability to offer competitive rates and quality service.  We are committed to
the origination of residential  mortgage loans.  These loans will be held in our
portfolio,  servicing retained,  thereby ensuring that our customers receive the
high service  levels they deserve.  To that end, we originated  $29.8 million of
one-to-four family residential mortgages in 1996. This represents an increase of
81.3% in production over the previous year.

     The Company  reported net earnings of $830,000 or $0.67 per share for 1996.
This  decrease  from 1995  earnings  of  $855,000  included a  one-time  special
assessment of $930,000 paid to recapitalize  the Savings  Association  Insurance
Fund ("SAIF")  which was the single most adverse event  affecting net income for
the year.  While it is frustrating to have our annual  earnings  clouded by this
assessment,  it is clear that insuring the  integrity of the deposit  system and
substantially  reducing our deposit insurance  premiums will greatly enhance the
long-term  profitability and competitiveness of the Bank. The Company's earnings
would have been $1.4  million for the year absent the one-time  SAIF  assessment
representing a 62.3% increase over last year's earnings.

     It is with  great  sorrow  that I inform  you of the  passing  of George J.
Finster, a member of our Board of Directors. Our Bank benefited greatly from his
dedication, business experience and wise counsel during his 28 years of service.
He will be dearly missed by us all. To meet the continued  demands of our Board,
Mr. Richard D. Ammian,  Senior Vice President of the Bank, has been appointed to
fill the vacancy on the Board due to the passing of Mr. Finster. We look forward
to Mr. Ammian's involvement and contributions to our Board.
<PAGE>
     The Board of Directors  and  management  team is working  diligently to set
goals  and  develop  long  term  strategies  to  increase  profitability  within
acceptable risk limitations and to enhance  shareholder value. We remain firm in
our  pledge  to  continue  to  be a  community  oriented  financial  institution
providing  affordable  financial  services and  products to the greater  Capital
District.  We at SFS Bancorp,  Inc. appreciate and thank you for taking stock in
our future and look forward to a long-lasting and profitable relationship.




                                             Joseph H. Giaquinto
                                             Chairman of the Board, President
                                             and Chief Executive Officer
<PAGE>
<TABLE>
<CAPTION>
                             SELECTED CONSOLIDATED FINANCIAL INFORMATION



                                                                December 31,
                                      --------------------------------------------------------------
                                         1996          1995        1994         1993         1992
                                      ---------     ---------    ---------    ---------    ---------
                                                               (In Thousands)
<S>                                   <C>           <C>          <C>          <C>          <C>
Selected Financial Condition Data:

Total assets .....................    $ 164,888     $ 166,529    $ 150,837    $ 146,260    $ 148,433
Cash and cash equivalents ........        2,896        10,453        6,468        3,481       13,929
Securities available for sale ....        1,990         7,976        7,776         --           --
Investment securities:
  Mortgage-backed securities .....       20,434        24,418       21,991       25,397       10,103
  Debt securities ................       15,746        18,658       16,902       20,842       16,153
FHLB stock .......................        1,215         1,117        1,123        1,092        1,092
Loans receivable, net ............      118,455       100,921       93,703       92,601      104,078
Real estate owned ................          178           200          204          128          134
Deposits .........................      140,616       139,671      138,299      134,653      137,627
Advance payments by borrowers ....        1,160         1,402        1,270        1,129        1,069
Stockholders' equity .............       21,671        24,261       10,046        9,642        9,229
<CAPTION>



                                                                December 31,
                                      --------------------------------------------------------------
                                         1996          1995        1994         1993         1992
                                      ---------     ---------    ---------    ---------    ---------
                                                               (In Thousands)
<S>                                   <C>           <C>          <C>          <C>          <C>
Selected Operations Data:

Total interest income ............    $  11,867     $  11,523    $   9,849    $   9,774    $  11,264
Total interest expense ...........        6,187         6,236        5,077        5,275        7,046
                                      ---------     ---------    ---------    ---------    ---------
  Net interest income ............        5,680         5,287        4,772        4,499        4,218
Provision for loan losses ........          120           370          120          440          507
                                      ---------     ---------    ---------    ---------    ---------
Net interest income after
 provision for loan losses .......        5,560         4,917        4,652        4,059        3,711
Noninterest income ...............          403           321          170          599          462
Noninterest expense ..............        5,239         4,027        4,096        4,239        3,809
                                      ---------     ---------    ---------    ---------    ---------
Income before taxes ..............          724         1,211          726          419          364
Income tax expense (benefit) .....         (106)          356          215           13          182
                                      ---------     ---------    ---------    ---------    ---------
Income before extraordinary item .          830           855          511          406          182
Extraordinary item - tax benefit .         --            --           --           --            178
                                      ---------     ---------    ---------    ---------    ---------
Net income .......................    $     830     $     855    $     511    $     406    $     360
                                      =========     =========    =========    =========    =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

                                                                                         Year Ended December 31,
                                                                     -----------------------------------------------------------
                                                                       1996         1995          1994         1993         1992
                                                                       ----         ----          ----         ----         ----
<S>                                                                  <C>          <C>           <C>          <C>          <C>
Selected Financial Ratios and Other Data:
Performance Ratios:
 Return on assets (ratio of net income to
   average total assets)..................................             0.50%        0.53%         0.34%        0.28%        0.24%
 Net interest rate spread.................................             2.95         2.93          3.06         2.96         2.72
 Net interest margin......................................             3.51         3.36          3.26         3.15         2.92
 Ratio of noninterest expense to average total assets.....             3.17         2.51          2.74         2.90         2.56
 Ratio of net interest income to noninterest expense......           108.41       131.29        116.50       106.13       110.74
 Return on equity (ratio of net income to average
   equity)................................................             3.73         5.07          5.31         4.33         4.04
 Liquidity ratio at end of year...........................            22.58        32.45         19.57        12.99        15.14
 Efficiency ratio.........................................            86.13        71.81         82.88        83.15        81.39

Asset Quality Ratios:
 Non-performing assets to total assets, at end of year....             0.61         0.62          1.93         1.80         1.43
 Allowance for loan losses to non-performing loans,
   at year end............................................            77.07        68.18         31.79        32.02        35.97
 Allowance for loan losses to total loans.................             0.54         0.56          0.91         0.86         0.68
 Allowance for loan losses to total assets................             0.39         0.34          0.57         0.55         0.48

Capital Ratios:
 Stockholders' equity to total assets at end of year......            13.14        14.57          6.66         6.59         6.22
 Average stockholders' equity to average total assets.....            13.48        10.50          6.43         6.40         5.97
 Ratio of average interest-earning assets to average
   interest-bearing liabilities...........................           114.72       110.84        105.75       105.09       104.15

 Number of full service offices...........................             3            3             3            3            3
</TABLE>
<PAGE>
                           MANAGEMENT'S DISCUSSION AND
                       ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

General

     Management's   discussion  and  analysis  of  the  consolidated   financial
condition and the results of  operations is intended to assist in  understanding
the consolidated  financial  condition and results of operations of the Company.
The information contained in this section should be read in conjunction with the
consolidated financial statements and accompanying notes thereto.

     SFS  Bancorp,  Inc.  (the  "Parent  Company")  is the  holding  company for
Schenectady  Federal Savings Bank and its subsidiary  (the "Bank"),  a federally
chartered  stock  savings  bank.  Collectively,  these  entities are referred to
herein as the  "Company." On June 29, 1995,  the Bank  completed its  conversion
from a federal  mutual  savings and loan  association to a federal stock savings
bank. On that date, the Parent  Company issued and sold 1,495,000  shares of its
common stock at $10.00 per share in connection with the conversion. Net proceeds
to the Parent Company were $14.2 million after reflecting conversion expenses of
$750,000.  The Parent  Company  used $7.1 million of the net proceeds to acquire
all of the issued and outstanding stock of the Bank.

Business Strategy

     The primary goal of management  is to improve the  Company's  profitability
and enhance its net worth while minimizing risk. The Company's  profitability is
dependent primarily on its net interest income,  which is the difference between
interest  earned  on  its  loans  and  investments  and  the  interest  paid  on
interest-bearing  liabilities.  The Company's  profitability is also affected by
the  generation of  noninterest  income,  which  primarily  consists of fees and
service charges. Net interest income is determined by (i) the difference between
the yield earned on  interest-earning  assets and rates paid on interest-bearing
liabilities   ("interest  rate  spread")  and  (ii)  the  relative   amounts  of
interest-earning assets and interest-bearing liabilities. The Company's interest
rate spread is affected by  regulatory,  economic and  competitive  factors that
influence interest rates, loan demand and deposit flows. In addition, net income
is affected by the level of noninterest expense and provision for loan losses.

     The  operations  of financial  institutions,  including  the  Company,  are
significantly  affected by prevailing economic  conditions,  competition and the
monetary and fiscal policies of governmental  agencies.  Lending  activities are
influenced by the demand for the supply of housing,  competition  among lenders,
the level of interest  rates and the  availability  of funds.  Deposit flows and
cost of funds are influenced by prevailing market rates of interest primarily on
competing  investments,  account maturities and the level of personal income and
savings in the Company's market area.

     Management  strives  to  operate  as  a  conservative,   well  capitalized,
profitable  community  bank  dedicated to  financing  home  ownership  and other
consumer needs,  and to provide  quality  service to its customers.  The Company
believes it successfully implements this strategy by:
<PAGE>
     Emphasizing One-to-Four Family Lending.  Historically, the Company has been
predominantly  a  one-to-four  family  residential  lender.  One-to-four  family
residential  loans  constituted  76.5% and 71.1% of total loans at December  31,
1996 and 1995, respectively.

     Maintaining Asset Quality.  The Company places strong emphasis on achieving
a high degree of asset quality maintained through sound  underwriting,  constant
monitoring  and  effective  collection   techniques.   The  Company's  ratio  of
non-performing  assets to total assets was 0.6% as of both December 31, 1996 and
1995.

     Managing Interest Rate Risk. In order to reduce the impact on the Company's
net interest income due to changes in interest rates,  the Company's  management
has adopted a strategy  that has been  designed to maintain  the  interest  rate
sensitivity of its assets and liabilities. The primary elements of this strategy
involve  emphasizing  the  origination of ARM loans and maintaining a short- and
medium-term investment portfolio. The level of adjustable or floating rate loans
included in total loans was 74.9% as of December 31, 1996.  Additionally,  24.8%
of the Company's  interest-earning  assets carried remaining terms of five years
or less.

     The Company's  management believes that a portion of passbook,  transaction
and other  non-certificate  accounts representing core deposits can have a lower
cost and be more resistant to interest rate changes than  certificate  accounts.
Accordingly,  the Company has used customer service and marketing initiatives to
maintain and expand its core deposits. In addition, the Bank is expected to open
its fourth  branch in early 1997 which is expected to increase the level of core
deposits  over  time.  While  the  Company  believes  that a  portion  of  these
non-certificate  accounts  are  interest  rate  sensitive  and may flow to other
investments if interest  rates  continue to rise, the Company  believes that the
balance of these accounts  represent core deposits.  At December 31, 1996, 38.2%
of the Company's  total deposits  consisted of passbook,  transaction  and other
non-certificate accounts.

Asset/Liability Management

     The  principal  financial  objective of the  Company's  interest  rate risk
management is to achieve long-term  profitability while limiting its exposure to
fluctuating  interest  rates.  The Company has sought to reduce  exposure of its
earnings to changes in market  interest  rates by managing the mismatch  between
assets and liability  maturities and interest  rates.  The principal  element in
achieving  this  objective is to increase the  interest-rate  sensitivity of the
Company's  assets by  holding  loans with  interest  rates  subject to  periodic
adjustment  to  market  conditions.   In  addition,  the  Company  maintains  an
investment  portfolio which primarily  consists of securities that mature within
five years.  The  Company  relies on retail  deposits  as its primary  source of
funds. Management believes retail deposits, compared to brokered deposits, limit
the effects of interest rate fluctuation because they generally represent a more
stable source of funds. As part of its interest rate risk strategy,  the Company
promotes  transaction accounts and certificates of deposit with terms up to five
years.
<PAGE>
     The  following  table is  provided by the OTS and sets forth as of December
31,  1996 the  Company's  interest  rate risk as  measured by changes in its net
portfolio  value ("NPV") (i.e.  the present value of the expected cash flow from
assets,  liabilities  and off-balance  sheet  contracts) for  instantaneous  and
sustained parallel shifts in the yield curve, in 100 basis point increments,  up
and down 400 basis points.
<TABLE>
<CAPTION>

       Change in
     Interest Rate         $ Amount              $ Change              % Change
     -------------         --------              --------              --------
    (Basis Points)                         (Dollars in Thousands)
<S>                         <C>                  <C>                     <C>
         +400               $15,153              $(7,053)                (32)%
         +300                17,431               (4,775)                (22)
         +200                19,507               (2,700)                (12)
         +100                21,166               (1,041)                 (5)
            0                22,207                   --                  --
         -100                22,609                  402                   2
         -200                22,893                  687                   3
         -300                23,385                1,178                   5
         -400                24,174                1,967                   9
</TABLE>

     As with any method of measuring  interest rate risk,  certain  shortcomings
are inherent in the method of analysis  presented in the  foregoing  table.  For
example,  although certain assets and liabilities may have similar maturities or
periods to  reprice,  they may react in  different  degrees to changes in market
interest  rates.  Also,  the  interest  rates on  certain  types  of  asset  and
liabilities may fluctuate in advance of changes in market interest rates,  while
interest  rates  on  other  types  may  lag  behind  changes  in  market  rates.
Additionally,  certain assets,  such as ARM loans,  have features which restrict
changes in interest rates on a short-term  basis and over the life of the asset.
Further,  in the  event  of a  change  in  interest  rates,  expected  rates  of
prepayment on loans and early withdrawals from certificates could likely deviate
significantly  from those assumed in calculating  the table. It is also possible
as a result of an  interest  rate  increase,  the  increased  mortgage  payments
required of ARM  borrowers  could  result in an increase  in  delinquencies  and
defaults.  Accordingly,  the data  presented  in the table  above  should not be
relied upon as indicative of actual  results in the event of changes in interest
rates. Furthermore,  the NPV presented in the table is not intended to represent
the fair market value of the Company.

Financial Condition

     Total assets  decreased  $1.6 million  (1.0%) to $164.9 million at December
31, 1996 from $166.5  million at December  31,  1995.  This  decrease  consisted
primarily of an increase in loans  receivable,  net of $17.5 million  (17.4%) to
$118.5 million at December 31, 1996 offset by decreases in federal funds sold of
$7.5 million  (82.4%) to $1.6  million,  investment  securities  of $6.9 million
(16.0%) to $36.2  million,  and  securities  available  for sale of $6.0 million
(75.1%) to $2.0 million at December 31, 1996.

     At December 31, 1996, total liabilities were $143.2 million representing an
increase of $949,000  (0.7%) from  December 31, 1995.  The increase was entirely
attributable to increases in total deposits to $140.6 million as of December 31,
1996 from $139.7 million a year earlier.
<PAGE>
     Stockholders'  equity  decreased  $2.6 million to $21.7 million at December
31, 1996 as compared to $24.3 million at December 31, 1995  primarily due to the
Company's stock repurchase program.  As a result of the repurchase program,  the
Company purchased $3.4 million of treasury stock during 1996.  Retained earnings
increased  by  $674,000  as a result of net income of the  Company  for the year
ended December 31, 1996 offset by the declaration and payment of dividends.  Net
unrealized gain on securities available for sale decreased $42,000 to $46,000 at
December 31, 1996.

     Nonperforming  assets  totaled  $1.0 million at December 31, 1996 and 1995,
respectively. The ratio of nonperforming loans to loans receivable, net improved
to .70% at December 31, 1996, compared with .83% at December 31, 1995. The ratio
of  nonperforming  assets to total assets was .61% at December 31, 1996 compared
with .62% at December 31, 1995.

Analysis of Net Interest Income

     Net interest income  represents the difference  between  interest earned on
interest-earning assets and interest paid on interest-bearing  liabilities.  Net
interest  income  depends  on  the  volumes  of   interest-earning   assets  and
interest-bearing liabilities and the interest rate earned or paid on them.

     The  following  table  presents for the periods  indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.  No tax equivalent  adjustments  were made.
Nonaccruing  loans  have been  included  in the table as loans  carrying  a zero
yield.
<PAGE>
<TABLE>
<CAPTION>
                                                                                Year Ended December 31,
                                                ------------------------------------------------------------------------------------
                                                             1996                                        1995
                                                ------------------------------------------------------------------------------------
                                                   Average        Interest                    Average      Interest
                                                 Outstanding       Earned/         Yield/   Outstanding     Earned/       Yield/
                                                   Balance         Paid            Rate       Balance       Paid           Rate
                                                   -------         ----            ----       -------       ----           ----
                                                                                 (Dollars in Thousands)
<S>                                              <C>             <C>                <C>       <C>           <C>            <C>
Interest-Earning Assets:
 Loans receivable, net(1)...................     $   111,524     $    8,758         7.85%     $ 97,120      $ 7,800        8.03%
 Mortgage-backed securities.................          22,403          1,418         6.33        23,199        1,464        6.31
 Securities available for sale..............           5,169            307         5.94         7,911          492        6.22
 Investment securities......................          16,698          1,059         6.34        17,227        1,041        6.04
 Other interest-earning assets
   including cash equivalents...............           4,698            247         5.26        10,948          640        5.85
 FHLB stock.................................           1,204             78         6.48         1,118           86        7.69
                                                 -----------     ----------         ----      --------      -------        ----
     Total interest-earning assets..........     $   161,696         11,867         7.34      $157,523       11,523        7.32
                                                 ===========     ----------                   ========      -------

Interest-Bearing Liabilities:
 Savings accounts...........................          38,857          1,173         3.02        44,054        1,325        3.01
 Money market accounts......................           5,195            161         3.10         4,809          129        2.68
 Demand and NOW accounts(2).................          10,102            148         1.47         9,090          133        1.46
 Certificate accounts.......................          85,642          4,680         5.46        82,893        4,620        5.57
 Escrow.....................................           1,155             25         2.16         1,266           29        2.29
                                                 -----------     ----------         ----      --------      -------        ----
    Total interest-bearing liabilities......     $   140,951          6,187         4.39      $142,112        6,236        4.39
                                                 ===========     ----------                   ========      -------
Net interest income.........................                     $    5,680                                 $ 5,287
                                                                 ==========                                 =======
Net interest rate spread....................                                        2.95%                                  2.93%
                                                                                    ====                                   ====
Net earning assets..........................     $    20,745                                  $ 15,411
                                                ============                                  ========
Net yield on average interest-
  earning assets............................                                        3.51%                                  3.36%
                                                                                    ====                                   ====
Average interest-earning assets to
  average interest-bearing liabilities......            1.15                                      1.11
                                                        ====                                      ====
<PAGE>
<CAPTION>
                                                          Year Ended December 31,
                                                 -------------------------------------
                                                                  1994
                                                 -------------------------------------
                                                   Average       Interest
                                                 Outstanding     Earned/        Yield/
                                                   Balance         Paid          Rate
                                                   -------         ----          ----
<S>                                              <C>              <C>            <C>
Interest-Earning Assets:
 Loans receivable, net(1)...................     $  91,306        $6,757         7.40%
 Mortgage-backed securities.................        23,500         1,451         6.17
 Securities available for sale..............         7,599           352         4.63
 Investment securities......................        16,627           921         5.54
 Other interest-earning assets
   including cash equivalents...............         6,385           283         4.43
 FHLB stock.................................         1,119            85         7.60
                                                ----------        ------         ----
     Total interest-earning assets..........      $146,536         9,849         6.72
                                                  ========        ------

Interest-Bearing Liabilities:
 Savings accounts...........................        56,685         1,706         3.01
 Money market accounts......................         6,224           155         2.49
 Demand and NOW accounts(2).................         9,163           137         1.50
 Certificate accounts.......................        65,425         3,054         4.67
 Escrow.....................................         1,070            25         2.34
                                                 ---------        ------         ----
    Total interest-bearing liabilities......      $138,567         5,077         3.66
                                                  ========        ------         -----
Net interest income.........................                      $4,772
                                                                  ======
Net interest rate spread....................                                     3.06%
                                                                                 ====
Net earning assets..........................      $  7,969
                                                  ========
Net yield on average interest-
  earning assets............................                                     3.26%
                                                                                 ====
Average interest-earning assets to
  average interest-bearing liabilities......          1.06
                                                      ====

(1)      Calculated net of deferred loan fees.
(2)      Includes noninterest-bearing demand accounts.
</TABLE>
<PAGE>
     The following table sets forth the weighted average yields on the Company's
interest-earning   assets,   the  weighted   average   interest  rates  paid  on
interest-bearing  liabilities  and the interest rate spread between the weighted
average yields and rates at December 31, 1996 and 1995.  Non-accruing loans have
been included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>



                                                                     At           At
                                                                December 31,  December 31,
                                                                    1996         1995
                                                                   ------        -----
<S>                                                                 <C>          <C>
Weighted average yield on:
 Loans receivable .......................................           7.94%        8.11%
 Mortgage-backed securities .............................           6.47         6.46
 Securities available for sale ..........................           6.26         6.23
 Investment securities ..................................           6.36         6.27
 Other interest-earning assets including cash equivalents           5.81         5.88
 FHLB Stock .............................................           6.61         6.85
   Combined weighted average yield on
     interest-earning assets ............................           7.55         7.43
                                                                    ----         ----
Weighted average rate paid on:
 Savings accounts .......................................           3.00         3.00
 Money market accounts ..................................           3.12         2.76
 NOW accounts ...........................................           1.75         1.75
 Certificate accounts ...................................           5.39         5.70
 Escrow .................................................           2.00         2.00
   Combined weighted average rate paid
     on interest-bearing liabilities ....................           4.37         4.56
                                                                    ----         ----

Spread ..................................................           3.18%        2.87%
                                                                    ====         ====
</TABLE>
<PAGE>
Rate/Volume Analysis

     The  following  schedule  presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning  assets and
interest-bearing  liabilities.  It distinguishes between the increase (decrease)
related to outstanding  balances and that due to the changes in interest  rates.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes  attributable to (i) changes in volume (i.e.,
changes  in  volume  multiplied  by old rate) and (ii)  changes  in rate  (i.e.,
changes in rate multiplied by old volume).  For purposes of this table,  changes
attributable  to both rate and  volume,  which  cannot be  segregated  have been
allocated  proportionately  to the  change  due to volume  and the change due to
rate.
<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                  ----------------------------------------------------------------------------
                                                           1996 vs. 1995                            1995 vs. 1994
                                                  ------------------------------------      ----------------------------------
                                                    Increase (Decrease)                      Increase (Decrease)
                                                         Due to                                   Due to
                                                  ---------------------                     --------------------
                                                                               Total                                   Total
                                                                             Increase                                Increase
                                                   Volume        Rate       (Decrease)      Volume         Rate     (Decrease)
                                                   ------        ----       ----------      ------         ----     ----------
                                                                                  (In Thousands)
<S>                                               <C>          <C>            <C>           <C>          <C>          <C>
Interest-earning assets:
 Loans receivable, net......................      $ 1,127      $  (169)       $  958        $ 446        $  597       $1,043
 Mortgage-backed securities.................          (50)           4           (46)         (19)           32           13
 Securities available for sale..............         (165)         (20)         (185)          15           125          140
 Investment securities......................          (29)          47            18           34            86          120
 Other interest-earning assets..............         (334)         (59)         (393)         247           110          357
 FHLB stock.................................            8          (16)           (8)         ---             1            1
                                                  -------      -------        ------        -----       -------       ------

   Total interest-earning assets............      $   557      $  (213)       $  344        $ 723       $   951       $1,674
                                                  =======      =======        ======        =====       =======       ======

Interest-bearing liabilities:
 Savings accounts...........................      $  (157)     $     5        $ (152)       $(380)      $    (1)      $ (381)
 Money market accounts......................            9           23            32          (37)           11          (26)
 Demand and NOW accounts....................           15          ---            15           (1)           (3)          (4)
 Certificate accounts.......................          146          (86)           60          907           659        1,566
 Escrow.....................................           (2)          (2)           (4)           4           ---            4
 Borrowings.................................          ---          ---           ---          ---           ---          ---
                                                  -------      -------        ------        -----       -------       ------

   Total interest-bearing liabilities.......      $    11      $   (60)       $  (49)       $ 493        $  666       $1,159
                                                  =======      =======        ======        =====       =======       ======

Net interest income.........................                                  $  393                                  $  515
                                                                              ======                                  ======
</TABLE>
<PAGE>
Results of Operations

     General.  The  Company's  results of  operations  depend  primarily  on net
interest income,  noninterest expense, and to a lesser extent,  income taxes and
noninterest  income.  Net  interest  income  is a  function  of  the  volume  of
interest-earning assets and interest-bearing  liabilities and the interest rates
earned or paid on such assets and liabilities, respectively. Noninterest expense
consists primarily of general and administrative  expenses, which this year also
included a one-time special  assessment to recapitalize the Savings  Association
Insurance Fund (the "SAIF"). The Company's noninterest income consists primarily
of fees charged on deposit accounts, and other loan charges which help to offset
the cost associated  with  establishing  and maintaining  these deposit and loan
accounts.

Comparison of Operating Results for Years Ended December 31, 1996 and 1995

     Net  Income.  The  Company  had net income of  $830,000  for the year ended
December 31, 1996, as compared to $855,000 for the year ended December 31, 1995.
As discussed below, the decrease in net income of $25,000 or 2.9%, was due to an
increase in  noninterest  expense of $1.2  million  offset by an increase in net
interest  income of $393,000,  an increase in noninterest  income of $82,000,  a
decrease in  provision  for loan losses of $250,000 and a decrease in income tax
expense of $462,000.

     Interest Income.  Interest income increased by $344,000, or 3.0% from $11.5
million in 1995 to $11.9 million in 1996.  This increase was due to the increase
in the amount of average  interest-earning  assets and the yield earned. Average
interest-earning  assets increased from $157.5 million in 1995 to $161.7 million
in 1996  resulting  from the  Company's  ability to utilize  for a full year the
proceeds  received from the initial public offering.  The yield on the Company's
interest-earning  assets  increased  from 7.32% for the year ended  December 31,
1995 to 7.34% for the year ended  December  31,  1996 as a result of the general
increase in the market rates of interest.

     Interest Expense.  Interest expense  decreased by $49,000,  or 0.8% to $6.2
million for the year ended  December  31,  1996.  The decrease was a result of a
$1.2 million (0.8%) decrease in average  interest-bearing  liabilities to $141.0
million.  The average  rate paid for the years ended  December 31, 1996 and 1995
was 4.39%. The mix within the deposit  structure  changed as the average balance
of certificate and demand and NOW account  balances grew $2.8 million (3.3%) and
$1.0 million (11.1%),  respectively while savings accounts declined $5.2 million
(11.8%). The average rate paid was a reflection of the general interest rate and
competitive environment that prevailed during 1996 and 1995.

     Net Interest Income. Net interest income increased  $393,000,  or 7.4% from
$5.3 million in 1995 to $5.7  million in 1996 due to a $5.3 million  increase in
average net  interest-earning  assets in 1996 as compared to 1995 and a 15 basis
point  increase  in margin.  The  increase  in net  interest-earning  assets was
primarily a result of the proceeds  received in the initial  public  offering of
the Company during 1995.
<PAGE>
     Provision  For  Loan  Losses.  The  decrease  of  $250,000  or 67.6% in the
provision  for loan losses  from 1995 to 1996  reflects  primarily  management's
evaluation of the loan  portfolio.  When  determining the level of provision for
loan losses,  management also considers charge off history,  as well as national
and regional economic  indicators such as unemployment  data, single family home
delinquency  data  reported   separately  by  the  Federal   National   Mortgage
Association ("FNMA") and the Federal Home Loan Mortgage  Corporation  ("FHLMC"),
local single family  construction  permits and local economic growth rates,  and
the  then  current  regulatory  and  the  general  economic   environment.   Net
charge-offs  decreased  from  $659,000  in 1995 to  $50,000  in 1996  due to the
Company's  resolution of certain  non-performing loans in 1995. The Company will
continue  to monitor  and modify its  allowance  for loan  losses as  conditions
dictate. Although the Company maintains its allowance for loan losses at a level
it considers adequate to provide for potential losses, there can be no assurance
that such  losses  will not exceed  the  estimated  amounts  or that  additional
provisions for loan losses will not be required in future periods.

     Noninterest Income. Total noninterest income increased by $82,000, or 25.5%
from $321,000 in 1995 to $403,000 in 1996. Other loan charges  increased $35,000
or 31.8% as a result of  increased  originations  and other  noninterest  income
increased  $46,000 or 97.9% as a result of increased  other real estate  income,
income  from the  Bank's  service  corporation  and  gains  taken on the sale of
certain fixed assets.

     Noninterest  Expense.  Noninterest  expense  increased by $1.2 million,  or
30.1%  from $4.0  million  in 1995 to $5.2  million  in 1996.  The  increase  is
primarily  attributable to the special  one-time SAIF  assessment  which totaled
$930,000.  Compensation and benefits  increased  $262,000 (11.6%) as a result of
annual merit  increases and the  establishment  of the Retention and Recognition
Plan  ("RRP")  partially  offset by  reduced  pension  and  retirement  benefits
expense. Mortgage servicing fees decreased $22,000 (35.5%) between 1995 and 1996
as serviced  loan  balances  continued  to decline.  Professional  service  fees
increased  $53,000  (28.0%)  during  1996 as  compared  to 1995 as a  result  of
increased cost associated with being a public company.  Advertising and business
promotion,  office occupancy and equipment  expenses,  other insurance premiums,
data  processing  fees,  and real estate owned  writedowns  remained  relatively
stable during 1996 as compared with 1995.  The ratio of  noninterest  expense to
average assets increased from 2.51% for 1995 to 3.17% for 1996.

     Income Tax Expense. Income tax expense decreased from $356,000 in 1995 to a
benefit of $106,000 in 1996.  The  decrease  is the result of  decreased  income
before  taxes  during 1996 and the  reduction  of the  valuation  allowance  for
deferred tax assets during 1996.  This reduction was primarily the result of the
expected realization of certain deferred items which were previously  considered
to be uncertain.

Comparison of Operating Results for the Years Ended December 31, 1995 and 1994

     Net  Income.  The  Company  had net income of  $855,000  for the year ended
December 31, 1995, as compared to $511,000 for the year ended December 31, 1994.
As discussed  below, the increase in net income of $344,000 or 67.3%, was due to
an increase  in net  interest  income of  $515,000,  an increase in  noninterest
income of $151,000 and a decrease in noninterest expense of $69,000,  which more
than  offset an  increase in the  provision  for loan losses of $250,000  and an
increase in income tax expense of $141,000.
<PAGE>
     Interest Income.  Interest income increased by $1.6 million,  or 16.2% from
$9.9  million in 1994 to $11.5  million in 1995.  This  increase  was due to the
increase  in the amount of  interest-earning  assets and the yield  earned.  The
yield on the Company's interest-earning assets increased from 6.72% for the year
ended  December  31,  1994 to 7.32% for the year ended  December  31,  1995 as a
result of the general increase in market rates of interest.

     Interest Expense. Interest expense increased by $1.1 million, or 21.6% from
$5.1 million in 1994 to $6.2 million in 1995.  The increase was largely a result
of a $3.5 million  (2.5%)  increase in average  interest-bearing  liabilities to
$142.1 million  combined with a 73 basis point (19.9%) increase in average rates
paid to 4.39%.  The mix  within the  deposit  structure  changed as the  average
balance of certificate account balances grew $17.5 million (26.8%) while savings
and money  market  accounts  declined  $12.6  million  (22.2%) and $1.4  million
(22.6%),  respectively.  The increase in average  rates paid was a reflection of
the general  interest rate and  competitive  environment  that prevailed  during
1995, compared with 1994.

     Net Interest Income. Net interest income increased $515,000,  or 10.8% from
$4.8 million in 1994 to $5.3  million in 1995 due to a $7.4 million  increase in
net  interest-earning  assets in 1995 as  compared  to 1994 and a 10 basis point
increase in margin. The increase in net interest-earning assets was primarily as
a result of an increase in the average  balance of  stockholders'  equity  which
increased  primarily  as a result of the net  proceeds  received  in the initial
public offering of the Company.

     Provision  for Loan  Losses.  The  increase  of  $250,000  or 208.3% in the
provision  for loan losses from 1994 to 1995  reflects  primarily a  significant
increase in the amount of loan  charge-offs from $101,000 in 1994 to $718,000 in
1995 and management's evaluation of the loan portfolio as well as its evaluation
of national  and  regional  economic  indicators  such as national  and regional
unemployment data, single family loan delinquency data as reported separately by
the Federal  National  Mortgage  Association  ("FNMA") and the Federal Home Loan
Mortgage  Corporation  ("FHLMC"),  local single family construction  permits and
local economic growth rates and the then current regulatory and general economic
environment.  Charge-offs  increased due to the Company's  resolution of certain
non-performing  loans.  The  Company  will  continue  to monitor  and modify its
allowance for loan losses as conditions dictate.  Although the Company maintains
its  allowance  for loan losses at a level it considers  adequate to provide for
potential losses, there can be no assurance that such losses will not exceed the
estimated  amounts or that  additional  provision  for loan  losses  will not be
required in future periods.

     Noninterest  Income.  Total  noninterest  income increased by $151,000,  or
88.8%,  from  $170,000 in 1994 to $321,000 in 1995.  Of the  $151,000  increase,
$109,000 was related to losses on the sale of  securities  taken in 1994.  Other
loan charges  increased  $27,000 or 32.5% as a result of  increased  home equity
credit line modification fees and other noninterest  income increased $13,000 or
38.2% as a result of increased other real estate income.

     Noninterest Expense. Noninterest expense decreased by $69,000, or 1.7% from
$4.1  million  in  1994 to $4.0  million  in  1995.  Compensation  and  benefits
increased  $57,000  (2.6%)  as a  result  of  annual  merit  increases  and  the
establishment of the Employee Stock Ownership Plan ("ESOP")  partially offset by
reduced  pension and  retirement  benefits  expense.  Advertising  and  business
promotion  decreased  $20,000  (15.9%)  reflecting a reduced  level of activity.
<PAGE>
Mortgage  servicing  fees  decreased  $21,000  (25.3%)  between 1994 and 1995 as
serviced loan balances  continued to decline.  Data  processing  fees  decreased
$12,000  (7.1%)  as a  result  of a  change  in the  method  of  recording  data
processing fees. Professional service fees increased $66,000 (53.7%) during 1995
as compared  with 1994 as a result of  increased  cost  associated  with being a
public company.  Real estate owned writedown  declined  $111,000  (100.0%) as no
writedowns were taken in 1995. Office occupancy and equipment expenses,  federal
deposit  insurance and other  insurance  premiums,  and other  expense  remained
relatively  stable during 1995 as compared with 1994.  The ratio of  noninterest
expense to average assets decreased from 2.74% for 1994 to 2.51% for 1995.

     Income Tax Expense.  Income tax expense  increased from $215,000 in 1994 to
$356,000 in 1995.  The increase is the result of increased  income  before taxes
during 1995 and the utilization of net operating loss carryforwards in 1994. The
effective tax rate for the year ended  December 31, 1995 was 29.4% compared with
29.6% for the prior year.

Liquidity and Capital Resources

     The  Company's  primary  sources  of  funds  are  deposits,  proceeds  from
principal and interest  payment on loans, the maturity of and interest income on
investment  securities,  proceeds from the sale of securities available for sale
and  advances  from  the  FHLB  of New  York.  While  maturities  and  scheduled
amortization of loans and securities are a predictable source of funds,  deposit
flows,  mortgage  prepayments  and loan sales are greatly  influenced by general
interest rates, economic conditions and competition.

     The Company  must  maintain an adequate  level of  liquidity  to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to  satisfy   financial   commitments   and  to  take  advantage  of  investment
opportunities.  The Company  generally  maintains  sufficient cash and overnight
deposits  to meet  short-term  liquidity  needs.  At  December  31,  1996,  cash
(including overnight deposits) totaled $2.9 million, or 1.8% of total assets. In
addition,  the Company  maintains a credit  facility  with the FHLB of New York,
which  provides for  immediately  available  advances.  As of December 31, 1996,
there  were  no  advances  under  this  credit  facility.  Depending  on  market
conditions and the pricing of deposit products and FHLB borrowings,  the Company
may continue to rely on FHLB borrowings for its liquidity needs.

     The  Company is required to  maintain  minimum  levels of liquid  assets as
defined by OTS  regulations.  This  requirement,  which may be varied by the OTS
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term  borrowings.  The required minimum liquidity ratio is
currently 5.0% and the short-term liquidity ratio is 1.0%. The Company's average
daily  liquidity  ratio for the year ended December 31, 1996 was 26.1%,  and its
short-term liquidity for the same period was 5.7%.

     The primary  investing  activities of the Company are the  origination  and
purchase of mortgage  loans and the  purchase  of  securities.  During the years
ended December 31, 1996, 1995 and 1994, the Company's mortgage loan originations
and  purchases  totaled  $31.4  million,   $23.6  million,  and  $21.8  million,
respectively.  The  Company  purchased  securities  available  for  sale of $6.9
million for the year ended  December 31, 1994.  The Company did not purchase any
securities  available  for sale  during  1996 and 1995.  The  Company  purchased
investment securities during the years ended December 31, 1996, 1995 and 1994 of
$6.0 million, $10.0 million and $5.9 million, respectively.
<PAGE>
     The primary financing activity of the Company is the attraction of deposits
and the issuance and subsequent  repurchase of the Company's shares.  During the
years ended December 31, 1996,  1995,  and 1994,  the Company  experienced a net
increase in deposits of $945,000, $1.4 million, and $3.6 million,  respectively.
During 1995 the Company  received  $13.0  million net proceeds  from the sale of
common stock during its initial public offering.  During the year ended December
31, 1996,  the Company  repurchased  269,750  shares of which 53,222 shares were
used to fund the RRP. The average price of treasury shares  purchased was $12.68
totaling $2.8 million.  The average price paid of $12.68 was approximately 74.4%
of the Company's book value per share of $17.05 at December 31, 1996. Management
believes that the repurchase of shares at less than book value is an appropriate
utilization of excess capital.  The Office of Thrift Supervision (OTS) restricts
the number of shares  which may be  repurchased  during  the three  year  period
following  conversion.   Generally,   only  5%  of  shares  outstanding  may  be
repurchased annually during the first three years following conversion. However,
the OTS has  allowed  additional  share  repurchases  of 5%  annually  based  on
extenuating facts and circumstances.

     At December  31,  1996,  the Bank's  capital  exceeded  each of the capital
requirements  of the OTS. At December  31,  1996,  the Bank's  tangible and core
capital levels were both $17.8 million (10.77% of total adjusted assets) and its
risk-based  capital  level  was $17.1  million  (20.92%  of total  risk-weighted
assets).  The current minimum regulatory capital ratio requirements are 1.5% for
tangible capital, 3.0% for core capital and 8.0% for risk-weighted capital.

     The Company  anticipates  that it will have  sufficient  funds available to
meet its current commitments.  At December 31, 1996, the Company had commitments
to  originate  loans of $2.2  million  as well as undrawn  commitments  of $10.4
million on home equity and other lines of credit. Certificates of deposits which
are  scheduled to mature in one year or less at December 31, 1996 totaled  $59.9
million.  Management  believes that a significant portion of these deposits will
remain with the Company.

Impact of Inflation and Changing Prices

     The consolidated  financial statements and related financial data presented
herein have been  prepared in  accordance  with  generally  accepted  accounting
principles  ("GAAP"),  which  generally  requires the  measurement  of financial
position  and  operating  results  in  terms  of  historical  dollars,   without
considering the change in the relative  purchasing  power of money over time due
to inflation. The primary impact of inflation is reflected in the increased cost
of the Company's operations. Unlike most industrial companies, virtually all the
assets and liabilities of a financial  institution are monetary in nature.  As a
result,  interest rates generally have a more significant  impact on a financial
institution's performance than do general levels of inflation. Interest rates do
not  necessarily  move in the same direction or to the same extent as the prices
of goods and services.

Impact of New Accounting Standards

     In May 1995, the Financial  Accounting  Standards Board issued Statement of
Financial  Accounting  Standard  No. 122,  "Accounting  for  Mortgage  Servicing
Rights"  (SFAS No.  122),  which  amends  SFAS No. 65,  "Accounting  for Certain
Mortgage Banking  Activities." SFAS No. 122 requires that entities  recognize as
separate assets, the rights to service mortgage loans for others,  regardless of
<PAGE>
how those  servicing  rights are acquired.  Additionally,  SFAS No. 122 requires
that the capitalized  mortgage servicing rights be assessed for impairment based
on the fair value of those rights,  and that  impairment,  if any, be recognized
through a valuation allowance. Since there have been no mortgage loans sold on a
servicing  retained  basis in 1996,  the adoption of SFAS No. 122 has not had an
effect  on  the  Company's   consolidated  financial  position  and  results  of
operations.

     In October 1995, the FASB issued SFAS No. 123,  "Accounting for Stock-Based
Compensation,"  which  establishes a fair value based method of  accounting  for
employee stock options or similar equity instruments such as the Company's Stock
Option Plan. Under SFAS No. 123, entities can recognize stock-based compensation
expense in the basic financial  statements  using either (i) the intrinsic value
based approach set forth in Accounting  Principles  Board ("APB") Opinion No. 25
or (ii) the fair  value  based  method  introduced  in SFAS  No.  123.  Entities
electing  to remain with the  accounting  in APB Opinion 25, must make pro forma
disclosures  of net income and  earnings  per share,  s if the fair value  based
method of accounting defined in SFAS No. 123 had been applied. Under APB Opinion
No. 25,  compensation  expense is determined  based upon the option's  intrinsic
value, or the excess (if any) of the market price of the underlying stock at the
measurement date over the amount the employee is required to pay. Under the fair
value based method introduced by SFAS No. 123,  compensation expense is based on
the option's estimated fair value at the grant date and is generally  recognized
over the vesting period.  The Company plans to measure  compensation costs using
APB Opinion No. 25; therefore,  the adoption of SFAS No. 123 will have no effect
on the Company's financial condition or results of operations.

     In June 1996, the FASB issued SFAS No. 125,  "Accounting  for Transfers and
Servicing of Financial Assets and  Extinguishment of Liabilities."  SFAS No. 125
provides  accounting  and  reporting  standards  for  transfers and servicing of
financial assets and  extinguishment of liabilities,  such as the sales of loans
with full or partial recourse.  SFAS No. 125 applies an approach that focuses on
financial and servicing  assets it controls and the liabilities it has incurred,
derecognized   financial   assets  when  control  has  been   surrendered,   and
derecognized  liabilities  when  extinguished.  SFAS No.  125 is  effective  for
transfers and servicing of financial  assets and  extinguishment  of liabilities
occurring  after  December 31,  1996,  and is to be applied  prospectively.  The
Company  does not expect the impact of  adopting  SFAS No. 125 to be material to
its consolidated financial statements.
<PAGE>
                        SFS Bancorp, Inc. and Subsidiary





                       Consolidated Financial Statements





                        As of December 31, 1996 and 1995


                   and for the years in the three year period


                            ended December 31, 1996








                  (With Independent Auditors' Report Thereon)

<PAGE>

                          Independent Auditors' Report


The Board of Directors and Shareholders
SFS Bancorp, Inc.:

We have audited the  accompanying  consolidated  balance  sheets of SFS Bancorp,
Inc. and  subsidiary  (the  Company) as of December  31, 1996 and 1995,  and the
related consolidated  statements of income,  changes in stockholders' equity and
cash flows for each of the years in the three year  period  ended  December  31,
1996. These  consolidated  financial  statements are the  responsibility  of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial  position of SFS Bancorp,  Inc.
and  subsidiary  as of  December  31,  1996 and 1995,  and the  results of their
operations  and their cash flows for each of the years in the three year  period
ended  December  31,  1996 in  conformity  with  generally  accepted  accounting
principles.

As discussed in note 1 and note 6 to the consolidated  financial statements,  as
of January  1,  1995,  the  Company  adopted  the  provisions  of the  Financial
Accounting Standards Board's Statement of Financial Accounting Standards No. 114
"Accounting  by Creditors For  Impairment of a Loan," and Statement of Financial
Accounting  Standards No. 118, "Accounting by Creditors For Impairment of a Loan
- Income Recognition and Disclosures," which prescribe  recognition criteria for
loan  impairment and  measurement  methods for certain  impaired loans and loans
whose terms are  modified in a troubled  debt  restructuring  subsequent  to the
adoption of these statements.



Albany, New York                          /s/KPMG Peat Marwick LLP
January 24, 1997                          ------------------------
                                          KPMG Peat Marwick LLP


<PAGE>
<TABLE>
<CAPTION>
                                       SFS BANCORP, INC. AND SUBSIDIARY

                                          Consolidated Balance Sheets

                                          December 31, 1996 and 1995



               Assets                                                               1996         1995
               ------                                                               ----         ----
                                                                            (in thousands, except share data)
<S>                                                                              <C>           <C>
Cash and due from banks                                                          $  1,296         1,353
Federal funds sold                                                                  1,600         9,100
                                                                                  -------      --------
              Total cash and cash equivalents                                       2,896        10,453

Securities available for sale, at fair value                                        1,990         7,976
Investment securities:
     Debt securities (approximate fair value
         of $15,642 and $18,712 at December 31,
         1996 and 1995, respectively)                                              15,746        18,658
     Mortgage-backed securities (approximate fair value
         of $20,322 and $24,645 at
         December 31, 1996 and 1995, respectively)                                 20,434        24,418
Investment required by law, stock in Federal Home Loan
   Bank of New York, at cost                                                        1,215         1,117
Loans receivable, net                                                             118,455       100,921
Accrued interest receivable                                                         1,137         1,161
Premises and equipment, net                                                         1,921         1,414
Real estate owned                                                                     178           200
Prepaid expenses and other assets                                                     916           211
                                                                                  -------      --------
              Total assets                                                       $164,888       166,529
                                                                                  =======      ========

         Liabilities and Stockholders' Equity

Liabilities:
     Due to depositors:
         Demand and NOW deposit accounts                                           10,496         9,990
         Savings accounts                                                          43,226        44,982
         Time deposit accounts                                                     86,894        84,699
                                                                                  -------      --------
              Total deposits                                                      140,616       139,671
                                                                                  -------      --------

     Advance payments by borrowers for property taxes and insurance                 1,160         1,402
     Accrued expenses and other liabilities                                         1,441         1,195
                                                                                  -------      --------
              Total liabilities                                                   143,217       142,268
                                                                                  -------      --------

                                                                                             (Continued)
Commitments and contingent liabilities
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                               SFS BANCORP, INC. AND SUBSIDIARY

                            Consolidated Balance Sheets, Continued

                                  December 31, 1996 and 1995



                                                                        1996            1995
                                                                        ----            ----
                                                                  (in thousands, except share data)
<S>                                                                  <C>            <C>
Stockholders' Equity:
     Preferred stock, $.01 par value.  Authorized 500,000 shares;
         none issued ............................................    $    --               _
     Common stock, $.01 par value.  Authorized 2,500,000
         shares; 1,495,000 shares issued; 1,270,997 and
         1,495,000 shares outstanding at December 31, 1996
         and  1995, respectively ................................           15            15
     Additional paid-in capital .................................       14,260        14,221
     Retained earnings, substantially restricted ................       11,687        11,013
     Treasury stock, at cost (224,003 shares at
         December 31, 1996, none at December 31, 1995)
     Common stock acquired:
         Employee stock ownership plan "ESOP" (95,680
           shares and 107,640 shares at  December 31, 1996
           and 1995,  respectively ..............................         (957)       (1,076)
         Recognition and retention plan "RRP" (42,757
           shares at December 31, 1996; none
           at December 31, 1995) ................................         (540)            -
     Net unrealized gain on securities available for sale .......           46            88
                                                                     ---------     ---------

              Total stockholders' equity ........................       21,671        24,261
                                                                     ---------     ---------

              Total liabilities and stockholders' equity ........    $ 164,888       166,529
                                                                     =========     =========


                See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                              SFS BANCORP, INC. AND SUBSIDIARY

                                              Consolidated Statements of Income

                                    For the years ended December 31, 1996, 1995 and 1994


                                                                         1996         1995        1994
                                                                         ----         ----        ----
                                                               (in thousands, except for per share amounts)
<S>                                                                  <C>          <C>         <C>
Interest income:
     Real estate loans ..........................................    $  8,714        7,762       6,674
     Other loans ................................................          44           38          83
     Mortgage-backed securities .................................       1,418        1,464       1,451
     Debt securities ............................................       1,059        1,041         921
     Fed funds sold and cash deposits ...........................         247          640         283
     Securities available for sale ..............................         307          492         352
     Stock in Federal Home Loan Bank ............................          78           86          85
                                                                     --------     --------    --------
              Total interest income .............................      11,867       11,523       9,849

Interest expense:
     Deposits ...................................................       6,187        6,236       5,077
                                                                     --------     --------    --------
              Net interest income ...............................       5,680        5,287       4,772

Provision for loan losses .......................................         120          370         120
                                                                     --------     --------    --------
              Net interest income after provision for loan losses       5,560        4,917       4,652
                                                                     --------     --------    --------

Noninterest income:
     Net gain (loss) on security transactions and
         writedown of common stock ..............................           8         --          (109)
     Service fee income .........................................          19           21          19
     Other loan charges .........................................         145          110          83
     Bank fees and service charges ..............................         138          143         143
     Other income ...............................................          93           47          34
                                                                     --------     --------    --------
              Total noninterest income ..........................         403          321         170
                                                                     --------     --------    --------
<PAGE>
<CAPTION>
                                      SFS BANCORP, INC. AND SUBSIDIARY

                                Consolidated Statements of Income (continued)

                            For the years ended December 31, 1996, 1995 and 1994


                                                                         1996         1995        1994
                                                                         ----         ----        ----
                                                               (in thousands, except for per share amounts)
<S>                                                                  <C>          <C>         <C>

Noninterest expense:
     Compensation and benefits ..................................       2,512        2,250       2,193
     Advertising and business promotion .........................         108          106         126
     Office occupancy and equipment expenses ....................         522          523         529
     Federal deposit insurance premiums .........................         322          323         311
     Federal deposit insurance special SAIF assessment ..........         930          --          --
     Other insurance premiums ...................................          97           89         103
     Mortgage servicing fees ....................................          40           62          83
     Data processing fees .......................................         166          157         169
     Real estate owned writedown ................................          --          --          111
     Professional service fees ..................................         242          189         123
     Other expense ..............................................         300          328         348
                                                                     --------     --------    --------
              Total noninterest expense .........................       5,239        4,027       4,096
                                                                     --------     --------    --------

              Income before taxes ...............................         724        1,211         726

Income tax expense (benefit) ....................................        (106)         356         215
                                                                     --------     --------    --------
Net income ......................................................    $    830          855         511
                                                                     ========     ========    ========

Net income per share ............................................    $    .67          .41         N/A
                                                                     ========     ========    ========

See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                  SFS BANCORP, INC. AND SUBSIDIARY

                                     Consolidated Statements of Changes in Stockholders' Equity

                                            Years ended December 31, 1996, 1995 and 1994

                                                                                                                           Common
                                                                                             Additional                    stock
                                                                   Shares       Common        paid-in      Retained       acquired
                                                                  Issued         stock        capital       earnings       by ESOP
                                                                  ------         -----        -------       --------       -------
                                                                                      (dollars in thousands)
<S>                                                              <C>             <C>           <C>            <C>           <C>

Balance at December 31, 1993 ................................          --        $  --            --            9,647          --
Net income ..................................................          --           --            --              511          --
Adjustment of securities available for sale to fair value ...          --           --            --             --            --
Change in valuation allowance on marketable equity securities          --           --            --             --            --


Balance at December 31, 1994 ................................          --           --            --           10,158          --
Net income ..................................................          --           --            --              855          --
Adjustment of securities available for sale to fair value ...          --           --            --             --            --
Common stock issued .........................................     1,495,000         15          14,185           --            --
Acquisition of common stock by ESOP (119,600 shares) ........          --           --            --             --          (1,196)
Allocation of ESOP stock (11,960 shares) ....................          --           --              36           --             120


Balance at December 31, 1995 ................................     1,495,000         15          14,221         11,013        (1,076)
Net income ..................................................          --           --            --              830          --
Adjustment of securities available for sale to fair value ...          --           --            --             --            --
Purchase of treasury stock (269,750 shares) .................          --           --            --             --            --
Acquisition of common stock by RRP ..........................          --           --            --             --            --
Amortization of award of RRP stock ..........................          --           --            --             --            --
Cash dividends declared .....................................          --           --            --             (156)         --
Allocation of ESOP stock (11,960 shares) ....................          --           --              39           --             119


Balance at December 31, 1996 ................................     1,495,000      $  15          14,260         11,687          (957)

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                  SFS BANCORP, INC. AND SUBSIDIARY

                                     Consolidated Statements of Changes in Stockholders' Equity

                                            Years ended December 31, 1996, 1995 and 1994
                                                            (continued)


                                                                         Net unrealized            Valuation
                                                                Common    gain (loss) on           allowance
                                                                stock      securities             on marketable
                                                               acquired    available    Treasury    equity
                                                               by RRP       for sale      stock    securities      Total
                                                               ------       --------      -----    ----------      -----
<S>                                                              <C>          <C>        <C>          <C>        <C>
Balance at December 31, 1993 ................................     --           --           --             (5)      9,642
Net income ..................................................     --           --           --           --           511
Adjustment of securities available for sale to fair value ...     --           (112)        --           --          (112)
Change in valuation allowance on marketable equity securities     --           --           --              5           5
                                                                ------        -----       ------       -------    -------

Balance at December 31, 1994 ................................     --           (112)        --           --        10,046
Net income ..................................................     --           --           --           --           855
Adjustment of securities available for sale to fair value ...     --            200         --           --           200
Common stock issued .........................................     --           --           --           --        14,200
Acquisition of common stock by ESOP (119,600 shares) ........     --           --           --           --        (1,196)
Allocation of ESOP stock (11,960 shares) ....................     --           --           --           --           156
                                                                ------        -----       ------       -------    -------


Balance at December 31, 1995 ................................     --             88         --           --        24,261
Net income ..................................................     --           --           --           --           830
Adjustment of securities available for sale to fair value ...     --            (42)        --           --           (42)
Purchase of treasury stock (269,750 shares) .................     --           --         (3,418)        --        (3,418)
Acquisition of common stock by RRP ..........................     (578)        --            578         --          --
Amortization of award of RRP stock ..........................       38         --           --           --            38
Cash dividends declared .....................................     --           --           --           --          (156)
Allocation of ESOP stock (11,960 shares) ....................     --           --           --           --           158
                                                                ------        -----       ------       -------    -------


Balance at December 31, 1996 ................................     (540)          46       (2,840)        --        21,671
                                                               =======        =====       ======       =======    =======

                                    See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                       SFS BANCORP, INC. AND SUBSIDIARY

                                    Consolidated Statements of Cash Flows

                             For the years ended December 31, 1996, 1995 and 1994

                                                                            1996          1995          1994
                                                                          --------     --------     --------
                                                                                     (in thousands)
<S>                                                                       <C>          <C>          <C>
Increase (decrease) in cash and cash equivalents:
    Reconciliation of net income to net cash provided by operating
      activities:
         Net income ..................................................    $    830          855          511
                                                                          --------     --------     --------
         Adjustments to reconcile net income to net cash provided by
             operating activities:
              Depreciation and amortization ..........................         140          143          142
              Net (accretion) amortization on investment securities ..         (12)         (30)           5
              Amortization of award of ESOP ..........................         158          156         --
              Amortization of award of RRP ...........................          38         --           --
              Provision for possible loan losses .....................         120          370          120
              Recovery credited to the allowance .....................        --             (7)        --
              Other real estate writedown ............................           7         --            112
              Loss on sale of other real estate ......................        --           --             12
              (Gain) loss on sale of available for sale securities ...          (8)        --            109
              Proceeds from sale of mortgage loans held for sale .....        --           --            279
              Net mortgage loans made to customers and held for sale .        --           --           (281)
              Net loss on sale of mortgage loans held for sale .......        --           --              2
              (Increase) decrease in accrued interest receivable .....          24         (109)         (71)
              (Increase) decrease in prepaid expenses and other assets
                                                                              (705)         (60)          36
              (Decrease) increase in accrued expenses and other
                liabilities ..........................................         246          (27)         386
                                                                          --------     --------     --------
                  Total adjustments ..................................           8          436          851
                                                                          --------     --------     --------
                  Net cash provided by operating activities ..........         838        1,291        1,362

Cash flows from investing activities:
     Proceeds from maturity/paydown of investment securities .........       8,924        8,269        4,847
     Purchases of investment securities ..............................      (6,000)      (9,995)      (5,907)
     Purchase of securities available for sale .......................        --           --         (6,885)
     Redemption (purchase) of FHLB Stock .............................         (98)           6          (31)
     Principal collected on mortgaged-backed securities ..............       3,984        2,954        3,406
     Net (increase) decrease in loan made to customers ...............     (10,859)      (2,710)       1,768
     Capital expenditures, net of disposals ..........................        (647)         (90)         (58)
     Purchase of loans receivable ....................................      (6,973)      (5,245)      (3,305)
     Purchases of mortgage-backed securities .........................        --         (5,381)        --
     Proceeds from the sale of available for sale securities .........       5,952         --          3,888
     Proceeds from the sale of other real estate .....................         193          378          115
                                                                          --------     --------     --------
                  Net cash used by investing activities ..............      (5,524)     (11,814)      (2,162)
                                                                          --------     --------     --------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                              SFS BANCORP, INC. AND SUBSIDIARY

                                      Consolidated Statements of Cash Flows, Continued

                                    For the years ended December 31, 1996, 1995 and 1994



                                                                          1996         1995          1994
                                                                                  (in thousands)
<S>                                                                    <C>          <C>          <C>

Cash flows from financing activities:
     Net increase in deposits .....................................    $    945        1,372        3,646
     Net increase (decrease) in advance payments by borrowers for
       property taxes and insurance ...............................        (242)         132          141
     Purchase of treasury stock ...................................      (3,418)        --           --
     Cash dividends paid ..........................................        (156)        --           --
     Net proceeds from common stock issued in stock conversion ....        --         14,200         --
     Acquisition of common stock by ESOP ..........................        --         (1,196)        --
                                                                       --------     --------     --------
                  Net cash provided (used) in financing activities       (2,871)      14,508        3,787
                                                                       --------     --------     --------

Net increase (decrease) in cash and cash equivalents ..............      (7,557)       3,985        2,987
Cash and cash equivalents at beginning of year ....................      10,453        6,468        3,481
                                                                       --------     --------     --------
Cash and cash equivalents at end of year ..........................    $  2,896       10,453        6,468
                                                                       ========     ========     ========

Supplemental  disclosures  of cash flow  information:
    Cash paid during the year
     for:
         Interest paid ............................................    $  6,187        6,264        5,119
                                                                       ========     ========     ========

         Taxes paid ...............................................    $    509          520           20
                                                                       ========     ========     ========
Supplemental schedule of noncash investing activities:
     Transfer of loans to other real estate owned .................    $    178          367          315
                                                                       ========     ========     ========

Investment securities reclassified as available for sale upon the
    adoption of Statement of Financial Accounting Standards No. 115    $   --           --          5,000
                                                                       ========     ========     ========

Adjustment of securities available for sale to fair value .........    $    (42)         200         (112)
                                                                       ========     ========     ========

Decrease in excess of cost over market value of marketable equity
    securities ....................................................    $   --           --           --
                                                                       ========     ========     ========



                        See accompanying notes to consolidated financial statements.

</TABLE>
<PAGE>
                        SFS BANCORP, INC. AND SUBSIDIARY

              Notes to Consolidated Financial Statements, Continued

(1)    Summary of Significant Accounting Policies

       SFS Bancorp,  Inc. (the Holding Company) was incorporated  under Delaware
       law in March,  1995 as a holding  company to purchase  100% of the common
       stock of Schenectady  Federal Savings Bank and subsidiary (the Bank). The
       Bank  converted from a mutual form to a stock form  institution,  and the
       Holding  Company  completed its initial public offering on June 29, 1995,
       at which time the Holding Company  purchased all of the outstanding stock
       of the Bank. To date, the principal  operations of SFS Bancorp,  Inc. and
       subsidiary (the Company) have been those of the Bank.

       The following is a description of the more significant policies which the
       Company  follows in preparing and presenting its  consolidated  financial
       statements:

       (a)    Basis of Presentation

              The accompanying  consolidated  financial  statements  include the
              accounts of the Holding  Company,  its wholly owned subsidiary the
              Bank,  and the Bank's  wholly owned  subsidiary.  All  significant
              intercompany   transactions   and  balances  are   eliminated   in
              consolidation.  The  accounting  and  reporting  policies  of  the
              Company  conform in all material  respects to  generally  accepted
              accounting  principles and to general  practice  within the thrift
              industry. In the OParent Company OnlyO financial  statements,  the
              investment  in the wholly owned  subsidiary  is carried  under the
              equity method of accounting.

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

              Material   estimates   that  are   particularly   susceptible   to
              significant change in the near-term relate to the determination of
              the  allowance  for loan losses and the  valuation  of real estate
              acquired in connection  with  foreclosures  or in  satisfaction of
              loans. In connection with the  determination  of the allowance for
              loan losses and the  valuation  of real estate  owned,  management
              obtained appraisals for significant properties.

       (b)    Business

              A substantial portion of the Company's assets are loans secured by
              real  estate  in  the  upstate  New  York  area.  In  addition,  a
              substantial  portion of the real estate  owned is located in those
              same  markets.  Accordingly,  the  ultimate  collectibility  of  a
              substantial  portion of the Bank's loan portfolio and the recovery
              of a  substantial  portion of the  carrying  amount of real estate
              owned are dependent upon market conditions in the upstate New York
              region.
<PAGE>
       (c)    Cash Equivalents

              For purposes of the  consolidated  statements  of cash flows,  the
              Company considers all highly liquid debt instruments with original
              maturities of three months or less to be cash equivalents.

       (d)    Securities Available for Sale and Investment Securities

              The Company adopted  Statement of Financial  Accounting  Standards
              No. 115,  (SFAS No. 115)  "Accounting  for Certain  Investments in
              Debt  and  Equity  Securities"  on  January  1,  1994.  Management
              determines  the  appropriate  classification  of securities at the
              time of  purchase.  If  management  has the  positive  intent  and
              ability to hold debt  securities to maturity,  they are classified
              as investment  securities and are stated at amortized cost.  These
              securities are adjusted for  amortization of premium and accretion
              of discount  using a method  which  approximates  the  level-yield
              method.  All other debt and equity  securities  are  classified as
              securities available-for-sale and are reported at fair value, with
              net unrealized gains or losses reported as a separate component of
              equity.  Realized  gains  and  losses  on the  sale of  securities
              available-for-sale    are    determined    using   the    specific
              identification method.

       (e)    Mortgage-Backed Securities

              Mortgage-backed securities, which are guaranteed by the Government
              National  Mortgage  Association  ("GNMA"),  the Federal  Home Loan
              Mortgage  Corporation  ("FHLMC") or the Federal National  Mortgage
              Corporation ("FNMA"),  represent participating interests in direct
              pass-through  pools of long-term  first mortgage loans  originated
              and serviced by the issuers of the  securities.  These  investment
              securities are carried at amortized  cost,  with  amortization  of
              premiums  and   accretion  of  discounts   determined   using  the
              level-yield method over the remaining term to maturity. Management
              has the  positive  intent and  ability  to hold  these  investment
              securities to maturity.

       (f)    Loans Receivable

              Loans  receivable are stated at unpaid  principal  amount,  net of
              unearned discount,  unamortized  premiums,  deferred loan fees and
              the allowance  for loan losses.  Premiums and discounts on related
              loans are amortized  into income using a method that  approximates
              the  level-yield  method.  Loan  origination  fees net of  certain
              related  costs  are  generally  amortized  into  income  over  the
              estimated  term of the  loan.  Interest  income  on  loans  is not
              recognized when considered doubtful of collection by management.

              Loans  considered  doubtful of collection by management are placed
              on a nonaccrual  status for the  recording of interest.  Generally
              loans past due 90 days or more as to  principal  or  interest  are
              placed on nonaccrual  status  except for certain  loans which,  in
              management's  judgment,  are  adequately  secured  and  for  which
              collection  is probable.  Previously  accrued  income that has not
              been collected is reversed from current  income.  Thereafter,  the
              application  of  payments  received  (principal  or  interest)  is
              dependent on the expectation of ultimate repayment of the loan. If
              ultimate repayment of the loan is expected,  any payments received
<PAGE>
              are applied in  accordance  with  contractual  terms.  If ultimate
              repayment of principal is not expected or management  judges it to
              be prudent,  any payment  received on a nonaccrual loan is applied
              to principal until ultimate repayment becomes expected.  Loans are
              removed  from  nonaccrual  status when they  become  current as to
              principal and interest and when, in the opinion of management, the
              loans are  estimated to be fully  collectible  as to principal and
              interest.  Amortization of related deferred fees is suspended when
              a loan is placed on nonaccrual status.

              The Company  maintains an allowance  for loan losses for estimable
              and probable  losses.  The allowance for loan losses is maintained
              at a level deemed  appropriate by management to adequately provide
              for  known  and   inherent   risks  in  the   present   portfolio.
              ManagementOs  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  the
              borrowersO  ability to pay. The determination of the amount of the
              allowance for loan losses includes  estimates that are susceptible
              to significant  fluctuations due to changes in appraisal values of
              collateral and general economic conditions. In connection with the
              determination of the allowance for loan losses, management obtains
              independent   appraisals   for   significant   properties.   While
              management  uses  available  information  to  recognize  losses on
              loans, future additions to the allowance may be necessary based on
              changes  in  economic  conditions,  particularly  in  the  Capital
              District region of New York State. In addition, various regulatory
              agencies,  as an  integral  part  of  their  examination  process,
              periodically  review the Company's allowance for loan losses. Such
              agencies  may require the Company to  recognize  additions  to the
              allowance  based upon their judgment of  information  available to
              them at the time of their examination.

              In 1993, the Financial  Accounting Standards Board ("FASB") issued
              Statement  of  Financial  Accounting  Standards  No. 114 (SFAS No.
              114), "Accounting by Creditors for Impairment of a Loan". SFAS No.
              114 was amended by Statement of Financial Accounting Standards No.
              118,  "Accounting  by Creditors  for  Impairment  of a Loan-Income
              Recognition and  Disclosures,"  (SFAS No. 118).  These  statements
              prescribe  recognition  criteria  for  loan  impairment  generally
              related to  commercial  type loans,  and  measurement  methods for
              certain  impaired  loans and all loans whose terms are modified in
              troubled debt  restructurings  subsequent to the adoption of these
              statements. A loan is considered impaired when it is probable that
              the  borrower  will not repay the loan  according  to the original
              contractual terms of the loan agreement.

              On January 1, 1995, the Company adopted the provisions of SFAS No.
              114 and SFAS No. 118 and has provided  the  required  disclosures.
              The  effect  of  adoption  was not  material  to the  consolidated
              financial statements. As a matter of policy, the Company generally
              places impaired loans on nonaccrual status and recognizes interest
              income  on  such  loans  only on a cash  basis,  upon  receipt  of
<PAGE>
              interest payments from the borrower. In some instances, all monies
              received  from the borrower,  or from the proceeds of  collateral,
              are applied directly to reduce the principal  balance of the loan,
              and no interest income is recognized  until the principal  balance
              of the  impaired  loan is paid in full or is no longer  considered
              impaired.

       (g)    Real Estate Owned

              Included in real estate owned are assets received from foreclosure
              and in-substance foreclosures.  In accordance with SFAS No. 114, a
              loan is classified as an in-substance foreclosure when the Company
              has taken  possession  of the  collateral  regardless  of  whether
              formal foreclosure proceedings have taken place.

              Foreclosed  assets,  including  in-substance   foreclosures,   are
              recorded  on an  individual  asset basis at net  realizable  value
              which is the lower of fair value minus  estimated costs to sell or
              "cost" (defined as the fair value at initial foreclosure).  When a
              property is acquired or  identified as  in-substance  foreclosure,
              the excess of the loan  balance  over fair value is charged to the
              allowance  for loan  losses.  Subsequent  writedowns  to carry the
              property at fair value are included in noninterest expense.

       (h)    Premises and Equipment

              Premises  and  equipment  are  stated  at  cost  less  accumulated
              depreciation  and  amortization.  Depreciation  is computed on the
              straight-line  or  accelerated  method over the  estimated  useful
              lives of the related  assets.  Useful lives are 20 to 50 years for
              banking  house  and 3 to 15 years  for  furniture,  fixtures,  and
              office equipment.

       (i)    Employee Benefit Plans

              The Company has a defined  benefit  pension plan covering all full
              time employees meeting age and service requirements. The projected
              unit  credit  method  was  utilized  to measure  the net  periodic
              pension costs over the employee's service life.

       (j)    Income Taxes

              Income taxes are provided on income  reported in the  consolidated
              statements  of income  regardless  of when such taxes are payable.
              The Company accounts for income taxes in accordance with Statement
              of Financial  Accounting Standards No. 109, OAccounting for Income
              TaxesO  (SFAS  No.  109).  SFAS No.  109  requires  the  asset and
              liability  method of accounting for income taxes.  Under the asset
              and  liability  method of SFAS No.  109,  deferred  tax assets and
              liabilities  are  recognized  for  the  future  tax   consequences
              attributable to differences  between financial  statement carrying
              amounts of existing assets and  liabilities  and their  respective
              tax basis.  Deferred tax assets and liabilities are measured using
              enacted tax rates expected to apply to taxable income in the years
              in which those temporary  differences are expected to be recovered
              or settled.  Under SFAS No. 109, the effect on deferred tax assets
<PAGE>
              and  liabilities  of a change in tax rates is recognized in income
              in the period that  includes the  enactment  date.  The  CompanyOs
              policy is that  deferred  tax  assets are  reduced by a  valuation
              reserve if, based on the weight of available evidence,  it is more
              likely than not that some or all of the  deferred  tax assets will
              not be realized.

       (k)    Accounting  for Transfers  and  Servicing of Financial  Assets and
              Extinguishment of Liabilities

              In June 1996,  the  Financial  Accounting  Standards  Board issued
              Statement  of  Financial  Accounting  Standards  No. 125 (SFAS No.
              125),  which  provides  accounting  and  reporting  standards  for
              transfers and servicing of financial assets and  extinguishment of
              liabilities    based    on    consistent    application    of    a
              financial-components   approach   that  focuses  on  control.   In
              addition,  SFAS No. 125 amends  SFAS No. 115 to prevent a security
              from being  classified  as held to maturity if the security can be
              prepaid  or  settled  in such a  manner  that  the  holder  of the
              security  would  not  recover  substantially  all of its  recorded
              investment.  The extension of the SFAS No. 115 approach to certain
              non-security  financial  assets and the  amendment of SFAS No. 115
              are  effective  for  financial  assets held on or  acquired  after
              January 1,  1997.  Effective  January  1, 1997,  SFAS No. 125 will
              supersede  SFAS No. 122.  SFAS No. 125 is effective  for transfers
              and   servicing  of  financial   assets  and   extinguishment   of
              liabilities occurring after December 31, 1996. Management believes
              the  adoption  of SFAS No. 125 will not have a material  impact on
              the CompanyOs consolidated financial statements.

       (l)    Borrowings

              The  Company  has an  overnight  line of  credit  and a  one-month
              overnight repricing line of credit with the Federal Home Loan Bank
              of New York as of December 31, 1996 totaling  approximately  $16.6
              million.  The interest rate may fluctuate based on existing market
              conditions  and  customersO  demands  for  credit.  There  were no
              amounts  outstanding  under  this line of credit at  December  31,
              1996.

       (m)    Earnings per Share

              Earnings  per share was  determined  by dividing net income by the
              weighted average number of shares  outstanding  during the period.
              The weighted average number of shares does not include unallocated
              employee stock  ownership plan shares.  Earnings per share in 1995
              were  compiled on earnings  and weighted  average  shares from the
              date of conversion through December 31, 1995. The weighted average
              number of shares  outstanding  was  1,248,074  for the year  ended
              December 31, 1996,  and  1,495,000 for the period from the date of
              conversion through December 31, 1995. In calculating  earnings per
              share for 1995,  post  conversion net income of $613,000 was used.
              The effect of  outstanding  stock option awards is not material to
              the calculation of earnings per share.  Earnings per share are not
              presented for periods  prior to the initial stock  offering as the
              Bank was a mutual thrift at the time and no stock was outstanding.
<PAGE>
       (n)    Reclassifications

              Certain  amounts  in the prior  years'  financial  statements  are
              reclassified  whenever  necessary,  in  order  to  conform  to the
              presentation in the current year's financial statements.


(2)    Conversion to Stock Ownership

       On June 29, 1995,  the Holding  Company sold  1,495,000  shares of common
       stock at  $10.00  per share to  depositors,  employees  of the Bank,  and
       outsiders.  Net proceeds  from the sale of stock of the Holding  Company,
       after deducting conversion expenses of approximately $750,000, were $14.2
       million and are reflected as common stock and additional  paid-in capital
       in the  accompanying  consolidated  balance sheets.  The Company utilized
       $7.1 million of the net  proceeds to acquire all of the capital  stock of
       the Bank.

       As part of the conversion, the Bank established a liquidation account for
       the benefit of eligible depositors who continue to maintain their deposit
       accounts  in the  Bank  after  conversion.  In the  unlikely  event  of a
       complete  liquidation  of the  Bank,  each  eligible  depositor  will  be
       entitled  to  receive a  liquidation  distribution  from the  liquidation
       account, in the proportionate amount of the then current adjusted balance
       for deposit accounts held,  before  distribution may be made with respect
       to the  Bank's  capital  stock.  The Bank may not  declare  or pay a cash
       dividend to the Holding  Company  on, or  repurchase  any of, its capital
       stock if the effect thereof would cause the retained earnings of the Bank
       to be reduced  below the amount  required  for the  liquidation  account.
       Except for such  restrictions,  the existence of the liquidation  account
       does not restrict the use or application of retained earnings.

       The Bank's capital exceeds all of the fully phased-in capital  regulatory
       requirements.  The  Office  of  Thrift  Supervision  ("OTS")  regulations
       provide  that an  institution  that exceeds all fully  phased-in  capital
       requirements  before and after a  proposed  capital  distribution  could,
       after  prior  notice but without the  approval by the OTS,  make  capital
       distribution  during the calendar year of up to 100% of its net income to
       date  during  the  calendar  year plus the amount  that  would  reduce by
       one-half its "surplus  capital  ratio" (the excess capital over its fully
       phased-in  capital  requirements)  at the beginning of the calendar year.
       Any  additional  capital  distributions  would require  prior  regulatory
       approval.  At December 31, 1996,  the maximum amount that could have been
       paid by the Bank to the Holding Company was approximately $7.0 million.

       Unlike the Bank, the Holding  Company is not subject to these  regulatory
       restrictions on the payment of dividends to its stockholders.

(3)    Reserve Requirements

       The  Company is  required  to  maintain  certain  reserves of cash and/or
       deposits  with the  Federal  Reserve  Bank.  The  amount of this  reserve
       requirement,  included  in cash and due  from  banks,  was  approximately
       $171,000 and $149,000 at December 31, 1996 and 1995, respectively.

       The Company is also required to maintain  certain  levels of stock in the
Federal Home Loan Bank of New York.
<PAGE>
(4)    Securities Available-for-Sale

       The  available-for-sale  portfolio at December 31, 1996 and 1995 consists
       of mutual funds  representing  investments  in both  adjustable and fixed
       rate mortgage-related securities and U.S. Government obligations.

       The amortized  cost and  approximate  fair value at December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
                                                                                     1996
                                                             -------------------------------------------------------
                                                                                (in thousands)
                                                                               Gross          Gross      Approximate
                                                              Amortized     Unrealized     Unrealized       Fair
                                                                Cost           Gains         Losses         Value
                                                                ----           -----         ------         -----
<S>                                                          <C>              <C>            <C>          <C>
           Mutual funds                                      $  1,944           46            --             1,990
                                                               -------        -----          ------       --------
               Total securities available-for-sale           $  1,944           46            --             1,990
                                                               =======        =====          ======       ========
<CAPTION>

                                                                                     1995
                                                             -------------------------------------------------------
                                                                                (in thousands)
                                                                               Gross          Gross      Approximate
                                                              Amortized     Unrealized     Unrealized       Fair
                                                                Cost           Gains         Losses         Value
                                                                ----           -----         ------         -----
<S>                                                          <C>             <C>             <C>         <C>
           Mutual funds                                      $  7,888           88             --           7,976
                                                               -------        -----          ------       --------
               Total securities available-for-sale           $  7,888           88             --           7,976
                                                               =======        =====          ======       ========
</TABLE>
       Proceeds   from   the   sale  of   securities   available-for-sale   were
       approximately  $6.0 million,  $0, and $3.9 million during 1996,  1995 and
       1994,   respectively.   During  1996,  the  sale  of   available-for-sale
       securities resulted in gross realized gains of $44,000 and gross realized
       losses of $36,000. During 1994, the sale of available for sale securities
       resulted in gross realized gain of approximately $8,000.


(5)    Investment and Mortgage-Backed Securities

       (a)    Investment Securities
<PAGE>
              The  amortized  cost and  approximate  fair  values of  investment
securities at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
                                                           Gross         Gross       Approximate
                                            Amortized    Unrealized    Unrealized      Fair
                                              Cost         Gains         Losses        Value
                                              ----         -----         ------        -----
                                                               (in thousands)
<S>                                          <C>          <C>          <C>           <C>
U.S. Government securities and agencies      $13,461            1          (98)       13,364

States and political subdivisions .....           84         --           --              84
Public utilities ......................        2,201         --             (7)        2,194
                                             -------      -------      -------       -------
  Total investment securities .........      $15,746            1         (105)       15,642
                                             =======      =======      =======       =======
</TABLE>
              The  amortized  cost and  approximate  fair  values of  investment
securities at December 31, 1995 is as follows:
<TABLE>
<CAPTION>
                                                           Gross         Gross      Approximate
                                            Amortized    Unrealized   Unrealized        Fair
                                              Cost         Gains        Losses         Value
                                              ----         -----        ------         -----
                                                               (in thousands)
<S>                                          <C>          <C>         <C>             <C>
U.S. Government securities and agencies      $15,660           58           (6)       15,712

States and political subdivisions .....           93         --           --              93
Corporate securities ..................          204         --           --             204
Public utilities ......................        2,701            4           (2)        2,703
                                             -------      -------      -------       -------
  Total investment securities .........      $18,658           62           (8)       18,712
                                             =======      =======      =======       =======
</TABLE>
              There were no sales of investment securities during 1996, 1995 and
1994.

              The amortized cost and  approximate  fair value of debt securities
              at December 31, 1996, by  contractual  maturity,  are shown below.
              Expected  maturities  will  differ  from  contractual   maturities
              because borrowers may have the right to call or prepay obligations
              with or without call or prepayment penalties.

<TABLE>
<CAPTION>
                                                       Amortized         Estimated
                                                         Cost           Fair Value
                                                         ----           ----------
                                                              (in thousands)
<S>                                                    <C>               <C>
                Due within one year                    $  4,251              4,245
                Due one year to five years               10,216             10,118
                Due five years to ten years                  84                 84
                Due after ten years                       1,195              1,195
                                                        -------          ---------
                     Total debt securities             $ 15,746             15,642
                                                       ========             ======
</TABLE>
<PAGE>
       (b)    Mortgage-Backed Securities

              A summary of mortgage-backed securities at December 31, 1996 is as
follows:
<TABLE>
<CAPTION>
                                          Gross           Gross         Estimated
                          Amortized     Unrealized      Unrealized        Fair
                            Cost          Gains           Losses         Value
                            ----          -----           ------         -----
                                              (in thousands)
<S>                       <C>            <C>             <C>             <C>

GNMA .............        $ 2,538            183              (1)          2,720
FHLMC ............         12,395             15            (254)         12,156
FNMA .............          5,501             34             (89)          5,446
                          -------        -------         -------         -------
                          $20,434            232            (344)         20,322
                          =======        =======         =======         =======
</TABLE>
              A summary of mortgage-backed securities at December 31, 1995 is as
follows:
<TABLE>
<CAPTION>

                                          Gross          Gross        Estimated
                          Amortized     Unrealized      Unrealized       Fair
                            Cost          Gains          Losses          Value
                            ----          -----          ------          -----
                                             (in thousands)
<S>                       <C>            <C>             <C>             <C>

GNMA .............        $ 3,107            240            --             3,347
FHLMC ............         14,388             55             (87)         14,356
FNMA .............          6,923             45             (26)          6,942
                          -------        -------         -------         -------
                          $24,418            340            (113)         24,645
                          =======        =======         =======         =======
</TABLE>

              There were no sales of  mortgage-backed  securities  during  1996,
1995 and 1994.
<PAGE>
              The  amortized  cost and estimated  fair value of  mortgage-backed
              securities  at December 31, 1996,  by final  contractual  maturity
              date,  are shown below.  Contractual  maturities  will differ from
              actual  maturities  because  borrowers  have the  right to call or
              prepay obligations without penalties.
<TABLE>
<CAPTION>
                                                        Amortized     Estimated
                                                         Cost         Fair Value
                                                         ----         ----------
                                                             (in thousands)
<S>                                                     <C>               <C>

Due within five years ........................          $14,366           14,035
Due five years to ten years ..................              236              240
Due after  ten years .........................            5,832            6,047
                                                        -------          -------
                                                        $20,434           20,322
                                                        =======          =======
</TABLE>
              The  Company  held  no   mortgage-backed   securities  with  final
contractual maturities of one year or less.

(6)    Loans Receivable, Net

       A  summary  of  loans  receivable  at  December  31,  1996 and 1995 is as
follows:
<TABLE>
<CAPTION>
                                                              1996         1995
                                                              ----         ----
                                                                (in thousands)
<S>                                                        <C>          <C>
Loans secured by real estate:
     Residential:
         Conventional ................................     $ 84,840       64,322
         Home equity .................................       22,904       22,723
         FHA insured .................................        3,511        4,797
         VA guaranteed ...............................        2,810        3,100
     Commercial and multi family .....................        4,532        6,144
                                                           --------     --------
                                                            118,597      101,086
                                                           --------     --------
Other loans:
     Education .......................................            4           22
     Commercial ......................................            4            5
     Personal ........................................           34           41
     Property improvement ............................            3            5
     Loans on savings accounts .......................          478          361
                                                           --------     --------
                                                                523          434
                                                           --------     --------
Less:
     Unearned discount and net deferred loan fees ....           23           27
     Allowance for loan losses .......................          642          572
                                                           --------     --------
                                                                665          599
                                                           --------     --------
         Loans receivable, net .......................     $118,455      100,921
                                                           ========     ========
</TABLE>
<PAGE>
       Not included in the Company's loans  receivable are real estate mortgages
       serviced by the Bank for other  institutions  of  approximately  $4.2 and
       $4.9 million at December 31, 1996 and 1995, respectively.

       As a result of the  adoption  of SFAS No.  114,  the  allowance  for loan
       losses related to impaired loans is based on discounted  cash flows using
       the  loan's  initial  effective  interest  rate or the fair  value of the
       collateral  for certain loans where  repayment of the loan is expected to
       be provided  solely by the underlying  collateral  (collateral  dependent
       loans).  The Company's  impaired loans at December 31, 1996 and 1995 were
       collateral dependent. The Company considers estimated costs to sell, on a
       discounted  basis,  when  determining the fair value of collateral in the
       measurement  of impairment if those costs are expected to reduce the cash
       flows available to repay or otherwise satisfy the loans.

       At both December 31, 1996 and 1995, the recorded investment in loans that
       were  considered to be impaired under SFAS No. 114 totaled  approximately
       $744,000.  The amount in both years represents one impaired loan that, as
       a result of charge-offs  of  approximately  $202,000,  did not require an
       allowance for credit losses  determined in accordance  with SFAS No. 114.
       The  average  recorded  investment  in impaired  loans  during the twelve
       months ended  December 31, 1996 and 1995 was  approximately  $744,000 and
       $1,091,000, respectively.

       For the years ended  December 31, 1996 and 1995,  the Company  recognized
       approximately  $74,000 and $50,000 of interest  income on impaired loans,
       respectively.

       The  following   table  sets  forth  the   information   with  regard  to
non-performing loans:
<TABLE>
<CAPTION>

                                                                1996           1995
                                                               ------       -------
                                                                  (in thousands)
<S>                                                          <C>           <C>

         Loans on a nonaccrual status                        $    801           798
         Loans contractually past due 90 days or more
             and still accruing interest                           32            41
         Restructured loans                                       --             --
                                                               ------       -------
                  Total non-performing loans                 $    833           839
                                                               ======       =======
</TABLE>


       Interest on nonaccrual and restructured  loans of approximately  $81,000,
       $99,000  and  $196,000  would  have been  earned in  accordance  with the
       original  contractual  terms  of  the  loans  in  1996,  1995  and  1994,
       respectively.  Approximately $74,000, $38,000 and $47,000 of interest was
       collected and recognized as income in 1996, 1995 and 1994,  respectively.
       There are no commitments  to extend  further  credit on the  restructured
       loans.
<PAGE>
       Certain directors and executive officers of the Company were customers of
       and had other  transactions  with the Company in the  ordinary  course of
       business.  Loans to these  parties  were made in the  ordinary  course of
       business at the Company's  normal credit terms,  including  interest rate
       and collateralization.  The aggregate of such loans totaled approximately
       $145,000 and $140,000 at December 31, 1996 and 1995, respectively.  Total
       advances to the directors and  executive  officers  during the year ended
       December 31, 1996 were $13,000.  Total  payments made on these loans were
       approximately $8,000.

       Changes in the allowance for loan losses for the years ended December 31,
1996, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
                                                     1996       1995       1994
                                                     ----       ----       ----
                                                           (in thousands)
<S>                                                 <C>        <C>        <C>

Balance, beginning of year ....................     $ 572        861        804
Provision charged to operations ...............       120        370        120
Loans charged off .............................       (87)      (718)      (101)
Recoveries on loans previously charged off ....        37         59         38
                                                    -----      -----      -----
Balance, end of year ..........................     $ 642        572        861
                                                    =====      =====      =====
</TABLE>
(7)    Accrued Interest Receivable

       A summary of accrued interest receivable as of December 31, 1996 and 1995
by type was as follows:
<TABLE>
<CAPTION>
                                                              1996           1995
                                                              ----           ----
                                                                 (in thousands)
<S>                                                         <C>           <C>
Loans ..............................................        $  693           645
Mortgage-backed securities .........................           120           144
Investment securities ..............................           324           372
                                                            ------        ------
    Total accrued interest receivable ..............        $1,137         1,161
                                                            ======        ======
</TABLE>
(8)    Premises and Equipment, Net
<PAGE>
       Premises and  equipment at December 31, 1996 and 1995 are  summarized  by
major classification as follows:

<TABLE>
<CAPTION>
                                                                1996        1995
                                                                  (in thousands)
<S>                                                           <C>         <C>
Land ...................................................      $  305         305
Leasehold improvements .................................         240         203
Office buildings .......................................       2,338       1,915
Furniture, fixtures and equipment ......................         889         842
                                                              ------      ------
        Total ..........................................       3,772       3,265

Less accumulated depreciation and amortization .........       1,851       1,851
                                                              ------      ------
        Premises and equipment, net ....................      $1,921       1,414
                                                              ======      ======
</TABLE>
       Depreciation and amortization  included in office occupancy and equipment
       expense amounted to approximately $140,000, $143,000 and $142,000 for the
       years ended December 31, 1996, 1995 and 1994, respectively.

(9)    Real Estate Owned

       A summary of real estate acquired  through  foreclosure by the Company or
       classified as  in-substance  foreclosure as of December 31, 1996 and 1995
       is as follows:
<TABLE>
<CAPTION>

                                                            1996            1995
                                                            ----            ----
                                                              (in thousands)
<S>                                                         <C>             <C>
Residential (1 - 4 family) .....................            $ 93            --
Commercial property ............................              85             200
                                                            ----            ----
    Total real estate owned ....................            $178             200
                                                            ====            ====
</TABLE>
<PAGE>
(10)   Due to Depositors

       Due to  depositors  account  balances at  December  31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
                                                  Stated
                                                   rate       1996         1995
                                                         (in thousands)
<S>                                             <C>         <C>         <C>
Savings deposit accounts:
     Passbook and statement deposit accounts
                                                    3.00%   $ 37,152      40,745
     Money market deposit accounts .........    2.76 - 4.41    6,074       4,237

                                                            --------    --------
                                                              43,226      44,982
Time deposit accounts:

           3.00 - 3.99 .....................                    --         1,124
           4.00 - 4.99 .....................                  23,244       2,691
           5.00 - 5.99 .....................                  50,815      51,996
           6.00 - 6.99 .....................                  12,835      28,119
           7.00 - 7.99 .....................                     --          618
           8.00 - 8.99 .....................                     --          151
                                                            --------    --------
                                                              86,894      84,699
NOW deposit accounts .......................        1.75       9,104       7,913
Demand deposit accounts ....................           0       1,392       2,077
                                                            --------    --------
         Total deposits ....................                $140,616     139,671
                                                            ========    ========
</TABLE>

       The approximate amount of contractual maturities of time deposit accounts
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>


                Year ended December 31,     (in thousands)
<S>                                             <C>
                            1997                $59,914
                            1998                 16,040
                            1999                  7,528
                            2000                  2,328
                            2001                  1,084
                                                -------
                                                $86,894
</TABLE>
       At  December  31, 1996 and 1995,  the  aggregate  amount of time  deposit
       accounts   with   balances   equal  to  or  in  excess  of  $100,000  was
       approximately $6.2 million and $5.4 million, respectively.
<PAGE>
       Interest  expense on deposits  and  advance  payments  by  borrowers  for
       property taxes and insurance for the years ended December 31, 1996,  1995
       and 1994 is summarized as follows:
<TABLE>
<CAPTION>

                                                             1996       1995      1994
                                                                   (in thousands)
<S>                                                        <C>         <C>        <C>

Escrow balances .......................................    $   25         29         25
Passbook and statement savings ........................     1,173      1,325      1,706
Money market accounts .................................       161        129        155
Time deposits .........................................     4,680      4,620      3,054
NOW accounts ..........................................       148        133        137
                                                           ------     ------     ------
     Total interest on deposits and advance payments by
        borrowers for property taxes and insurance ....    $6,187      6,236      5,077
                                                           ======     ======     ======

Weighted average interest rates .......................      4.32%      4.39%      3.66%
                                                           ======     ======     ======

</TABLE>

(11)   Income Taxes

       As discussed in Note 1, the Company adopted SFAS No. 109 as of January 1,
       1993. At  implementation,  the Company was unable to record any impact of
       the prior years' net operating loss  carryforwards due to the uncertainty
       of the realization of the resultant  deferred tax asset.  Therefore,  the
       adoption  of  SFAS  No.  109  had no  material  impact  on the  Company's
       financial position at January 1, 1993.

       The  following is a summary of the  components  of income tax expense for
the year ended December 31:
<TABLE>
<CAPTION>

                                                 1996           1995        1994
                                                 ----           ----        ----
                                                         (in thousands)
<S>                                             <C>           <C>          <C>
Current tax expense:
    Federal ............................        $ 372           306          175
    State ..............................           76            50           40
    Deferred benefit ...................         (554)         --           --
                                                -----         -----        -----
Income tax expense (benefit) ...........        $(106)          356          215
                                                =====         =====        =====
</TABLE>
<PAGE>
       The  provision  for  income  taxes is less than the  amount  computed  by
applying  the U.S.  Federal  income  tax rate of 34% to income  before  taxes as
follows:
<TABLE>
<CAPTION>
                                                1996                      1995                      1994
                                       ----------------------    ---------------------      ----------------------
                                                       % of                      % of                      % of
                                                      Pretax                    Pretax                    Pretax
                                        Amount        Income      Amount        Income       Amount       Income
                                        ------        ------      ------        ------       ------       ------
                                                                      (dollars in thousands)
<S>                                     <C>          <C>           <C>            <C>        <C>            <C>

Tax expense at statutory rate ...       $ 246          34.0%      $ 412           34.0%       $247           34.0%
Utilization of net operating loss
    carryforward ................          --            --          --             --         (97)         (13.4)
State income tax, net of
    federal tax benefit .........          45           6.2          33            2.7          26            3.6
Change in beginning of year
   balance of the valuation
   allowance for deferred tax
   assets .......................        (396)        (54.7)        (78)          (6.4)         --            --
Other, net ......................          (1)          (.1)        (11)           (.9)         39            5.4
                                        -----         ----         -----          ----         ---           ----
                                        $(106)        (14.6)%     $ 356           29.4%       $215           29.6%
                                        =====         =====       =====           ====        ====           ====
</TABLE>
<PAGE>
       The tax effects of significant  temporary  differences  that give rise to
the deferred tax assets and liabilities as of December 31, 1996 and 1995, are as
follows:
<TABLE>
<CAPTION>
                                                                              1996           1995
                                                                            --------        --------
                                                                                (in thousands)
<S>                                                                       <C>               <C>
                Deferred tax assets:
                    Allowance for loan losses                             $      276             195
                    Deferred loan fees, net                                        3               4
                    Deferred compensation and pension costs                      406             303
                    Recognition and retention plan expense                        62             --
                    Securities basis adjustment                                   46              54
                                                                            --------        --------
                         Total gross deferred tax assets                         793             556
                         Less valuation allowance                                (96)           (492)
                                                                            --------        --------
                         Net deferred tax assets                                 697              64
                                                                            --------        --------

                Deferred tax liabilities:
                    Depreciation differences                                      74              48
                    Accretion of discount on securities                           19              16
                    Other items                                                   50             --
                                                                            --------        --------
                         Total gross deferred tax liabilities                    143              64
                                                                            --------        --------

                         Net deferred tax asset at year-end                      554              -

                         Net deferred tax asset at beginning of year             --               -

                         Deferred tax benefit for the years ended         $      554              -
                                                                            ========        =======
</TABLE>
<PAGE>
       The  valuation  allowance for deferred tax assets as of December 31, 1996
       was  $96,000,  a reduction  of $396,000  from  December  31,  1995.  This
       reduction was primarily the result of the expected realization of certain
       deferred  items which were  previously  considered  to be  uncertain.  In
       evaluating the valuation  allowance the Company takes into  consideration
       the  nature  and timing of the  deferred  tax asset  items as well as the
       amount of available open tax  carrybacks.  The Company has fully reserved
       its New York State deferred tax asset,  which is a significant  component
       of deferred  tax assets,  due to the lack of carryback  and  carryforward
       provisions  available in New York State.  Any changes in the deferred tax
       asset  valuation  allowance  is  based  upon  the  CompanyOs   continuing
       evaluation of the level of such  allowance and the  realizability  of the
       temporary differences creating the deferred tax asset.

       Formerly,  as a qualifying thrift  institution under IRS guidelines,  the
       Bank was allowed a special bad debt deduction  which has not been subject
       to deferred taxes through  December 31, 1987 in accordance  with SFAS No.
       109. Accordingly, no deferred tax liability has been recorded for the tax
       bad  debt  reserve  at  December  31,  1987.  This  reserve,   which  was
       approximately  $4.6 million at December 31, 1987,  will not be subject to
       tax  as  long  as  the  Bank  does  not  redeem   stock  or  have  excess
       distributions to its shareholder.


(12)   Fair Value of Financial Instruments

       SFAS No. 107,  "Disclosures  about Fair Value of  Financial  Instruments"
       requires the Company to disclose  estimated fair values for its financial
       instruments.  SFAS No. 107 defined fair value of financial instruments as
       the  amount  at which  the  instrument  could be  exchanged  in a current
       transaction between willing parties other than in a forced or liquidation
       sale.  SFAS No. 107 defines a financial  instrument as cash,  evidence of
       ownership interest in an entity, or a contract that imposes on one entity
       a contractual  obligation to deliver cash or another financial instrument
       to a  second  entity  or  to  exchange  other  financial  instruments  on
       potentially  unfavorable  terms with a second  entity and conveys to that
       second  entity a contractual  right to receive cash or another  financial
       instrument   from  the  first  entity  or  to  exchange  other  financial
       instruments on potentially favorable terms with the first entity.

       Fair  value  estimates  are made at a  specific  point in time,  based on
       relevant  market   information   and  information   about  the  financial
       instrument.  These  estimates do not reflect any premium or discount that
       could  result from  offering  for sale at one time the  Company's  entire
       holdings of a particular  financial  instrument.  Because no ready market
       exists for a significant portion of the Company's financial  instruments,
       fair value estimates are based on judgments regarding future expected net
       cash flows, current economic conditions,  risk characteristics of various
       financial instruments,  and other factors. These estimates are subjective
       in nature and involve  uncertainties and matters of significant  judgment
       and,  therefore,   cannot  be  determined  with  precision.   Changes  in
       assumptions could significantly affect the estimates.

       Fair value  estimates  are based on existing  on- and  off-balance  sheet
       financial  instruments  without  attempting  to  estimate  the  value  of
       anticipated  future business and the value of assets and liabilities that
<PAGE>
       are  not  considered  financial   instruments.   Significant  assets  and
       liabilities  that are not  considered  financial  assets  or  liabilities
       include the deferred  tax asset and office  premises  and  equipment.  In
       addition,  tax ramifications related to the realization of the unrealized
       gains and  losses,  which  can have a  significant  effect on fair  value
       estimates,  have not have been  considered in the estimates of fair value
       under SFAS No. 107.

       In addition  there are  significant  intangible  assets that SFAS No. 107
       does not recognize,  such as the value of "core deposits",  the Company's
       branch network and other items generally referred to as "goodwill."

       The following  tables  present the carrying  amounts and  estimated  fair
       values of the Company's  financial  instruments  at December 31, 1996 and
       1995:
<TABLE>
<CAPTION>
                                                                            December 31, 1996
                                                                       --------------------------
                                                                             (in thousands)
                                                                        Carrying        Estimated
                                                                         Amount        Fair Value
                                                                         ------        ----------
<S>                                                                    <C>              <C>
Cash and cash equivalents ....................................         $  2,896            2,896
Securities available for sale ................................            1,990            1,990
Debt securities ..............................................           15,746           15,642
Mortgage-backed securities ...................................           20,434           20,322
Accrued interest receivable ..................................            1,137            1,137

Loans ........................................................          119,120          118,903

  Less:  allowance for loan losses ...........................              642             --
            unearned discount, and deferred loan fees, net ...               23             --
                                                                       --------         --------
       Net loans .............................................          118,455          118,903
                                                                       --------         --------
           Total financial assets ............................         $160,658          160,890
                                                                       ========         ========

Savings, now, and demand deposit accounts ....................           53,722           53,722
Time deposit accounts ........................................           86,894           86,968
Advance payments by borrowers for property taxes and insurance            1,160            1,160
Accrued interest on depositors accounts ......................                7                7
                                                                       --------         --------
           Total financial liabilities .......................         $141,783          141,857
                                                                       ========         ========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                           December 31, 1995
                                                                       --------------------------
                                                                             (in thousands)
                                                                        Carrying         Estimated
                                                                        Amount          Fair Value
                                                                        ------          ----------
<S>                                                                    <C>               <C>
Cash and cash equivalents ....................................         $ 10,453           10,453
Securities available-for-sale ................................            7,976            7,976
Debt securities ..............................................           18,658           18,712
Mortgage-backed securities ...................................           24,418           24,645
Accrued interest receivable ..................................            1,161            1,161

Loans ........................................................          101,520          102,389

  Less:  allowance for loan losses ...........................              572             --
            unearned discount, and deferred loan fees, net ...               27             --
                                                                       --------         --------
       Net loans .............................................          100,921          102,389
                                                                       --------         --------
           Total financial assets ............................         $163,587          165,336
                                                                       ========         ========

Savings, now, and demand deposit accounts ....................           54,972           54,972
Time deposit accounts ........................................           84,699           85,234
Advance payments by borrowers for property taxes and insurance            1,402            1,402
Accrued interest on depositors accounts ......................               10               10
                                                                       --------         --------
           Total financial liabilities .......................         $141,083          141,618
                                                                       ========         ========
</TABLE>

       Financial  Instruments  with  Carrying  Amount  Equal to Fair  Value  The
       carrying  amount  of cash and due  from  banks  and  federal  funds  sold
       (collectively  defined as "cash and cash equivalents"),  accrued interest
       receivable,  accrued interest payable,  and advance payments by borrowers
       for property  taxes and insurance is considered to be equal to fair value
       as a result of their short-term nature.

       Securities  Available  for  Sale,  Debt  Securities  and  Mortgage-Backed
       Securities  The fair value of securities  available for sale,  investment
       securities  and  mortgage-backed  securities  is  estimated  based on bid
       prices published in financial newspapers and bid quotations received from
       either quotation services or securities dealers.

       Loans
       Fair values are estimated for portfolios of loans with similar  financial
       characteristics.   Loans  are   segregated   by  type  such  as  one-  to
       four-family,  commercial real estate, consumer and commercial loans. Each
       loan  category  is  further  segmented  into  fixed and  adjustable  rate
       interest terms and by performing and nonperforming categories.

       The fair value of performing loans is calculated by discounting scheduled
       cash flows through the estimated maturity using estimated market discount
       rates that  reflect  the credit and  interest  rate risk  inherent in the
       loan.  The estimate of maturity is based on the  contractual  term of the
       loans to maturity, adjusted for estimated prepayments.
<PAGE>
       Fair value for nonperforming loans is based on recent external appraisals
       and discounting of cash flows.  Estimated cash flows are discounted using
       a rate  commensurate  with the risk  associated  with the estimated  cash
       flows.  Assumptions regarding credit risk, cash flows, and discount rates
       are  judgmentally  determined  using  available  market  information  and
       specific borrower information.

       Deposit Liabilities
       Under SFAS No. 107, the fair value of deposits  with no stated  maturity,
       such  as  noninterest-bearing  demand  deposits,  savings  deposits,  NOW
       deposits and money market deposits,  must be stated at the amount payable
       on  demand  as  of  December  31,  1996  and  1995.  The  fair  value  of
       certificates  of deposit is based on the discounted  value of contractual
       cash flows.  The  discount  rate is estimated  using the rates  currently
       offered for  deposits  of similar  remaining  maturities.  The fair value
       estimates of deposit  liabilities  in the foregoing  table do not include
       the  benefit  that  results  from the low cost  funding  provided  by the
       deposit  liabilities  compared  to the  cost of  borrowing  funds  in the
       market.

       Commitments to Extend Credit and Standby Letters of Credit
       The fair value of  commitments  to extend  credit is estimated  using the
       fees  currently  charged to enter into  similar  agreements,  taking into
       account  the  remaining   terms  of  the   agreements   and  the  present
       creditworthiness of the counterparties.  For fixed rate loan commitments,
       fair  value  also  considers  the  difference  between  current  level of
       interest  rates and the  committed  rates.  Based on an  analysis  of the
       foregoing  factors,  the fair  value of these  items  approximates  their
       carrying value at December 31, 1996 and 1995.


(13)   Commitments and Contingent Liabilities

       (a)    Off-Balance Sheet Financing and Concentrations of Credit

              The  Company  is a party to  certain  financial  instruments  with
              off-balance  sheet risk in the normal  course of  business to meet
              the financing needs of its customers.  These financial instruments
              are limited to  commitments to extend  credit.  These  instruments
              involve, to varying degrees,  elements of credit risk in excess of
              the amount recognized on the statement of financial condition. The
              contract  amounts  of these  instruments  reflect  the  extent  of
              involvement by the Company.

              The   Company's   exposure   to  credit   loss  in  the  event  of
              nonperformance  by the  other  party to the  commitment  to extend
              credit is represented by the contractual  notional amount of those
              instruments.  The Company uses the same credit  policies in making
              commitments as it does for on-balance sheet instruments.
<PAGE>
              Contract  amounts of financial  instruments  that represent credit
              risk as of  December  31,  1996  and 1995 at  fixed  and  variable
              interest rates are as follows:
<TABLE>
<CAPTION>

                                                              1996
                                               --------------------------------
                                                 Fixed      Variable      Total
                                                 -----      --------      -----
                                                         (in thousands)
<S>                                            <C>           <C>          <C>
Financial instruments
  whose contract amounts represent
  credit risk:
    Conventional mortgage loans .........      $   316        1,572        1,888
    Home equity .........................         --         10,278       10,278
    Commercial loans ....................          306         --            306
    Overdraft loans .....................          114         --            114
                                               -------      -------      -------
                                               $   736       11,850       12,586
                                               =======      =======      =======
<CAPTION>
                                                               1995
                                               --------------------------------
                                                Fixed        Variable     Total
                                                -----        --------     -----
                                                          (in thousands)
<S>                                            <C>          <C>          <C>
Financial instruments
  whose contract amounts represent
  credit risk:
    Conventional mortgage loans .........      $   483        3,054        3,537
    Home equity .........................         --          9,172        9,172
    Commercial loans ....................          152         --            152
    Overdraft loans .....................          112         --            112
                                               -------      -------      -------
                                               $   747       12,226       12,973
                                               =======       ======       ======
</TABLE>
              The range of interest rates on fixed rate  commitments was 5.0% to
              18.0% at December  31,  1996 and 6.25% to 18.00% at  December  31,
              1995. The Company offers  various  adjustable  rate mortgage (ARM)
              products  on  1-4  family  residential  dwellings.  The  principal
              one-year  ARM offered as of December  31, 1996 has a 2.00%  annual
              interest rate adjustment cap, and uses the weekly average from the
              one-year  Treasury  Constant  Maturity  Series,  plus a margin  of
              3.00%, as an index for rate adjustments. The lifetime rate ceiling
              for the  one-year ARM product at December 31, 1996 was 6.00% above
              the initial rate. The Company also offers 3/1 and 5/1 ARM products
<PAGE>
              where the rate is fixed for the first 3 and 5 years, respectively.
              After  the  initial   fixed  term,   the  mortgage  has  the  same
              characteristics  as a one-year ARM. The other ARM product  offered
              at December 31, 1996,  was a jumbo ARM with a lifetime  ceiling of
              6.00% above the initial rate. The Company does not originate loans
              which provide for negative amortization.  Mortgage loan terms vary
              from 10 to 30 years.

              Commitments  to extend credit are agreements to lend to a customer
              as long as there is no violation of any condition  established  in
              the contract. Commitments generally have fixed expiration dates or
              other termination  clauses and may require payment of a fee. Since
              many of the commitments are expected to expire without being fully
              drawn  upon,  the  total  commitment  amounts  do not  necessarily
              represent  future cash  requirements.  The Company  evaluates each
              customer's creditworthiness on a case-by-case basis. The amount of
              collateral,  if any, required by the Company upon the extension of
              credit is based on management's credit evaluation of the customer.
              Mortgage and construction  loan commitments are secured by a first
              or second  lien on real  estate.  Typically,  consumer  credit and
              overdraft loans do not require collateral.

              The Company does not engage in investments  in futures  contracts,
              forwards,  swaps, option contracts or other derivative investments
              with similar characteristics.

       (b)    Lease Commitments

              The  Company  leases  a  branch  facility  under  a  noncancelable
              operating lease expiring in 2006.  Total expenses under this lease
              for the  years  ended  December  31,  1996,  1995  and  1994  were
              approximately  $45,000,  $42,000  and  $40,000,   respectively.  A
              summary  of the  future  minimum  commitments  required  under the
              noncancelable facility lease are as follows:
<TABLE>
<CAPTION>
                     Years ending December 31:                  (in thousands)
<S>                                                               <C>
                               1997                               $    48
                               1998                                    48
                               1999                                    48
                               2000                                    48
                               2001                                    48
                               Thereafter                             252
                                                                    -----
                                                                  $   492
                                                                  =======

</TABLE>
(14)   Employee Benefit Plans

       The  Company's  defined  benefit,  non-contributory,  pension  plan  (the
       OPlanO)  covers  all  full  time   employees   meeting  age  and  service
       requirements.  The benefit  formula is equal to 2% of three year  average
       base earnings multiplied by the number of years of credited service up to
       30 years.  Benefits  contemplated  by the plan are being  funded  under a
       group annuity contract with an insurance company.
<PAGE>
       The  following  table  sets forth the Plan's  funded  status and  amounts
       recognized in the Company's consolidated financial statements at December
       31, 1996 and 1995:
<TABLE>
<CAPTION>

                                                              1996         1995
                                                           -------     -------
                                                                (in thousands)
<S>                                                         <C>         <C>
Actuarial present value of benefit obligations:
   Accumulated benefit obligation, including
     vested benefits of approximately $2,828,000 in
     1996 and $2,585,000 in 1995 .......................    $(2,927)     (2,630)
                                                            =======     =======

   Projected benefit obligation for service
      rendered to date .................................     (3,936)     (3,588)
   Plan assets at fair value ...........................      3,190       2,865
                                                            -------     -------
   Projected benefit obligations in excess
      of plan assets ...................................       (746)       (723)
   Unrecognized net loss from past experience
      different from that assumed of effects
      and changes in assumptions .......................        359         293
   Unrecognized prior service costs ....................          2           2
   Unrecognized net obligation at January 1,
      1989 being recognized over 19.66 years ...........        269         292

                                                            -------     -------
   Accrued pension liability ...........................    $  (116)       (136)
                                                            =======     =======
</TABLE>
              Net  pension  cost  for  1996  and  1995  included  the  following
components:
<TABLE>
<CAPTION>
                                                               1996        1995
                                                               ----        ----
<S>                                                           <C>         <C>
Service cost - benefits earned during the period .......      $ 171         139
Interest cost on projected benefit obligations .........        265         237
Actual return on plan assets ...........................       (171)       (352)
Net amortization and deferral ..........................        (67)        151
                                                              -----       -----
Net periodic pension cost ..............................      $ 198         175
                                                              =====       =====
</TABLE>
<PAGE>
       Significant  assumptions used in determining  pension expense of the Plan
for 1996, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
                                                1996         1995         1994
                                               ------       ------       ------
<S>                                             <C>          <C>          <C>
Discount rate ...........................       7.5%         7.5%         8.0%
Expected long-term rate of return .......       9.0%         9.0%         9.0%
Compensation increase rate ..............       6.0%         6.0%         6.0%
</TABLE>

       The Company has also  established  an Executive  Supplemental  Retirement
       Plan for key management personnel.  An expense of approximately  $72,000,
       $107,000 and $184,000 was recorded in 1996, 1995 and 1994, respectively.

       The Company also  maintains a defined  contribution  401(k) savings plan,
       covering  all  full  time  employees  who have  attained  age 21 and have
       completed  one year of  employment.  The Company  matches 50% of employee
       contributions that are less than or equal to 6% of the employee's salary.
       Total  expense  recorded  during  1996,  1995 and 1994 was  approximately
       $23,000, $24,000 and $22,000, respectively.

       Employee Stock Ownership Plan
       As part  of the  conversion  discussed  in  Note  2,  an  employee  stock
       ownership  plan  (ESOP)  was  established  to provide  substantially  all
       employees of the Company the opportunity to also become stockholders. The
       ESOP borrowed  $1,196,000 from the Company and used the funds to purchase
       119,600  shares  of  the  common  stock  of  the  Company  issued  in the
       conversion.  The loan  will be  repaid  principally  from  the  Company's
       discretionary  contributions  to the ESOP over a period of ten years.  At
       December  31,  1996 and  1995,  the loan had an  outstanding  balance  of
       $956,800 and  $1,076,400,  respectively,  and an interest  rate of 7.31%.
       Both the loan obligation and the unearned compensation are reduced by the
       amount of loan  repayments  made by the ESOP.  Shares  purchased with the
       loan  proceeds  are  held in a  suspense  account  for  allocation  among
       participants as the loan is repaid.  Contributions to the ESOP and shares
       released from the suspense  account are allocated  among  participants on
       the basis of compensation in the year of allocation.

       The  Company  accounts  for the  ESOP in  accordance  with  the  American
       Institute of Certified Public Accountants' Statement of Position No. 93-6
       "Employees'   Accounting   For  Stock   Ownership   Plans"   (SOP  93-6).
       Accordingly, the shares pledged as collateral are reported as unallocated
       ESOP  shares  in  stockholdersO  equity.  As  shares  are  released  from
       collateral, the Company reports compensation expense equal to the current
       market  price  of the  shares,  and the  shares  become  outstanding  for
       earnings per share computations. Unallocated ESOP shares are not included
       in  the   earnings   per  share   computations.   The  Company   recorded
       approximately  $158,000 and $156,000 of  compensation  expense  under the
       ESOP in 1996 and 1995, respectively.
<PAGE>
       The ESOP shares as of December 31, 1996 were as follows:
<TABLE>
<CAPTION>
<S>                                                                   <C>
Allocated shares ...............................................          11,960
Shares released for allocation .................................          11,960
Unallocated shares .............................................          95,680
                                                                      ----------
                                                                         119,600

Market value of unallocated shares at December 31, 1996 ........      $1,411,280
                                                                      ==========
</TABLE>

(15)   Stock Option Plans

       The  Company  has   established   fixed   Incentive   Stock   Option  and
       Non-qualified Stock Option Plans. These programs reserve shares of common
       stock  (adjusted  for stock  splits and  dividends)  for  issuance to key
       employees.  Options may be granted at a price no less than the greater of
       the par value or fair  market  value of such  shares on the date on which
       such option is granted, and expire ten years from the date of grant.

       The Company  applies APB  Opinion No. 25 and related  Interpretations  in
       accounting  for its plans.  Accordingly,  no  compensation  cost has been
       recognized  for its stock option plans.  In October 1995, the FASB issued
       SFAS No. 123,  OAccounting  for Stock-Based  Compensation.O  SFAS No. 123
       requires  Companies not using a fair value based method of accounting for
       employee stock options or similar plans, to provide pro forma  disclosure
       of net income and earnings per share as if that method of accounting  had
       been  applied.  The fair value of each option  grant is  estimated on the
       date of grant  using  the  Black-Scholes  option-pricing  model  with the
       following weighted-average  assumptions used for grants in 1996: dividend
       of $.24 for each year;  expected  volatility of 25.0%; risk free interest
       rates of 5.6%; and expected lives of 7 years.  Pro forma  disclosures for
       the Company for the year ending December 31, 1996 is as follows:
<TABLE>
<CAPTION>
                                           (in thousands except per share data)
<S>                                                   <C>
Net income:
    As reported ...........................           $   830
    Pro Forma .............................               744
Earning Per Share:
    As reported ...........................               .67
    Pro Forma .............................               .60
</TABLE>

       A  summary  of the  status  of the  CompanyOs  stock  option  plans as of
       December  31, 1996 and changes  during the year on that date is presented
       below:
<PAGE>
<TABLE>
<CAPTION>
                                                                       Weighted-
                                                                        Average
                                                                        Exercise
                                                          Shares          Price
<S>                                                     <C>              <C>
Options:
    Outstanding at January 1 ...................            --              --
    Granted ....................................         133,054         $12.625
    Exercised ..................................            --              --
    Cancelled ..................................         (18,687)         12.625
    Outstanding at Year-end ....................         114,367          12.625
    Exercisable at Year-end ....................            --              --

Estimated Weighted-Average Fair Value ..........        $   4.08
                                                        ========

</TABLE>
       The following  table  summarizes  information  about the CompanyOs  stock
options at December 31, 1996:
<TABLE>
<CAPTION>

                                         Options Outstanding                  Options Exercisable
                                              Weighted
                                               Average        Weighted-                     Weighted-
                                Number        Remaining        Average        Number         Average
              Exercise        Outstanding    Contractual      Exercise      Exercisable     Exercise
                Price         at 12/31/96       Life            Price       at 12/31/96       Price
                -----         -----------       ----            -----       -----------       -----
<S>           <C>               <C>           <C>             <C>              <C>             <C>
              $12.625           114,367       7 years         $12.625           --             $--

</TABLE>

(16)   Regulatory Capital Requirements

       OTS regulations  require savings  institutions to maintain minimum levels
       of regulatory  capital.  Under the  regulations in effect at December 31,
       1996,  the Bank was  required  to  maintain a minimum  ratio of  tangible
       capital  to total  adjusted  assets of 1.5%;  a  minimum  ratio of Tier 1
       (core) capital to total  adjusted  assets of 3.0%; and a minimum ratio of
       total (core and supplementary) capital to risk-weighted assets of 8.0%.

       Under its prompt  corrective action  regulations,  the OTS is required to
       take certain supervisory  actions (and may take additional  discretionary
       actions) with respect to an  undercapitalized  institution.  Such actions
       could  have  a  direct  material  effect  on an  institutionOs  financial
       statements.  The regulations establish a framework for the classification
       of  savings   institutions   into  five  categories:   well  capitalized,
       adequately capitalized, undercapitalized, significantly undercapitalized,
       and critically  undercapitalized.  Generally,  an institution  considered
       well  capitalized  if it has a Tier 1  (core)  capital  ratio of at least
       5.0%; a Tier 1  risk-based  capital  ratio of at least 6.0%;  and a total
       risk-based capital ratio of at least 10.0%.
<PAGE>
       The foregoing  capital ratios are based in part on specific  quantitative
       measures of assets,  liabilities and certain  off-balance  sheet items as
       calculated under  regulatory  accounting  practices.  Capital amounts and
       classifications  are also  subject to  qualitative  judgments  by the OTS
       about capital components, risk weightings and other factors.

       Management  believes  that,  as of December 31, 1996,  the Bank meets all
       capital adequacy  requirements to which it is subject.  Further, the most
       recent  OTS  notification  categorized  the  Bank  as a well  capitalized
       institution under the prompt corrective  action  regulations.  There have
       been no  conditions  or events since that  notification  that  management
       believes have changed the AssociationOs capital classification.

       The  following is a summary of the Bank's and  Company's  actual  capital
       amounts and ratios as of December 31,  1996,  compared to the OTS minimum
       capital adequacy requirements and the OTS requirements for classification
       as a well capitalized institution.
<TABLE>
<CAPTION>
                                                                    Minimum Capital          Classification
                                                  Actual               Adequacy          as Well Capitalized
                                                                    ---------------      -------------------
                                            Amount       Ratio          Ratio                      Ratio
                                            ------       -----          -----                      -----
<S>                                     <C>             <C>             <C>                        <C>
              Bank
              Tangible capital          $    17,762     10.77%          1.50%                        --
              Tier 1 (core) capital          17,762     10.77           3.00                         5.00
              Risk-based capital:
                  Tier 1                     17,762     20.19           --                           6.00
                  Total                      17,120     20.92           8.00                        10.00

<CAPTION>

                                                  Actual
                                        ----------------------
                                            Amount       Ratio
                                            ------       -----
<S>                                     <C>             <C>
              Consolidated
              Tangible capital          $    21,625     13.12%
              Tier 1 (core) capital          21,625     13.12
              Risk-based capital:
                  Tier 1                     21,625     24.59
                  Total                      22,267     25.32

</TABLE>
(17)   Parent Company Financial Information

       SFS Bancorp,  Inc. was organized to serve as the holding  company for the
       Bank and began operations on June 29, 1995 in conjunction with the Bank's
       mutual-to-stock  conversion  and the  Holding  Company's  initial  public
       offering  of  its  common  stock.  The  Holding  Company's  statement  of
       financial  condition  as of  December  31,  1996  and  1995  and  related
       statements of income and cash flows for the year ended  December 31, 1996
       and the period from June 29, 1995 to December 31, 1995 are as follows:
<PAGE>
<TABLE>
<CAPTION>
                              Statement of Financial Condition
                              as of December 31, 1996 and 1995

                                                                  1996          1995
                                                                --------     --------
                                                          (in thousands, except share data)
     Assets
<S>                                                             <C>          <C>
Cash and cash equivalents ..................................    $     96          135
Loan receivable from subsidiary ............................       3,757        7,076
Equity in net assets of subsidiary .........................      17,808       17,030
Other assets ...............................................          58           41
                                                                --------     --------

                  Total assets .............................    $ 21,719       24,282
                                                                ========     ========

     Liabilities and Stockholders' Equity

Liabilities:
     Other liabilities .....................................    $     48           21
                                                                --------     --------

Stockholders' Equity:
     Preferred stock, $.01 par value.  Authorized 500,000
          shares; none issued ..............................    $   --           --
     Common stock, $.01 par value.  Authorized
          2,500,000 shares; 1,495,000 shares issued;
          1,270,997 and 1,495,000 shares outstanding at
          December 31, 1996 and 1995, respectively .........          15           15
     Additional paid-in capital ............................      14,260       14,221
     Retained earnings, substantially restricted ...........      11,687       11,013
     Treasury stock, at cost (224,003 shares at
          December 31, 1996, none at December 31, 1995) ....      (2,840)        --
     Common stock acquired:
         Employee stock ownership plan "ESOP" (95,680
            share and 107,640 shares at December 31,
            1996 and 1995, respectively ....................        (957)      (1,076)
         Recognition and retention plan "RRP" (42,757
            share at December 31, 1996; none at
             December 31, 1995) ............................        (540)        --
     Net unrealized gain on securities available for sale ..          46           88
                                                                --------     --------

                  Total stockholders' equity ...............      21,671       24,261
                                                                --------     --------

                  Total liabilities and stockholders' equity    $ 21,719       24,282
                                                                ========     ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                               Statement of Income
                    For the year ended December 31, 1996 and
                  For the period from inception (June 29, 1995)
                            through December 31, 1995


                                                                  1996      1995
                                                                  ----      ----
                                                                  (in thousands)
<S>                                                               <C>       <C>
Interest income ............................................      $384      269
Interest expense ...........................................       --       --

     Net interest income ...................................       384      269

Noninterest expense ........................................       104       49
                                                                  ----      ---

Income before income taxes and equity in undistributed
     earnings of subsidiary ................................       280      220
                                                                  ----      ---

Income tax expense .........................................       112       89
                                                                  ----      ---

Income before equity in undistributed earnings
     of subsidiary .........................................       168      131

Equity in undistributed earnings of subsidiary (for the
     year ended December  31, 1996 and the period from
     June 29, 1995 through December 31, 1995) ..............       662      724
                                                                  ----      ---

Net income .................................................      $830      855
                                                                  ====      ===
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   Statement of Cash Flows
                           For the year ended December 31, 1996 and
                        For the period from inception (June 29, 1995)
                                  through December 31, 1995


                                                                            1996        1995
                                                                            ----        ----
                                                                            (in thousands)
<S>                                                                      <C>         <C>
Cash flows from operating activities:
     Net income .....................................................    $   830         855
     Adjustment  to  reconcile  net  income to net cash  provided  by
         operating activities:
           Equity in undistributed earnings of subsidiary ...........       (662)       (724)
           Increase in other assets .................................        (17)        (41)
           Increase in liabilities ..................................         27          21
                                                                         -------     -------
              Net cash provided by operating activities .............        178         111
                                                                         -------     -------

Cash flows from investing activities:
     Investment in common stock of subsidiary .......................       --        (7,100)
     Net (increase) decrease in loans ...............................      3,319      (7,076)
                                                                         -------     -------
              Net cash provided (used) in investing activities ......      3,319     (14,176)
                                                                         -------     -------

Cash flows from financing activities:
     Proceeds from issuance of common stock, net ....................       --        14,200
     Purchase of treasury stock .....................................     (3,418)       --
     Cash dividends paid ............................................       (156)       --
     Distribution of RRP shares .....................................         38        --
              Net cash provided (used) from financing activities ....     (3,536)     14,200
                                                                         -------     -------

Net increase (decrease) in cash and cash equivalents ................        (39)        135

Cash and cash equivalents:
     Beginning of period ............................................        135        --

     End of period ..................................................    $    96         135
                                                                         =======     =======
</TABLE>

       These  financial  statements  should  be read  in  conjunction  with  the
       Company's consolidated financial statements and notes thereto.
<PAGE>
                              CORPORATE INFORMATION


Annual Meeting

     The annual  meeting of SFS Bancorp,  Inc. will be held on April 16, 1997 at
10:00  a.m.  at the Main  Office  of the  Company  at  251-263  State  Street in
Schenectady, New York.

Market Information

     SFS  Bancorp,  Inc.  Common Stock is traded on the Nasdaq  National  System
under the symbol "SFED." SFS Bancorp, Inc. Common Stock was issued at $10.00 per
share in connection  with the conversion of  Schenectady  Federal from mutual to
stock form on June 29, 1995. At February 28, 1997 there were  approximately  357
holders of record and  approximately 389 additional  beneficial  shareholders of
SFS Bancorp,  Inc. Common Stock and 1,270,997 shares  (reflects  correction from
Annual Reports mailed to shareholders) of common stock issued and outstanding.

PRICE RANGE OF COMMON STOCK

     The  table  below  shows  the  range of high and low bid  prices  since the
Company's Common Stock began trading on June 30, 1995. The information set forth
in the  table  below was  provided  by the  Nasdaq.  Such  information  reflects
interdealer prices, without retail mark-up,  mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
                   1996                                                1995
------------------------------------------       ------------------------------------------
                       High          Low                                High          Low
                       ----          ---                                ----          ---
<S>                  <C>           <C>            <C>                 <C>           <C>
First Quarter        $ 13.00       $ 11.50        Second Quarter      $11.75        $10.50
Second Quarter       $ 13.00       $ 11.75        Third Quarter       $13.25        $11.125
Third Quarter        $ 14.25       $ 12.00        Fourth Quarter      $13.50        $12.00
Fourth Quarter       $ 16.25       $ 13.50
</TABLE>

As of December 31, 1996, the Corporation declared dividends totaling $156,000 or
$0.12 per share on its Common Stock.  Dividend  payment  decisions are made with
consideration of a variety of factors including earnings,  financial  condition,
market  considerations  and regulatory  restrictions.  Restrictions  on dividend
payments  are  described  in  Note  2 of the  Notes  to  Consolidated  Financial
Statements included in this Annual Report.

Annual Report on Form 10-KSB and Other Investor Information

     SFS Bancorp,  Inc.  will furnish at no charge to any  stockholder a copy of
SFS Bancorp, Inc.'s Annual Report on Form 10-KSB for the year ended December 31,
1996 and the  exhibits  thereto  required  to be filed with the  Securities  and
Exchange Commission by writing to:

              David J. Jurczynski
              Chief Financial Officer
              SFS Bancorp, Inc.
              251-263 State Street
              Schenectady, New York  12305
              (518) 395-2300
<PAGE>
Transfer Agent and Registrar                              Independent Auditors

Registrar and Transfer Company                            KPMG Peat Marwick, LLP
10 Commerce Drive                                         74 North Pearl Street
Cranford, NJ  07016                                       Albany, NY  12207
(908) 272-8511

Special Counsel

Silver Freedman & Taff, L.L.P.
1100 New York Avenue, N.W.
7th Floor, East Tower
Washington, D.C.  20005

BOARD OF DIRECTORS OF SFS BANCORP, INC. AND SCHENECTADY FEDERAL
SAVINGS BANK

Joseph H. Giaquinto, Chairman                             Gerald I. Klein
John F. Assini, M.D.,  Vice Chairman                      Robert A. Schlansker
Richard D. Ammian

OFFICERS OF SFS BANCORP, INC. AND SCHENECTADY FEDERAL SAVINGS BANK

Joseph H. Giaquinto
  President and Chief Executive Officer

Richard D. Ammian
  Senior Vice President and Secretary

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

Michael Krywinski
  Vice President

William Pezzula
  Vice President