1998 ANNUAL REPORT
















                                     [LOGO]










                                SFS BANCORP, INC.
                              Schenectady, New York








<PAGE>




                                            TABLE OF CONTENTS









         President's Message  ............................................   1

         Selected Consolidated Financial Information .....................   2

         Management's Discussion and Analysis of Financial
           Condition and Results of Operations ...........................   4
 
         Independent Auditors' Report  ...................................  20
 
         Consolidated Financial Statements ...............................  21
 
         Corporate Information ...........................................  56
 





<PAGE>
                               PRESIDENT'S MESSAGE
                               -------------------

Dear Fellow Stockholders:

         On behalf of the Board of  Directors,  Officers  and  Employees  of SFS
Bancorp, Inc. (SFS) and its wholly owned subsidiary, Schenectady Federal Savings
Bank (the "Bank"), we are pleased to present to you our Annual Report for 1998.

         Undoubtedly  the most  noteworthy  event during 1998 was the  announced
merger of SFS Bancorp,  Inc. with and into Cohoes Bancorp, Inc. (Cohoes) a newly
formed  holding  company of Cohoes  Savings  Bank.  The merger was  perceived by
management  and the Board of SFS as an  opportunity  to  maximize  value for our
shareholders. The merger was terminated when Cohoes notified SFS in October that
the merger was no longer feasible due to the  significant  decline in the market
values of publicly held thrift  institutions  and  institutions  converting from
mutual to stock, as well as,  regulatory  concerns  regarding the pricing of the
transaction.  As a result,  SFS received a termination fee of $2,000,000  during
the fourth quarter of 1998.

         Net income for 1998 was $2,115,000 compared to $1,068,000 for 1997. The
increase of $1,047,000 was primarily  attributable  to the termination fee which
was partially offset by one-time merger related expenses of $355,000.  Excluding
the termination fee and one-time merger related  expenses,  net income increased
by  approximately  $60,000 to $1,128,000 or 5.6% from 1997 levels.  The focus on
core  banking  products  and net  interest  income  provided  the  basis for the
increase in the net income  exclusive of the termination fee and one-time merger
related  expenses.  SFS will  continue  to focus on core  banking  products  and
services  as a means of  improving  net  income and  enhancing  the value of our
franchise.

         In 1998, the Bank again reaffirmed its commitment to meeting the credit
needs  of our  community  through  mortgage  and  consumer  lending.  Net  loans
increased  $6.4  million  during 1998 to $140.2  million at year-end  1998.  The
increase was primarily the result of originations of local residential  mortgage
loans which the Bank  continues to own and service.  This  continues our ongoing
policy of  generating  high  asset  quality  investments.  Non-performing  loans
decreased  $487,000 or 36.2%  during 1998 to $860,000 or  approximately  0.6% of
total assets at year end 1998.

         Our management team has been working diligently on the  much-publicized
Year  2000  data  processing  issue.  We have  developed  a  comprehensive  plan
including   contingency  and  business  resumption  issues  that  addresses  the
sensitivity of processes  affected by the century date change.  We do not expect
that the cost of fully  complying with this issue will have a material impact on
our earnings in 1999.  All mission  critical  systems have been modified and all
have been  tested and deemed to be  compliant.  We expect to be fully  compliant
long before the change to the new millennium.

         As  always,  please  be  assured  that  your  Board  of  Directors  and
management  team  remain  committed  to  explore  capital  management  and other
strategies that will result in maximizing value for our shareholders.  Thank you
for your continued support and confidence in SFS Bancorp, Inc.

                                                Sincerely,

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

                                                                                      December 31,
                                                          -------------------------------------------------------------------- 
                                                            1998           1997           1996           1995           1994
                                                          --------       --------       --------       --------       --------
                                                                                    (In thousands)
<S>                                                       <C>            <C>            <C>            <C>            <C>     
        Selected Financial Condition Data

        Total assets  . . . . . . . . . . . . . . .       $178,167       $174,428       $164,888       $166,529       $150,837
        Cash and cash equivalents   . . . . . . . .          3,812          2,176          2,896         10,453          6,468
        Securities available for sale . . . . . . .         16,954          4,067          1,990          7,976          7,776
        Investment securities   . . . . . . . . . .         11,661         28,979         36,180         43,076         38,893

        FHLB stock    . . . . . . . . . . . . . . .          1,338          1,338          1,215          1,117          1,123
        Loans receivable, net   . . . . . . . . . .        140,210        133,786        118,455        100,921         93,703
        Real estate owned   . . . . . . . . . . . .            271            111            178            200            204

        Deposits  . . . . . . . . . . . . . . . . .        150,578        150,469        140,616        139,671        138,299
        Advance payments by borrowers
           for taxes and insurance  . . . . . . . .          1,425          1,281          1,160          1,402          1,270
        Stockholders' equity  . . . . . . . . . . .         23,610         21,431         21,671         24,261         10,046

<CAPTION>
                                                                                     December 31,
                                                       -----------------------------------------------------------------------
                                                           1998           1997           1996           1995           1994
                                                       -----------    -----------    -----------    -----------    -----------
                                                                                    (In thousands)
<S>                                                       <C>            <C>            <C>            <C>            <C>     
        Selected Operations Data

        Total interest income   . . . . . . . . . .       $ 12,751       $ 12,368       $ 11,867       $ 11,523       $  9,849

        Total interest expense . . . . .  . . . . .          6,902          6,623          6,187          6,236          5,077
                                                        -----------    -----------    -----------    -----------    ---------- 
          Net interest income . . . . . . . . . . .          5,849          5,745          5,680          5,287          4,772
        Provision for loan losses . . . . . . . . .            120            120            120            370            120
                                                        -----------    -----------    -----------    -----------    ---------- 
        Net interest income after
          provision for loan losses . . . . . . . .          5,729          5,625          5,560          4,917          4,652
        Noninterest income    . . . . . . . . . . .          2,462            423            333            280            137
        Noninterest expense   . . . . . . . . . . .          4,638          4,288          5,169          3,986          4,063
                                                        -----------    -----------    -----------    -----------    ---------- 
        Income before taxes   . . . . . . . . . . .          3,553          1,760            724          1,211            726
        Income tax expense (benefit)  . . . . . . .          1,438            692           (106)           356            215
                                                        ===========    ===========    ===========    ===========    ========== 
        Net income    . . . . . . . . . . . . . . .     $    2,115     $    1,068     $      830     $      855     $      511
                                                        ===========    ===========    ===========    ===========    ===========
</TABLE>
                                        2
<PAGE>
<TABLE>
<CAPTION>
                                  SELECTED CONSOLIDATED FINANCIAL INFORMATION, continued


                                                                                   Year Ended December 31,
                                                                --------------------------------------------------------- 
                                                                 1998         1997         1996        1995         1994
                                                                ------       ------       ------      ------       ------
<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. . . . . . . . .. . . . . . . . .       1.20%        0.63%        0.50%       0.53%        0.34%
  Net interest rate spread  . . . . . . . . . . . . . . . .       2.88         2.96         2.95        2.93         3.06
  Net interest margin . . . . . . . . . . . . . . . . . . .       3.40         3.46         3.51        3.36         3.26
                                                  . . . . .
  Ratio of noninterest expense to average total assets  . .       2.63         2.51         3.13        2.48         2.72
  Ratio of net interest income to noninterest expense . . .     126.11       133.97       109.89      131.29       116.50
  Return on equity (ratio of net income to average
      equity) . . . . . . . . . . . . . . . . . . . . . . .       9.74         5.04         3.73        5.07         5.31
                                      . . . . . . .
  Liquidity ratio at end of year   . . . . . . . . . . . .       19.24        19.72        22.58       32.45        19.57
  Efficiency ratio  . . . . . . . . . . . . . . . . . . . .      67.87        69.52        85.96       71.60        82.77

 Asset Quality Ratios:
 ---------------------

  Non-performing assets to total assets, at end of year . .       0.64         0.84         0.61        0.62         1.93
  Allowance for loan losses to non-performing loans,
     at year end  . . . . . . . . . . . . . . . . . . . . .     110.76        57.78        77.07       68.18        31.79
  Allowance for loan losses to total loans  . . . . . . . .       0.67         0.58         0.54        0.56         0.91

 Capital Ratios:
 ---------------

  Stockholders' equity to total assets at end of year . . .      13.25       12.29        13.14        14.57        6.66
  Average stockholders' equity to average total assets  . .      12.31       12.43        13.48        10.50        6.43
  Ratio of average interest-earning assets to average
    interest-bearing liabilities. . . . . . . . . . . . . .     112.84      112.68       114.72       110.84      105.75

  Number of full service offices  . . . . . . . . . . . . .          4           4            3            3           3
</TABLE>


                                       3

<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.

Forward Looking Statements

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

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

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


                                        4
<PAGE>
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 recurring  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:

         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 96.0% and 94.9% of total gross loans at December
31, 1998 and 1997, 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% and 0.8% as of December 31, 1998
and 1997, respectively.

         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 adjustable and floating
rate loans and maintaining a short- and medium-term  investment  portfolio.  The
level of adjustable or floating rate loans  included in total loans was 56.3% as
of December  31, 1998.  Additionally,  20.2% of the  Company's  interest-earning
assets carried remaining terms of five years or less.


                                       5
<PAGE>
         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.  While the
Company believes that a portion of these  non-certificate  accounts are interest
rate sensitive and may flow to other  investments if interest rate  differential
between certificate and non-certificate  accounts continue, the Company believes
that a  significant  portion of the  balance of these  accounts  represent  core
deposits.  At December 31, 1998, 38.3% 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.

         The  following  table  is  provided  by the OTS and  sets  forth  as of
December 31, 1998 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                       $15,305                       $(9,223)                     (38)%
              +300                        18,141                        (6,387)                     (26)
              +200                        20,726                        (3,802)                     (15)
              +100                        22,848                        (1,680)                      (7)
                0                         24,528                            --                       --
              -100                        26,038                         1,510                        6
              -200                        27,376                         2,848                       12
              -300                        29,082                         4,554                       19
              -400                        30,678                         6,150                       25


</TABLE>


                                       6
<PAGE>
         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  increased  $3.7  million  (2.1%)  to $178.2  million  at
December  31,  1998 from $174.4  million at December  31,  1997.  This  increase
consisted  primarily  of an increase in loans  receivable,  net of $6.3  million
(4.8%) to $140.2  million at December  31,  1998 and an  increase in  securities
available  for sale of $12.9  million  (316.9%) to $17.0 million at December 31,
1998.  These  increases  were offset by a decrease in  investment  securities of
$17.3 million  (59.8%) to $11.7 million at December 31, 1998.  The change in the
composition of the investment portfolio classifications from held to maturity to
available  for  sale  will  provide  management  the  flexibility  to  entertain
strategies to maximize the return of the combined portfolios.

         Total liabilities were $154.6 million at December 31, 1998 representing
an increase of $1.6 million  (1.0%) from  December  31,  1997.  The increase was
attributable  to marginal  increases in total  deposits and advance  payments by
borrowers for taxes and insurance combined with long-term  borrowings which were
$700,000 at December 31, 1998. There were no long-term borrowings as of December
31, 1997.

         Stockholders' equity increased $2.2 million (10.2%) to $23.6 million at
December 31, 1998 as compared to $21.4  million at December  31, 1997.  Retained
earnings  increased by $1.7 million as a result of net income of the Company for
the year ended December 31, 1998 of $2.1 million offset by the  declaration  and
payment of dividends of $387,000.

         Non-performing assets totaled $1.1 million and $1.5 million at December
31,  1998 and 1997,  respectively.  The  decrease  in  non-performing  assets of
$400,000 (25.1%) is primarily attributable to principal paydowns received on the
Bank's  largest  non-performing  loan.  In  addition to the  principal  payments
received on this loan, the Bank recovered  approximately $56,000 on a previously
charged off portion of this loan  relationship.  The  remaining  portion of this
loan is considered adequately collateralized and payments have remained current.
All remaining  loans  classified as  non-performing  are secured by  one-to-four
family residential  


                                       7
<PAGE>
properties.  The decrease in  non-performing  loans was offset by an increase in
real  estate  owned.  All assets in other real  estate are  recorded  at the net
realizable value. The ratio of allowance for loan losses to non-performing loans
was 110.76% at December 31, 1998, compared with 57.78% at December 31, 1997. The
ratio of  non-performing  assets to total  assets was .64% at December  31, 1998
compared with .84% at December 31, 1997.

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.



                                       8
<PAGE>
<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,                         
                                                     -------------------------------------------------------------------------------
                                                                        1998                                      1997              
                                                     --------------------------------------     ------------------------------------
                                                        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) . . . . . . . . .      $139,445     $  10,693        7.67%       $124,994       $ 9,757       7.81%
        Mortgage-backed securities   . . . . . . .        13,700           850        6.20          18,807         1,189       6.32 
        Securities available for sale. . . . . . .         8,988           562        6.25           4,368           286       6.55 
        Investment securities  . . . . . . . . . .         4,755           335        7.05          13,779           896       6.50 
        Other interest-earning assets
          including cash equivalents . . . . . . .         4,042           214        5.29           2,845           153       5.38 
        FHLB stock     . . . . . . . . . . . . . .         1,338            97        7.25           1,322            87       6.58 
                                                        --------     ---------                    --------       -------           
            Total interest-earning assets  . . . .      $172,268        12,751        7.40        $166,115        12,368       7.45 
                                                        ========     ---------                    ========       -------           

       Interest-Bearing Liabilities:
        Savings accounts   . . . . . . . . . . . .        36,460         1,069        2.93          36,982         1,113       3.01 
        Money market accounts    . . . . . . . . .         7,618           249        3.27           7,197           251       3.49 
        Demand and NOW accounts(2) . . . . . . . .        11,539           158        1.37          10,660           159       1.49 
         Certificate accounts. . . . . . . . . . .        95,526         5,390        5.64          91,420         5,075       5.55 
        Long term borrowings      . . . .  . . . .           139             7        5.04              --            --         -- 
        Escrow   . . . . . . . . . . . . . . . . .         1,378            29        2.10           1,162            25       2.15
                                                        --------     ---------                    --------       -------           
           Total interest-bearing liabilities  . .      $152,660         6,902        4.52        $147,421         6,623       4.49 
                                                        ========     ---------      ------        ========       -------     ------
       Net interest income   . . . . . . . . . . .                   $   5,849                                   $ 5,745            
                                                                     =========                                   =======           
       Net interest rate spread    . . . . . . . .                                    2.88%                                    2.96%
                                                                                      ====                                     ==== 
       Net earning assets  . . . . . . . . . . . .      $ 19,608                                 $  18,694                          
                                                        ========                                 =========                         
       Net yield on average interest-
         earning assets  . . . . . . . . . . . . .                                    3.40%                                    3.46%
                                                                                      ====                                     ==== 
       Average interest-earning assets to
         average interest-bearing liabilities  . .          1.13                                      1.13                          
                                                            ====                                      ====                        
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                     Year Ended December 31,                
                                                           ------------------------------------- 
                                                                              1996                    
                                                           -------------------------------------   
                                                             Average        Interest                 
                                                           Outstanding       Earned/      Yield/     
                                                             Balance          Paid         Rate      
                                                             --------        -------      ------  
                                                                     (Dollars in Thousands)
 <S>                                                         <C>             <C>         <C>  
      Interest-Earning Assets:                    
       Loans receivable, net(1) . . . . . . . . .            $111,524        $ 8,758       7.85%      
       Mortgage-backed securities   . . . . . . .              22,403          1,418       6.33       
       Securities available for sale. . . . . . .               5,169            307       5.94       
       Investment securities  . . . . . . . . . .              16,698          1,059       6.34       
       Other interest-earning assets                                                                  
         including cash equivalents . . . . . . .               4,698            247       5.26       
       FHLB stock     . . . . . . . . . . . . . .               1,204             78       6.48       
                                                             --------        -------                
           Total interest-earning assets  . . . .            $161,696         11,867       7.34       
                                                             ========        -------                 
                                                                                                      
      Interest-Bearing Liabilities:                                                                   
       Savings accounts   . . . . . . . . . . . .              38,857          1,173       3.02       
       Money market accounts    . . . . . . . . .               5,195            161       3.10       
       Demand and NOW accounts(2) . . . . . . . .              10,102            148       1.47       
        Certificate accounts. . . . . . . . . . .              85,642          4,680       5.46       
       Long term borrowings      . . . .  . . . .                  --             --         --       
       Escrow   . . . . . . . . . . . . . . . . .               1,155             25       2.16       
                                                             --------        -------                 
          Total interest-bearing liabilities  . .             140,951          6,187        4.39      
                                                             ========        -------      ------      
      Net interest income   . . . . . . . . . . .                            $ 5,680                  
                                                                             =======                 
      Net interest rate spread    . . . . . . . .                                           2.95%     
                                                                                          ======      
      Net earning assets  . . . . . . . . . . . .            $ 20,745                                 
                                                             ========                                
      Net yield on average interest-                                                                  
        earning assets  . . . . . . . . . . . . .                                          3.51%      
                                                                                          ======      
      Average interest-earning assets to                                                              
        average interest-bearing liabilities  . .                1.15                                 
                                                             =========                              
                                                      
</TABLE>
              (1)  Calculated net of deferred loan fees.
              (2)  Includes noninterest-bearing demand accounts.



                                       9
<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,
                                                 --------------------------------------------------------------------------------  
                                                            1998 vs. 1997                              1997 vs. 1996
                                                 --------------------------------------     ------------------------------------- 
                                                  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  . . . . . . . . .     $1,105       $  (169)       $   936       $1,051       $  (52)       $   999
      Mortgage-backed securities   . . . . . .       (317)          (22)          (339)        (227)          (2)          (229)
      Securities available for sale  . . . . .        289           (13)           276          (51)          30            (21)
      Investment securities  . . . . . . . . .       (643)           82           (561)        (190)          27           (163)
      Other interest-earning assets  . . . . .         63            (2)            61         (100)           6            (94)
      FHLB stock     . . . . . . . . . . . . .          1             9             10            8            1              9
                                                  -------       -------        -------       ------       ------        ------- 

     Total interest-earning assets   . . . . .    $   498       $  (115)       $   383       $  491       $   10        $   501
                                                  =======       =======        =======       ======       ======        ======= 

     Interest-bearing liabilities:
      Savings accounts   . . . . . . . . . . .    $   (16)      $   (28)       $   (44)      $  (56)     $    (4)       $   (60)
      Money market accounts    . . . . . . . .         14           (16)            (2)          74           16             90
      Demand and NOW accounts        . . . . .         13           (14)            (1)           8            3             11
      Certificate accounts   . . . . . . . . .        231            84            315          320           75            395
      Long-term borrowings   . . . . . . . . .          7             0              7            0            0              0
      Escrow . . . . . . . . . . . . . . . . .          5            (1)             4            0            0              0
                                                 ---------      --------       -------      -------      -------        ------- 

        Total interest-bearing liabilities . .    $   254       $     25      $    279      $   346      $    90        $   436
                                                  =========     =========     ========      =======      =======        ======= 

     Net interest income                                                      $    104                                  $    65
                                                                              ========                                  ======= 

</TABLE>
                                       10

<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.  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, 1998 and 1997

         Net Income.  The Company reported net income of $2,115,000 for the year
ended  December 31, 1998, as compared to $1,068,000  for the year ended December
31, 1997. As discussed below, the increase in net income of $1,047,000 or 98.0%,
was due to an increase in  noninterest  income of $2,039,000  and an increase in
net interest  income of $104,000.  These  increases were partially  offset by an
increase  in  noninterest  expense of  $350,000  and an  increase  in income tax
expense of $746,000.

         Interest Income.  Interest income  increased by $383,000,  or 3.1% from
$12.4  million in 1997 to $12.8  million in 1998.  This  increase  was due to an
increase in the balance of average  interest-earning assets offset by a decrease
in the yield  earned.  Average  interest-earning  assets  increased  from $166.1
million  in  1997  to  $172.3  million  in  1998.  The  yield  on the  Company's
interest-earning  assets  decreased  from 7.45% for the year ended  December 31,
1997 to 7.40% for the year ended  December  31,  1998 as a result of the general
decrease  in  the  market  rates  of  interest  on  both  loans  and  investment
securities.

         Interest  Expense.  Interest  expense  increased by $279,000 or 4.2% to
$6.9 million for the year ended  December 31, 1998. The increase was a result of
an  increase  in the  balance of average  interest-bearing  liabilities  of $5.2
million,  or 3.6% to $152.7  million.  The average  rate paid for the year ended
December 31, 1998 was 4.52% as compared to 4.49% in 1997. The average balance of
all deposit  products  increased from 1997 to 1998 except savings accounts which
decreased  on average  $522,000  (1.4%).  The  increase in the  various  deposit
products was due in part to the opening of a new branch in March 1997 along with
continued  competitive  pricing  and to a lesser  extent  the flow from  savings
accounts to higher paying certificate accounts. The increase in the average rate
paid can be  attributable to the  composition of the deposit  structure  whereby
certificate  accounts represented a greater percentage of total deposits in 1998
compared to 1997. The competitive  rate  environment  that prevailed during 1998
and 1997 also affected the average rate paid.

         Net Interest Income.  Net interest income increased $104,000 or 1.8% to
$5.8  million in 1998 due  principally  to the  relative  increase  of the loans
receivable, net portfolio in relation to total interest earning assets from 1997
to 1998.  The  percentage  of average  loans  receivable,  net to total  average
interest earning assets increased from 75.2% in 1997 to 80.9% in 1998.


                                       11
<PAGE>
         Provision For Loan Losses.  The  provision for loan losses  amounted to
$120,000  for  1998  and  1997,  respectively.  When  determining  the  level of
provision for loan losses,  management considers historical charge off ratios as
well as the then current  regulatory and the general economic  environment.  The
Company's ability to collect on numerous loans previously  charged off continued
throughout 1998 and 1997. As a result of successful  collection  efforts,  total
recoveries  exceeded  total  charge offs by $55,000 in 1998 and $16,000 in 1997.
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 probable  losses in the present
portfolio,  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 $2,039,000,
or  482.0%  from  $423,000  in 1997 to  $2,462,000  in 1998.  The  increase  was
principally  attributable  to a $2,000,000 fee resulting from the termination of
the definitive  agreement pursuant to which the Company was to merge with Cohoes
Bancorp,  Inc. (Cohoes),  a newly-formed holding company organized in connection
with Cohoes  Savings  Bank's  conversion  from a mutual to a stock  institution.
Cohoes had advised the Company that the  transaction  was no longer feasible due
to significant  declines in market values of publicly traded thrift institutions
and  institutions  undertaking  mutual-to-stock  conversions.  Despite  the best
efforts of both  parties,  revised  terms  acceptable  to everyone  could not be
agreed upon.

         Noninterest Expense. Noninterest expense increased by $350,000, or 8.2%
from $4.3  million in 1997 to $4.6  million in 1998.  The  increase is primarily
attributable to the professional  services and other expenses  incurred totaling
$355,000 associated with the terminated merger as described above.  Compensation
and  benefits  increased  $52,000  (2.0%) from 1997 to 1998.  The increase was a
result of annual merit increases and increased  employee benefits  partially due
to an increase in the Employee  Stock  Ownership Plan (ESOP) expense offset by a
reduction in the number of employees.  Data  processing  fees increased  $20,000
(11.4%) during 1998 to $195,000 due in part to incremental  expenses  related to
the  Company's  efforts  to comply  with the Year 2000  data  processing  issue.
Advertising  and business  promotion  decreased  $34,000  (39.5%) as a result of
expenses  incurred  in 1997  for the  opening  of a new  branch.  FDIC  premiums
increased  $18,000 (24.3%) to $92,000 as a result of the SAIF insurance  premium
refunded the Bank in the first quarter of 1997 which had been paid in the fourth
quarter  of 1996  subsequent  to the  capitalization  of  SAIF.  Other  expenses
decreased  $44,000 (10.1%) to $390,000 in 1998 due in part to reduced  servicing
expenses as the serviced  mortgage  portfolio  decreases and reduced premiums on
insurance  policies  that were put out to bid.  Office  occupancy  and equipment
expenses and professional service fees remained relatively stable during 1998 as
compared with 1997.  As a result of the merger  related  expenses,  the ratio of
noninterest expense to average assets increased from 2.51% for 1997 to 2.63% for
1998.

         Income Tax Expense. Income tax expense increased $746,000 from $692,000
in 1997 to $1,438,000 in 1998. Income before taxes increased $1,793,000 (101.9%)
to $3,553,000 as a 


                                       12
<PAGE>
result of the  recognition  of fees  associated  with the  failed  merger net of
related  expenses as described  above. The effective tax rates for 1998 and 1997
were 40.5% and 39.3%,  respectively.  The increase was primarily attributable to
an  increase in the  nondeductible  portion of the  compensation  expense of the
Company's ESOP.


Comparison of Operating Results for the Years Ended December 31, 1997 and 1996

         Net Income.  The Company reported net income of $1,068,000 for the year
ended December 31, 1997, as compared to $830,000 for the year ended December 31,
1996. As discussed  below,  the increase in net income of $238,000 or 28.7%, was
due to a decrease in noninterest expense of $881,000, an increase in noninterest
income of $90,000  and an  increase in net  interest  income of  $65,000.  These
increases  were  partially  offset by an  increase  in  income  tax  expense  of
$798,000.

         Interest Income.  Interest income  increased by $501,000,  or 4.2% from
$11.9  million in 1996 to $12.4  million in 1997.  This  increase  was due to an
increase  in both the balance of average  interest-earning  assets and the yield
earned. Average interest-earning assets increased from $161.7 million in 1996 to
$166.1  million  in 1997.  The yield on the  Company's  interest-earning  assets
increased  from 7.34% for the year ended December 31, 1996 to 7.45% for the year
ended  December 31, 1997 as a result of the  Company's  ability to originate and
purchase loans and therefore affect the overall  composition of interest earning
assets.  The yield was also affected by the general increase in the market rates
of interest.

         Interest  Expense.  Interest  expense  increased by $436,000 or 7.0% to
$6.6 million for the year ended  December 31, 1997. The increase was a result of
an  increase  in the  balance of average  interest-bearing  liabilities  of $6.5
million,  or 4.6% to $147.4  million.  The average  rate paid for the year ended
December  31, 1997 was 4.49% as  compared  to 4.39% in 1996.  The mix within the
deposit structure changed as the average balance of certificate and money market
account  balances  grew a combined $7.8 million  (8.6%) while  savings  accounts
declined $1.9 million  (4.8%).  The change in the deposit mix was due in part to
the opening of the new branch which had higher promotional certificate rates and
to a lesser extent the flow from savings  accounts to higher paying  certificate
accounts.  The average rate paid was a reflection  of the general  interest rate
and competitive environment that prevailed during 1997 and 1996.

         Net Interest Income. Net interest income increased $65,000,  or 1.1% to
$5.7  million in 1997 due  principally  to the  relative  increase  of the loans
receivable, net portfolio in relation to total interest earning assets from 1996
to 1997.  The  percentage  of average  loans  receivable,  net to total  average
interest earning assets increased from 69.0% in 1996 to 75.2% in 1997.

         Provision For Loan Losses.  The  provision for loan losses  amounted to
$120,000  for  1997  and  1996,  respectively.  When  determining  the  level of
provision for loan losses,  management considers historical charge off ratios as
well as the then current  regulatory and the general economic  environment.  Net
charge-offs decreased from $50,000 in 1996 to a $16,000 net recovery in 1997 due
to the Company's  ability to collect on numerous  loans  previously 



                                 13 
<PAGE>
charged off  combined  with a decrease in charge offs in 1997.  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 probable losses in the present  portfolio,
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 $90,000, or
27.0% from  $333,000 in 1996 to $423,000 in 1997.  The increase was  principally
attributable  to an  increase  of $48,000 in net gain on  security  transactions
combined with increases in other loan charges and Bank fees and service charges.

         Noninterest  Expense.  Noninterest  expense  decreased by $881,000,  or
17.0%  from $5.2  million  in 1996 to $4.3  million  in 1997.  The  decrease  is
primarily  attributable  to the special  one-time SAIF  assessment in 1996 which
totaled  $930,000  and an  ongoing  reduction  in the  FDIC  insurance  premiums
subsequent  to the  special  assessment.  Compensation  and  benefits  increased
$188,000 (7.7%) from 1996 to 1997. The increase was a result of increased retail
staff due to the opening of a new branch in March 1997,  annual merit increases,
and  increased  employee  benefits  partially  due to the  increases in the ESOP
expense. Office occupancy and equipment expense increased $98,000, or 18.8% as a
result of increases in  depreciation,  property  taxes and utilities  associated
with  the  opening  of the  new  branch.  Advertising  and  business  promotion,
professional  service fees,  data  processing  fees, and other expense  remained
relatively  stable during 1997 as compared with 1996.  The ratio of  noninterest
expense to average assets decreased from 3.13% for 1996 to 2.51% for 1997.

         Income Tax  Expense.  Income tax  expense  increased  from a benefit of
$106,000 in 1996 to an expense of $692,000 in 1997.  The  effective tax rate for
1997 was 39.3%. The income tax benefit  recognized in 1996 primarily  reflects a
reduction of the  deferred tax asset  valuation  reserve  which  reduced the tax
effect on pre-tax  income.  The  reduction in the deferred  valuation  allowance
during 1996 was  primarily  the result of the  expected  realization  of certain
deferred  items  which  were  previously  considered  uncertain.  There  were no
comparable reductions in the deferred tax asset valuation reserve during 1997.


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


                                       14
<PAGE>
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, 1998, cash and cash  equivalents  totaled $3.8
million,  or 2.1% 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, 1998, there was $700,000 advanced 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  4.0% and for the month of  December  1998,  the Bank  exceeded  that,
maintaining an average liquidity ratio of 19.24%.

         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, 1998, 1997 and 1996, the Company's mortgage loan originations
and  purchases  totaled  $36.7  million,   $35.4  million,  and  $31.4  million,
respectively.  The Company purchased  securities available for sale of $16.9 and
$6.1 million for the years ended December 31, 1998 and 1997,  respectively.  The
Company did not  purchase any  securities  available  for sale during 1996.  The
Company  purchased  investment  securities  during the years ended  December 31,
1998, 1997 and 1996 of $699,000, $1.7 million and $6.0 million, respectively.

         The primary  financing  activity of the  Company is the  attraction  of
deposits and the  repurchase  of the  Company's  shares.  During the years ended
December 31, 1998,  1997,  and 1996,  the Company  experienced a net increase in
deposits of $109,000, $9.9 million, and $945,000, respectively.  During the year
ended December 31, 1997, the Company repurchased 77,475 shares.  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 $19.68  totaling $1.5 million for 1997 and $12.68  totaling $3.5 million for
1996. The average price paid was approximately 111.0% and 74.4% of the Company's
book value per share at December  31, 1997 and 1996,  respectively.  The Company
did not repurchase  shares during 1998. 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.  As of June 29,  1998,  the OTS no longer
restricts the amount of shares the Company may elect to repurchase.

         At December 31, 1998, the Bank's  capital  exceeded each of the capital
requirements  of the OTS. At December  31,  1998,  the Bank's  tangible and core
capital levels were both $20.5 million (11.50% of total adjusted assets) and its
risk-based  capital  level  was $21.4  million  (22.65%  of total  risk-weighted
assets).  The current minimum regulatory capital ratio 


                                       15
<PAGE>
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, 1998, the Company had commitments
to  originate  loans of $2.1  million  as well as undrawn  commitments  of $10.2
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, 1998 totaled  $68.1
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 Recent Accounting Standards

In June 1998, the FASB issued  Statement of Financial  Accounting  Standards No.
133,  "Accounting  for Derivative  Instruments  and Hedging  Activities,"  which
establishes  accounting  and  reporting  standards for  derivative  instruments,
including certain derivative  instruments  embedded in other contracts,  and for
hedging  activities.  It requires that an entity  recognize all  derivatives  as
either assets or liabilities in the statement of financial condition and measure
those  instruments  at fair value.  This  Statement is effective  for all fiscal
quarters of fiscal years beginning after June 15, 1999.  Management is currently
evaluating the impact of this Statement on the Company's  consolidated financial
statements.


Impact of the Year 2000

General.  The Year 2000 ("Y2K") issue confronting the Company and its suppliers,
customers,  customers'  suppliers  and  competitors  centers on the inability of
computer systems to recognize the year 2000. Many existing computer programs and
systems  originally  were programmed with six digit dates that provided only two
digits to identify the calendar  year in the date field.  With the impending new
millennium,  these  programs and computers  will recognize "00" as the year 1900
rather than the year 2000.


                                       16
<PAGE>
Financial  institution  regulators  recently have increased their focus upon Y2K
compliance issues and have issued guidance  concerning the  responsibilities  of
senior management and directors.  The Federal Financial Institutions Examination
Council  ("FFIEC")  has issued  several  interagency  statements  on Y2K Project
Management Awareness.  These statements require financial institutions to, among
other things, examine the Y2K implications of their reliance on vendors and with
respect  to data  exchange  and the  potential  impact of the Y2K issue on their
customers, suppliers and borrowers. These statements also require each federally
regulated  financial  institution  to survey its exposure,  measure its risk and
prepare a plan to address  the Y2K  issue.  In  addition,  the  federal  banking
regulators have issued safety and soundness guidelines to be followed by insured
depository  institutions,  such as the  Bank,  to assure  resolution  of any Y2K
problems.  The  federal  banking  agencies  have  assessed  that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and, thus, that an institution's  failure to address appropriately the Y2K
issue  could  result in  supervisory  action,  including  the  reduction  of the
institution's  supervisory  ratings,  the denial of applications for approval of
mergers or acquisitions or the imposition of civil money penalties.

Risks. Like most financial  services  providers,  the Company and its operations
may be  significantly  affected  by the  Y2K  issue  due  to its  dependence  on
technology and  date-sensitive  data.  Computer  software and hardware and other
equipment,  both within and  outside the  Company's  direct  control,  and third
parties  with  whom  the  Company  electronically  or  operationally  interfaces
(including  without limitation its customers and third party vendors) are likely
to be  affected.  If computer  systems  are not  modified in order to be able to
identify  the  year  2000,  many  computer  applications  could  fail or  create
erroneous  results.  As a result,  many  calculations  which  rely on date field
information,  such  as  interest,  payment  or due  dates  and  other  operating
functions,  could generate results which are  significantly  misstated,  and the
Company  could  experience  an  inability  to  process   transactions,   prepare
statements or engage in similar  normal  business  activities.  Likewise,  under
certain  circumstances,  a failure to  adequately  address  the Y2K issue  could
adversely affect the viability of the Company's  suppliers and creditors and the
creditworthiness of its borrowers.  Thus, if not adequately  addressed,  the Y2K
issue could result in a significant  adverse impact on the Company's  operations
and, in turn, its financial condition and results of operations.


State of Readiness.  During May 1998, the Company formally  approved its plan to
address  the Y2K issue.  Since  that time the  Company  has taken the  following
steps:


- Established senior management advisory and review responsibilities;
- Completed a Company-wide inventory of applications and system software;
- Implemented a tracking  database for  applications and vendor software created
  by regulators;
- Developed compliance plans and schedules for all lines of business;
- Begun computer application testing;
- Initiated vendor compliance verification;
- Contacted all vendors with whom the Company interacts to determine their state
  of readiness;


                                       17
<PAGE>
- Begun  awareness  and education  activities  for  employees  through  existing
  internal communication channels; and
- Developed a process to respond to  customer  inquires as well as help  educate
  customers on the Y2K issue.

The following paragraphs summarize the phases of the Company's Y2K plan:

1.  Awareness  Phase.  The Company  formally  established a Y2K plan headed by a
senior manager, and a Y2K committee was assembled for management of the project.
The project committee created a plan of action that includes milestones,  budget
estimates,  strategies,  and methodologies to track and report the status of the
project.  Members  of  the  project  committee  also  attended  conferences  and
information  sharing  sessions  to gain  more  insight  into the Y2K  issue  and
potential strategies for addressing it. This phase is substantially complete.

2.  Assessment  Phase.  The Company's  strategies  were further  developed  with
respect  to how the  objectives  of the Y2K plan  would be  achieved,  and a Y2K
business  risk  assessment  was made to quantify the extent of the Company's Y2K
exposure. A corporate inventory (which is periodically updated as new technology
is acquired and as systems progress through  subsequent phases) was developed to
identify and monitor Y2K readiness for information systems (hardware,  software,
utilities,  and vendors) as well as  environmental  systems  (security  systems,
facilities,  etc.).  Systems  were  prioritized  based on  business  impact  and
available  alternatives.  Mission  critical  systems  supplied  by vendors  were
researched to determine Y2K readiness. If Y2K-ready versions were not available,
the  Company  began  identifying  functional   replacements  which  were  either
upgradeable to currently  Y2K-ready,  and a formal plan was developed to repair,
upgrade or replace all mission  critical  systems.  This phase is  substantially
complete.

Beginning in 1997 and  throughout  1998, the Company began Y2K evaluation of all
commercial  borrowers  at the time of the  annual  review  of their  loans.  All
commercial customers were evaluated for Y2K exposure by the Internal Loan Review
Committee using a questionnaire  developed by the Company's Y2K committee and an
assessment as to the borrower's  reliance on data processing and the risk to the
overall  viability  of the  business.  As part of the  current  credit  approval
process, all new and renewed loans are evaluated for Y2K risk. While the Company
will continue to monitor the progress being made by its commercial  customers in
addressing their own Y2K issues, to date the Company is generally satisfied with
customers'  responses  and their  progress  in  addressing  their Y2K risk.  The
Company's primary assets are residential mortgage loans which have been assessed
with minimal risk as it relates to Y2K and the impact on the creditworthiness of
these loans individually or as a whole.

3. Conversion/Renovation  Phase. The Company's corporate inventory revealed that
upgrades are available for all  vendor-supplied  mission critical  systems.  All
mission critical  applications and the majority of other  applications which are
deemed  Y2K-ready have been received and placed into production and have entered
the validation process.


                                       18
<PAGE>
4.  Validation/Implementation  Phase. This phase is designed to test the ability
of hardware and software to accurately  process date sensitive data. The Company
currently  is in the  process of  validation  testing of each  mission  critical
applications.  The Company's Y2K test environment,  periodically supplied by its
service  bureau  data  center,  is  virtually   insulated  from  production  and
development   environments.   The  Company  has  reassigned  internal  personnel
responsibilities in anticipation of the increased work efforts and has increased
staff to support normal business activities.  The Company's validation phase was
substantially  completed during 1998 for all mission critical systems except for
the accounting  general ledger system which will undergo  validation  testing in
the first quarter of 1999.  During the  validation  testing  process to date, no
significant  Y2K  problems  have been  identified  relating  to any  modified or
upgraded mission critical systems.

Company's Resources Invested.  The Company's Y2K committee has been assigned the
task of ensuring that all systems  across the Company are  identified,  analyzed
for Y2K  compliance,  corrected  if  necessary,  tested,  and  changes  put into
service.  The Y2K  committee  members  represent  all  functional  areas  of the
Company,  including  retail  banking,  data  processing,   loan  administration,
accounting,   operations,  compliance,  internal  audit,  human  resources,  and
marketing.  The  committee  is headed by a senior  vice  president  who  reports
directly to the  Company's  chief  executive  officer.  The  Company's  Board of
Directors  oversees  the Y2K plan and  provides  guidance  and  resources to the
project committee.  The Board is updated  periodically as to the progress of the
committee.

The Company is expensing all costs  associated  with required  system changes as
those projects are incurred,  and such costs are being funded through  operating
cash flow. Expenditures incurred for hardware upgrades are being capitalized and
depreciated in accordance with the Company's  policies.  The total  expenditures
associated with the Y2K conversion  project,  exclusive of internal  costs,  are
estimated to be  approximately  $100,000.  As of December 31, 1998,  the Company
incurred or was  contractually  committed for  services,  equipment and software
totaling  approximately $73,000 for the Y2K conversion project. The Company does
not expect significant  increases in future data processing costs related to Y2K
compliance above the aforementioned estimate.

Contingency  Plans.  Virtually all the Company's  mission  critical  systems are
dependent on third party vendors or service  providers.  Therefore,  contingency
plans include selecting a new vendor or service provider and converting to their
system. In the event a current vendor's system fails during  validation  testing
and it is  determined  that the vendor is unable or  unwilling  to  correct  the
failure,  the Company  will  convert to a new system from a list of  prospective
vendors.  In each case,  realistic  trigger dates have been established to allow
for orderly and successful conversion.  The Board of Directors approved a formal
contingency and business resumption plan in December 1998.


                                       19
<PAGE>




















                        SFS Bancorp, Inc. and Subsidiary

                        Consolidated Financial Statements

                        As of December 31, 1998 and 1997
               and for each of the years in the three-year period
                             ended December 31, 1998

                   (With Independent Auditors' Report Thereon)


<PAGE>






                          Independent Auditors' Report


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

We have audited the  accompanying  consolidated  balance  sheets of SFS Bancorp,
Inc. and  subsidiary  (the  Company) as of December  31, 1998 and 1997,  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,
1998. 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,  1998 and 1997,  and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.



/s/KPMG LLP
-----------
KPMG LLP


January 22, 1999



                                       20
<PAGE>
<TABLE>
<CAPTION>
                                 SFS BANCORP, INC. AND SUBSIDIARY
                                   Consolidated Balance Sheets
                                    December 31, 1998 and 1997
                                                                          1998             1997
                                                                        ---------        -------
                  Assets                                           (in thousands, except share data)
<S>                                                                     <C>                <C>  
Cash and due from banks ...........................................     $   1,712          1,876
Federal funds sold ................................................         2,100            300
                                                                        ---------        -------
         Total cash and cash equivalents ..........................         3,812          2,176
Securities available for sale, at fair value (note 5) .............        16,954          4,067
Investment securities (estimated fair value of $11,758 and $29,095,
     at December 31, 1998 and 1997, respectively) (note 6) ........        11,661         28,979
Stock in Federal Home Loan Bank of New York, at cost ..............         1,338          1,338
Loans receivable, net (note 7) ....................................       140,210        133,786
Accrued interest receivable (note 8) ..............................         1,133          1,130
Premises and equipment, net (note 9) ..............................         2,191          2,242
Real estate owned (note 10) .......................................           271            111
Prepaid expenses and other assets .................................           597            599
                                                                        ---------        -------
         Total assets .............................................     $ 178,167        174,428
                                                                        =========        =======
    Liabilities and Stockholders' Equity
Liabilities:
    Due to depositors (note 11):
       Non-interest bearing .......................................         2,103          2,265
       Interest bearing ...........................................       148,475        148,204
                                                                        ---------        -------
         Total deposits ...........................................       150,578        150,469
                                                                        ---------        -------
    Advance payments by borrowers for taxes and insurance .........         1,425          1,281
    Long-term borrowings (note 13) ................................           700           --
    Accrued expenses and other liabilities ........................         1,854          1,247
                                                                        ---------        -------
         Total liabilities ........................................       154,557        152,997
                                                                        ---------        -------
Commitments and contingent liabilities (notes 12 and 17)
Stockholders' Equity:
    Preferred stock, $.01 par value, authorized 500,000 shares ....          --             --
    Common stock, $.01 par value, authorized 2,500,000 shares;
       1,495,000 shares issued at December 31, 1998 and 1997 ......            15             15
    Additional paid-in capital ....................................        14,576         14,365
    Retained earnings, substantially restricted ...................        14,150         12,422
    Treasury stock, at cost (286,528 shares at December 31, 1998
       and 1997) ..................................................        (4,089)        (4,089)
    Common stock acquired by employee stock ownership plan
       (ESOP) .....................................................          (718)          (837)
    Unearned recognition and retention plan (RRP) .................          (318)          (455)
    Accumulated other comprehensive income ........................            (6)            10
                                                                        ---------        -------
         Total stockholders' equity ...............................        23,610         21,431
                                                                        ---------        -------
         Total liabilities and stockholders' equity ...............     $ 178,167        174,428
                                                                        =========        =======
</TABLE>
See accompanying notes to consolidated financial statements  
                                       21
<PAGE>
<TABLE>
<CAPTION>
                                 SFS BANCORP, INC. AND SUBSIDIARY
                                Consolidated Statements of Income
                       For the years ended December 31, 1998, 1997 and 1996

                                                                   1998        1997         1996
                                                                 -------     -------     -------
                                                         (in thousands, except for per share amounts)
<S>                                                              <C>           <C>         <C>  
Interest income:
    Loans ..................................................     $10,693       9,757       8,758
    Investment securities ..................................       1,185       2,085       2,477
    Securities available for sale ..........................         562         286         307
    Federal funds sold and cash deposits ...................         214         153         247
    Stock in Federal Home Loan Bank of New York ............          97          87          78
                                                                 -------     -------     -------
       Total interest income ...............................      12,751      12,368      11,867

Interest expense:
    Deposits (note 11) .....................................       6,895       6,623       6,187
    Borrowings .............................................           7        --          --
                                                                 -------     -------     -------
       Total interest expense ..............................       6,902       6,623       6,187

       Net interest income .................................       5,849       5,745       5,680

Provision for loan losses (note 7) .........................         120         120         120
                                                                 -------     -------     -------

       Net interest income after provision for loan losses .       5,729       5,625       5,560
                                                                 -------     -------     -------
Noninterest income:
    Bank fees and service charges ..........................         176         160         138
    Net gain on security transactions ......................        --            56           8
    Termination fee related to merger (note 2) .............       2,000        --          --
    Other income ...........................................         286         207         187
                                                                 -------     -------     -------
       Total noninterest income ............................       2,462         423         333
                                                                 -------     -------     -------

Noninterest expense:
    Compensation and benefits ..............................       2,683       2,631       2,443
    Office occupancy and equipment expenses ................         610         620         522
    Professional service fees ..............................         261         268         241
    Data processing fees ...................................         195         175         166
    Advertising and business promotion .....................          52          86         108
    Federal deposit insurance premiums .....................          92          74         322
    Federal deposit insurance special SAIF assessment ......        --          --           930
    Expenses related to terminated merger (note 2) .........         355        --          --
    Other expense ..........................................         390         434         437
                                                                 -------     -------     -------
       Total noninterest expense ...........................       4,638       4,288       5,169
                                                                 -------     -------     -------

       Income before taxes .................................       3,553       1,760         724

Income tax expense (benefit) (note 12) .....................       1,438         692        (106)
                                                                 -------     -------     -------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 SFS BANCORP, INC. AND SUBSIDIARY
                                Consolidated Statements of Income
                       For the years ended December 31, 1998, 1997 and 1996
                                           (continued)

                                                                   1998        1997        1996
                                                                 -------     -------     -------
                                                         (in thousands, except for per share amounts)
<S>                                                              <C>           <C>         <C>  
Net income .................................................     $ 2,115       1,068         830
                                                                 =======     =======     =======

Basic earnings per share ...................................     $  1.94        0.96        0.68
                                                                 =======     =======     =======

Diluted earnings per share .................................     $  1.83        0.93        0.67
                                                                 =======     =======     =======
</TABLE>

See accompanying notes to consolidated financial statements 

                                       22
<PAGE>
<TABLE>
<CAPTION>
                                                  SFS BANCORP, INC. AND SUBSIDIARY
                                     Consolidated Statements of Changes in Stockholders' Equity
                                            Years ended December 31, 1998, 1997 and 1996
                                                                                                            Retained                
                                                                                            Additional      earnings       Treasury 
                                                                      Shares      Common     paid-in     substantially      stock,  
                                                                      issued      stock       capital     restricted       at cost
                                                                      ------      -----       -------     ----------       -------
                                                                                             (dollars in thousands) 
<S>                                                                 <C>         <C>          <C>           <C>            <C>   
Balance at December 31, 1995 .................................      1,495,000   $    15      14,221        11,013              --   
Comprehensive income:
   Net income ................................................           --          --          --           830              --   
   Other comprehensive income, net of taxes:
     Unrealized net holding losses arising
         during the year (pre-tax $37) .......................           --          --          --            --              --   
     Reclassification adjustment for net gains realized in net
         income during the year (pre-tax $8) .................           --          --          --            --              --   
   Other comprehensive income ................................                                                                      
Comprehensive income .........................................                                                                      
Purchases of common stock (269,750 shares) ...................           --          --          --            --          (3,418)  
Grant of restricted stock under RRP (45,747 shares) ..........           --          --          --            --             578   
Amortization of unearned RRP compensation ....................           --          --          --            --              --   
Cash dividends declared on common stock ......................           --          --          --          (156)             --   
Allocation of ESOP stock (11,960 shares) .....................           --          --          39            --              --   
                                                                    ---------   -------      ------        ------          ------
Balance at December 31, 1996 .................................      1,495,000        15      14,260        11,687          (2,840)  
Comprehensive income:
   Net income ................................................           --          --          --         1,068              --   
   Other comprehensive income, net of taxes:
     Unrealized net holding losses arising
         during the year (pre-tax $3) ........................           --          --          --            --              --   
     Reclassification adjustment for net gains realized in net
         income during the year (pretax $56) .................           --          --          --            --              --   
   Other comprehensive income ................................                                                                      
Comprehensive income .........................................                                                                      
Purchases of common stock (77,475 shares) ....................           --          --          --            --          (1,486)  
Grants of restricted stock under RRP (7,475 shares) ..........           --          --          --            --             143   
Amortization of unearned RRP compensation ....................           --          --          --            --              --   
Cash dividends declared on common stock ......................           --          --          --          (333)             --   
Exercise of stock options (7,475 shares) .....................           --          --          --            --              94   
Allocation of ESOP stock (11,960 shares) .....................           --          --         105            --              --   
                                                                    ---------   -------      ------        ------          ------
Balance at December 31, 1997 .................................      1,495,000        15      14,365        12,422          (4,089)  
Comprehensive income:
   Net income ................................................           --          --          --         2,115              --   
   Other comprehensive income, net of taxes:
     Unrealized net holding losses arising
         during the year (pre-tax $26) .......................           --          --          --            --              --   
Comprehensive income .........................................                                                                      
Amortization of unearned RRP compensation ....................           --          --          --            --              --   
Tax benefit related to vested RRP shares .....................           --          --          49            --              --   
Cash dividends declared on common stock ......................           --          --          --          (387)             --   
Allocation of ESOP stock (11,960 shares) .....................           --          --         162            --              -- 
                                                                    ---------   -------      ------        ------          ------  
Balance at December 31, 1998 .................................      1,495,000   $    15      14,576        14,150          (4,089)  
                                                                    =========   =======      ======        ======          ======   
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                               Accumulated                      
                                                                     Common       Unearned        other                             
                                                                     stock       recognition      compre-       Compre-             
                                                                    acquired    and retention     hensive         sive              
                                                                     by ESOP        plan          income         income      Total 
                                                                     -------        ----          ------         ------      -----  
<S>                                                                 <C>            <C>              <C>        <C>          <C>  
Balance at December 31, 1995 .................................      (1,076)           --              88                     24,261 
Comprehensive income:                                                                                                               
   Net income ................................................          --            --              --       $   830          830 
                                                                                                               -------        
   Other comprehensive income, net of taxes:                                                                                        
     Unrealized net holding losses arising                                                                                          
         during the year (pre-tax $37) .......................          --            --              --           (37)             
     Reclassification adjustment for net gains realized in net                                                                      
         income during the year (pre-tax $8) .................          --            --              --            (5)
                                                                                                               -------              
   Other comprehensive income ................................                                       (42)          (42)         (42)
                                                                                                               -------    
Comprehensive income .........................................                                                 $   788              
                                                                                                               =======              
Purchases of common stock (269,750 shares) ...................          --            --              --                     (3,418)
Grant of restricted stock under RRP (45,747 shares) ..........          --          (578)             --                         -- 
Amortization of unearned RRP compensation ....................          --            38              --                         38 
Cash dividends declared on common stock ......................          --            --              --                       (156)
Allocation of ESOP stock (11,960 shares) .....................         119            --              --                        158 
                                                                    ------         -----            ----                    ------- 
Balance at December 31, 1996 .................................        (957)         (540)             46                     21,671 
Comprehensive income:                                                                                                               
   Net income ................................................          --            --              --         1,068        1,068 
                                                                                                               -------         
   Other comprehensive income, net of taxes:                                                                                        
     Unrealized net holding losses arising                                                                                          
         during the year (pre-tax $3) ........................          --            --              --            (2)             
     Reclassification adjustment for net gains realized in net                                                                      
         income during the year (pretax $56) .................          --            --              --           (34)        
                                                                                                               -------             
   Other comprehensive income ................................                                       (36)          (36)         (36)
                                                                                                               -------        
Comprehensive income .........................................                                                 $ 1,032              
                                                                                                               =======              
Purchases of common stock (77,475 shares) ....................          --            --              --                     (1,486)
Grants of restricted stock under RRP (7,475 shares) ..........          --          (143)             --                         -- 
Amortization of unearned RRP compensation ....................          --           228              --                        228 
Cash dividends declared on common stock ......................          --            --              --                       (333)
Exercise of stock options (7,475 shares) .....................          --            --              --                         94 
Allocation of ESOP stock (11,960 shares) .....................         120            --              --                        225 
                                                                    ------         -----            ----                    ------- 
Balance at December 31, 1997 .................................        (837)         (455)             10                     21,431 
Comprehensive income:                                                                                                               
   Net income ................................................          --            --              --         2,115        2,115 
                                                                                                               -------       
   Other comprehensive income, net of taxes:                                                                                        
     Unrealized net holding losses arising                                                                                          
         during the year (pre-tax $26) .......................          --            --             (16)          (16)         (16)
                                                                                                               -------      
Comprehensive income .........................................                                                 $ 2,099              
                                                                                                               ======= 
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                                Accumulated                      
                                                                     Common       Unearned        other                             
                                                                     stock       recognition      compre-       Compre-             
                                                                    acquired    and retention     hensive         sive              
                                                                     by ESOP        plan          income         income      Total 
                                                                     -------        ----          ------         ------      -----  
<S>                                                                 <C>            <C>              <C>        <C>          <C>     
Amortization of unearned RRP compensation ....................          --           137              --                        137 
Tax benefit related to vested RRP shares .....................          --            --              --                         49 
Cash dividends declared on common stock ......................          --            --              --                       (387)
Allocation of ESOP stock (11,960 shares) .....................         119            --              --                        281
                                                                    ------         -----            ----                    ------- 
Balance at December 31, 1998 .................................        (718)         (318)             (6)                    23,610 
</TABLE>
                                                                                
                                                                   
                                       24
<PAGE>
<TABLE>
<CAPTION>
                                    SFS BANCORP, INC. AND SUBSIDIARY
                                 Consolidated Statements of Cash Flows
                          For the years ended December 31, 1998, 1997 and 1996

                                                                      1998          1997         1996
                                                                    --------     --------     --------
                                                                               (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 ............................................    $  2,115        1,068          830
         Adjustments to reconcile net income to net
            cash provided by operating activities:
               Depreciation ....................................         204          190          140
               Net accretion on investment securities ..........         (74)         (75)         (12)
               Net amortization on securities available for sale           3         --           --
               ESOP compensation expense .......................         281          225          158
               Amortization of RRP .............................         137          228           38
               Provision for loan losses .......................         120          120          120
               Real estate owned writedown .....................        --           --              7
               Loss on sale of real estate owned ...............        --              3         --
               Gain on sales of securities available for sale ..        --            (56)          (8)
               (Increase) decrease in accrued interest
                 receivable ....................................          (3)           7           24
               Decrease (increase) in prepaid expenses
                 and other assets ..............................           2          317         (705)
               Increase (decrease) in accrued expenses
                 and other liabilities .........................         666         (200)         246
                                                                    --------     --------     --------
               Net cash provided by operating
                       activities ..............................       3,451        1,827          838
                                                                    --------     --------     --------
Cash flows from investing activities:
    Proceeds from maturities and paydowns of
       investment securities ...................................      18,091        8,976       12,908
    Proceeds from the sales and calls of securities
        available for sale .....................................       4,000        4,000        5,952
    Purchases of investment securities .........................        (699)      (1,700)      (6,000)
    Purchases of securities available for sale .................     (16,916)      (6,051)        --
    Purchases of FHLB stock ....................................        --           (123)         (98)
    Net increase in loans made to customers ....................      (4,366)     (11,923)     (10,859)
    Capital expenditures, net of disposals .....................        (153)        (511)        (647)
    Purchases of loans receivable ..............................      (2,365)      (3,550)      (6,973)
    Proceeds from the sales of real estate owned ...............          27           86          193
                                                                    --------     --------     --------

                    Net cash used by investing activities ......      (2,381)     (10,796)      (5,524)
                                                                    --------     --------     --------
</TABLE>
                                                                     (Continued)
                                       24
<PAGE>
<TABLE>
<CAPTION>
                                SFS BANCORP, INC. AND SUBSIDIARY
                             Consolidated Statements of Cash Flows
                      For the years ended December 31, 1998, 1997 and 1996




                                                               1998         1997        1996
                                                              -------     -------     -------
                                                                      (in thousands)
<S>                                                           <C>         <C>         <C>
Cash flows from financing activities:
    Net increase in deposits .............................    $   109       9,853         945
    Net increase (decrease) in advance payments
        by borrowers for property taxes and insurance ....        144         121        (242)
    Purchases of common stock for treasury ...............       --        (1,486)     (3,418)
    Cash dividends paid ..................................       (387)       (333)       (156)
    Proceeds from exercise of stock options ..............       --            94        --
    Proceeds from FHLB advances ..........................        700        --          --
                                                              -------     -------     -------
                    Net cash provided (used) in financing
                       activities ........................        566       8,249      (2,871)
                                                              -------     -------     -------
Net increase (decrease) in cash and cash equivalents .....      1,636        (720)     (7,557)
Cash and cash equivalents at beginning of year ...........      2,176       2,896      10,453
                                                              -------     -------     -------
Cash and cash equivalents at end of year .................    $ 3,812       2,176       2,896
                                                              =======     =======     =======
Supplemental disclosures of cash flow information:
    Cash paid during the year for:
       Interest paid .....................................    $ 6,895       6,623       6,187
                                                              =======     =======     =======
       Taxes paid ........................................    $   854         538         509
                                                              =======     =======     =======
Supplemental schedule of noncash investing activities:
    Transfer of loans to other real estate owned .........    $   187          22         178
                                                              =======     =======     =======
Adjustment of securities available for sale to fair value,
    net of increase in deferred tax asset of $10 in 1998
    and increase in deferred tax liability of $6 in 1997 .    $   (16)        (36)        (42)
                                                              =======     =======     =======
Deferred tax benefit related to vested RRP shares ........    $    49        --          --
                                                              =======     =======     =======
</TABLE>

See accompanying notes to consolidated financial statements.

                                       25
<PAGE>
                        SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

                        December 31, 1998, 1997 and 1996


(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 "Parent Company Financial Information" (note 19),
              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.
<PAGE>
       (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.


                                       26                            (Continued)
<PAGE>
                        SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

              Management believes that the allowance for loan losses is adequate
              and that real estate owned is properly  valued.  While  management
              uses available  information to recognize  losses on loans and real
              estate owned,  future  additions to the allowance or writedowns on
              real estate  owned may be  necessary  based on changes in economic
              conditions.  In  addition,  various  regulatory  agencies,  as  an
              integral part of their examination  process,  periodically  review
              the Bank's  allowance  for loan losses.  Such agencies may require
              the Bank to recognize  additions to the allowance or writedowns on
              real  estate  owned  based on their  judgments  about  information
              available to them at the time of their  examination  which may not
              be currently available to management.

       (c)    Cash Equivalents

              For purposes of the  consolidated  statements  of cash flows,  the
              Company  considers  all cash and due from banks and federal  funds
              sold to be cash equivalents.

       (d)    Securities Available for Sale,  Investment  Securities and Federal
              Home Loan Bank of New York Stock

              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.  All
              other debt and  marketable  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
              stockholders'  equity,  net of estimated income taxes. The Company
              does not maintain a trading portfolio.

              Realized  gains and losses on the sale of securities  are based on
              the net proceeds and the amortized  cost of the  securities  sold,
              using the specific  identification  method. The cost of securities
              is adjusted for amortization of premium and accretion of discount,
              which is calculated on an effective interest method.

              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
              Association ("FNMA"),  represent participating interests in direct
              pass-through  pools of long-term  first mortgage loans  originated
              and serviced by the issuers of the securities.

              Unrealized  losses on securities  are charged to earnings when the
              decline  in fair  value of a  security  is judged to be other than
              temporary.

              Non-marketable  equity securities,  such as Federal Home Loan Bank
              of New York stock,  are stated at cost.  The investment in Federal
              Home Bank of New York stock is required for membership.
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       (e)    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  using  the  interest   method  of
              amortization.  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
              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  allowance  for loan losses is  maintained  at a level  deemed
              appropriate by management  based on an evaluation of the known and
              inherent   risks  in  the   present   portfolio,   the   level  of
              non-performing  loans, past loan loss experience,  estimated value
              of underlying  collateral,  and current and  prospective  economic
              conditions.  The  allowance is increased  by  provisions  for loan
              losses charged to operations.

              Impaired loans are identified and measured in accordance with SFAS
              No. 114,  "Accounting  by Creditors for Impairment of a Loan," and
              SFAS No. 118,  "Accounting by Creditors for Impairment of a Loan -
              Income Recognition and Disclosures." A loan is considered impaired
              when it is probable  that the borrower will be unable to repay the
              loan  according  to the  original  contractual  terms  of the loan
              agreement,  or  the  loan  is  restructured  in  a  troubled  debt
              restructuring  subsequent to January 1, 1995.  These standards are
              applicable  principally to commercial  and commercial  real estate
              loans,  however,  certain provisions related to restructured loans
              are applicable to all loan types.
<PAGE>
              Under these  Statements  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 are
              generally  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 these
              costs are expected to reduce the cash flows  available to repay or
              otherwise satisfy the loans.

                                         28                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to 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. 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.

       (f)    Real Estate Owned

              Included  in  real   estate   owned  are  assets   received   from
              foreclosures  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.  Costs
              incurred to develop or improve  properties are capitalized,  while
              holding costs are charged to expense.

       (g)    Premises and Equipment, Net

              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.

       (h)    Pension Plan

              The Company has a defined  benefit  pension plan covering all full
              time employees meeting age and service requirements.  This plan is
              accounted  for  in  accordance  with  SFAS  No.  87,   "Employers'
              Accounting for Pensions."

       (i)    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 SFAS No.
              109,  "Accounting  for Income  Taxes."  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
<PAGE>
              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 and  liabilities  of a change in tax
              rates is  recognized  in income in the period  that  includes  the
              enactment  date. The Company's  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.

                                         29                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       (j)    Stock Based Compensation Plans

              Compensation  expense in connection  with the  Company's  Employee
              Stock  Ownership  Plan (ESOP) is recorded in  accordance  with the
              American Institute of Certified Public  Accountants'  Statement of
              Position  No. 93-6,  "Employers'  Accounting  for  Employee  Stock
              Ownership Plans."

              The Company accounts for its stock option plans in accordance with
              the  provisions of Accounting  Principles  Board (APB) Opinion No.
              25,  "Accounting  for  Stock  Issued to  Employees."  Accordingly,
              compensation  expense is recognized  only if the exercise price of
              the option is less than the fair value of the underlying  stock at
              the  grant  date.  SFAS  No.  123,   "Accounting  for  Stock-Based
              Compensation,"  encourages entities to recognize the fair value of
              all  stock-based  awards  on the  date of  grant  as  compensation
              expense  over the  vesting  period.  Alternatively,  SFAS No.  123
              allows entities to continue to apply the provisions of APB Opinion
              No.  25 and  provide  pro  forma  disclosures  of net  income  and
              earnings per share as if the  fair-value-based  method  defined in
              SFAS No. 123 had been applied. The Company has elected to continue
              to apply the  provisions of APB Opinion No. 25 and provide the pro
              forma disclosures required by SFAS No. 123.

              The  Company's  Recognition  and  Retention  Plan  ("RRP") is also
              accounted  for in  accordance  with APB  Opinion  No. 25. The fair
              value of the shares  awarded,  measured as of the grant  date,  is
              recognized   as   unearned    compensation   (a   deduction   from
              stockholders' equity) and amortized to compensation expense as the
              shares become vested.  Any excess of the cost to fund purchases of
              RRP  shares  over  the   grant-date   fair  value  is  charged  to
              stockholders' equity.

       (k)    Earnings per Share

              On December 31, 1997, the Company adopted SFAS No. 128,  "Earnings
              per  Share,"  which   establishes   standards  for  computing  and
              presenting   earnings  per  share.  SFAS  No.  128  requires  dual
              presentation  of basic and diluted  earnings per share on the face
              of the income  statement for all entities  with a complex  capital
              structure.  Basic  earnings  per share  excludes  dilution  and is
              computed by dividing  income  available to common  stockholders by
              the weighted  average number of common shares  outstanding for the
              period. Diluted earnings per share reflects the potential dilution
              that could occur if securities or other  contracts to issue common
              stock were exercised or converted into common stock or resulted in
              the  issuance of common  stock that then shared in the earnings of
              the entity.  All  earnings  per share data reflect the adoption of
              SFAS No.  128.  Unallocated  ESOP  shares are not  included in the
              weighted  average number of common shares  outstanding  for either
              the basic or diluted earnings per share calculations.
<PAGE>
       (l)    Segment Reporting

              During 1998, the Company adopted SFAS No. 131,  "Disclosures about
              Segments of an Enterprise and Related Information." This Statement
              requires  the Company to report  financial  and other  information
              about operating  segments  meeting certain  quantitative and other
              requirements as defined by this Statement.

              The  Company's  operations  are solely in the  financial  services
              industry  and  include  the  provision  of   traditional   banking
              services.  The Company operates solely in the geographical  region
              of Upstate New York. In the opinion of the  Company's  management,
              the Company  does not have any  reportable  segments as defined by
              SFAS No. 131.


                                         30                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       (m)    Reclassifications

              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)     Terminated Merger

       On October  23,  1998,  the  Company  and Cohoes  Savings  Bank  (Cohoes)
       announced the termination of a definitive  agreement entered into on July
       31, 1998, pursuant to which the Company was to merge into Cohoes Bancorp,
       Inc., a newly-formed  holding  company of Cohoes  organized in connection
       with  Cohoes'  conversion  from a mutual to a stock  institution.  Cohoes
       advised  the  Company  that the  merger  was not  feasible  because  of a
       significant  decline  in  the  market  values  of  publicly  held  thrift
       institutions and institutions  undertaking  mutual-to-stock  conversions,
       and regulatory concerns regarding the pricing of the merger.  Despite the
       best efforts of both parties,  revised terms acceptable to everyone could
       not be agreed upon. Pursuant to the definitive agreement, Cohoes paid the
       Company  a  termination  fee  of  $2  million.   The  Company  recognized
       professional  and other expenses  associated  with the terminated  merger
       totaling $355,000.


(3)    Earnings Per Share

       The  following is a  reconciliation  of net income and  weighted  average
       shares for the basic and diluted  earnings  per share (EPS)  calculations
       for the years ended December 31:
<TABLE>
<CAPTION>
                                                              (in thousands except share and per share information)

                                                                                      1998
                                                                 -----------------------------------------------
                                                                                    Weighted
                                                                                     Average           Per-Share
                                                                 Net Income           Shares             Amount
                                                                 ---------          ---------         ----------
<S>                                                              <C>                 <C>               <C>       
       Basic EPS                                                 $   2,115           1,092,029         $     1.94
                                                                                                       ==========
       Dilutive effect of potential common shares related
           to stock based compensation plans                             -              61,410
                                                                 ---------           --------- 
       Diluted EPS                                               $   2,115           1,153,439         $     1.83
                                                                 =========           =========         ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                                       1997
                                                                 ------------------------------------------------
                                                                                     Weighted
                                                                                      Average          Per-Share
                                                                 Net Income           Shares             Amount
                                                                 ---------          ---------         ----------
<S>                                                              <C>                 <C>               <C>       
       Basic EPS                                                 $   1,068           1,108,094         $      .96
                                                                                                       ==========
       Dilutive effect of potential common shares related
           to stock based compensation plans                             -              46,231
                                                                 ---------           ---------
       Diluted EPS                                               $   1,068           1,154,325         $      .93
                                                                 =========           =========         ==========
</TABLE>
                      

                                         31                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

 
<TABLE>
<CAPTION>
                                                                                      1996
                                                                 -----------------------------------------------
                                                                                    Weighted
                                                                                     Average           Per-Share
                                                                 Net Income           Shares             Amount
                                                                 ---------          ---------         ----------
<S>                                                              <C>                 <C>               <C>       
       Basic EPS                                                 $      830          1,224,703          $      .68
                                                                                                        ==========
       Dilutive effect of potential common shares related
           to stock based compensation plans                              -             10,128
                                                                 ----------          ---------
       Diluted EPS                                               $      830          1,234,831          $      .67
                                                                 ==========          =========          ==========
 </TABLE>

(4)    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
       $202,000 and $164,000 at December 31, 1998 and 1997, respectively.

       The Company is also required to maintain  certain  levels of stock in the
       Federal Home Loan Bank of New York.

(5)    Securities Available for Sale

       The amortized  cost and  estimated  fair value are as follows at December
       31:
<TABLE>
<CAPTION>
                                                                        1998
                                              ------------------------------------------------------
                                                                   (in thousands)
                                                               Gross          Gross        Estimated
                                              Amortized      Unrealized     Unrealized        Fair
                                                 Cost          Gains          Losses          Value
                                               -------        -------        -------        -------
<S>                                            <C>            <C>             <C>           <C>  
U.S. Government securities and agencies        $ 4,084              6             10          4,080
Corporate bonds .......................         12,880             19             25         12,874
                                               -------        -------        -------        -------
    Total securities available for sale        $16,964             25             35         16,954
                                               =======        =======        =======        =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                        1997
                                              ------------------------------------------------------
                                                                   (in thousands)
                                                               Gross          Gross        Estimated
                                              Amortized      Unrealized     Unrealized        Fair
                                                 Cost          Gains          Losses          Value
                                               -------       -------       -------        -------
<S>                                            <C>           <C>           <C>            <C>  
U.S. Government securities and agencies        $4,051            16                -         4,067
                                               ------        ------        ---------        ------
    Total securities available for sale        $4,051            16                -         4,067
                                               ======        ======        =========        ======
</TABLE>

       There  were no sales  of  securities  available  for  sale  during  1998.
       Proceeds   from  the  sale  of   securities   available   for  sale  were
       approximately  $2.0  million  and  6.0  million  during  1997  and  1996,
       respectively.  During  1997,  sales  of  securities  available  for  sale
       resulted  in gross  realized  gains of  $56,000.  During  1996,  sales of
       securities available for sale resulted in gross realized gains of $44,000
       and gross realized losses of $36,000.


                                         32                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements
 

       The amortized cost and estimated  fair value of securities  available for
       sale at December  31, 1998,  by  contractual  maturity,  are shown below.
       Expected  maturities  will differ  from  contractual  maturities  because
       certain  issuers may have the right to call  obligations  with or without
       call penalties.
 
                                                     December 31, 1998
                                                 Amortized          Estimated
                                                   Cost           Fair Value
                                                  -------            ------- 
                                                        (in thousands)

Due within one year ....................          $   996                998   
Due one to five years ..................           12,926             12,917 
Due five years to ten years ............            3,042              3,039 
                                                  -------            ------- 
     Total securities available for sale          $16,964             16,954 
                                                  =======            ======= 
                                                                    

(6)    Investment Securities

       The amortized cost and estimated fair values of investment securities are
       as follows at December 31:
<TABLE>
<CAPTION>
                                                                  1998
                                           ----------------------------------------------
                                                         Gross       Gross      Estimated
                                           Amortized   Unrealized  Unrealized      Fair
                                              Cost       Gains       Losses       Value
                                            -------     -------     -------      -------
                                                            (in thousands)
<S>                                         <C>         <C>        <C>          <C>  
Mortgage backed securities ............     $ 9,809         104          (7)       9,906
U.S. Government securities and agencies       1,086        --          --          1,086
Time deposits held at other banks .....         699        --          --            699
States and political subdivisions .....          67        --          --             67
                                            -------     -------     -------      -------
 Total investment securities ..........     $11,661         104          (7)      11,758
                                            =======     =======     =======      =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                                  1997
                                           ----------------------------------------------
                                                         Gross       Gross      Estimated
                                           Amortized   Unrealized  Unrealized      Fair
                                              Cost       Gains       Losses       Value
                                            -------     -------     -------      -------
                                                            (in thousands)
<S>                                         <C>         <C>         <C>         <C>  
Mortgage backed securities ............     $16,966         194         (84)      17,076
U.S. Government securities and agencies      11,937          24         (18)      11,943
States and political subdivisions .....          76        --          --             76
                                            -------     -------     -------      -------
 Total investment securities ..........     $28,979         218        (102)      29,095
                                            =======     =======     =======      =======
</TABLE>

       There were no sales of investment securities during 1998, 1997 or 1996.

                                         33                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       The amortized cost and estimated  fair value of investment  securities at
       December 31, 1998, by  contractual  maturity,  are shown below  (mortgage
       backed securities are included by final contractual  maturity).  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 ..........................          $ 1,061            1,059
Due one year to five years ...................            6,082            6,078
Due five years to ten years ..................            1,760            1,794
Due after ten years ..........................            2,758            2,827
                                                        -------          -------
     Total investment securities .............          $11,661           11,758
                                                        =======          =======
</TABLE>
(7)    Loans Receivable, Net

       A summary of loans receivable is as follows at December 31:
<TABLE>
<CAPTION>
                                                             1998          1997
                                                           --------     --------
                                                               (in thousands)
<S>                                                        <C>           <C>    
Loans secured by real estate:
     Residential:
         Conventional ................................     $112,568      100,277
         Home equity .................................       19,570       22,658
         FHA insured .................................        2,107        2,772
         VA guaranteed ...............................        1,358        2,028
     Commercial and multi family .....................        4,914        6,130
                                                           --------     --------
                                                            140,517      133,865
                                                           --------     --------
Other loans:
     Loans on savings accounts .......................          473          573
     Autos ...........................................          241          110
     Other ...........................................           62           38
                                                           --------     --------
                                                                776          721
                                                           --------     --------
Less:
     Unearned discount and net deferred loan fees ....          130           22
     Allowance for loan losses .......................          953          778
                                                           --------     --------
                                                              1,083          800
                                                           --------     --------
       Loans receivable, net .........................     $140,210      133,786
                                                           ========     ========
</TABLE>
<PAGE>
       Not included in the Company's loans  receivable are real estate mortgages
       serviced by the Bank for other  institutions  of  approximately  $2.4 and
       $3.5 million at December 31, 1998 and 1997, respectively.

       At December 31, 1998 and 1997, the recorded investment in loans that were
       considered  to be  impaired  under  SFAS No.  114  totaled  approximately
       $185,000 and $691,000,  respectively. 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  years  ended  December  31,  1998,  1997 and 1996 was
       approximately $485,000, $718,000 and $744,000, respectively.

                                         34                          (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       The  following   table  sets  forth  the   information   with  regard  to
       non-performing loans at December 31:
<TABLE>
<CAPTION>
                                                               1998         1997
                                                              -----        -----
                                                                (in thousands)
<S>                                                           <C>          <C>  
Loans on a nonaccrual status .........................        $ 725        1,328
Loans contractually past due 90 days or more
     and still accruing interest .....................          135           19
Restructured loans ...................................         --           --
                                                              -----        -----
           Total non-performing loans ................        $ 860        1,347
                                                              =====        =====
</TABLE>
       Interest on  nonaccrual  loans of  approximately  $36,000,  $89,000,  and
       $81,000  would  have  been  earned  in   accordance   with  the  original
       contractual  terms of the  loans in 1998,  1997 and  1996,  respectively.
       Approximately  $51,000,  $0, and $74,000 of interest  was  collected  and
       recognized  as  income  in 1998,  1997 and  1996,  respectively,  on both
       nonaccrual and impaired loans.

       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
       $125,000 and $127,000 at December 31, 1998 and 1997, respectively.  There
       were advances to the directors  and  executive  officers  during the year
       ended December 31, 1998 of approximately  $4,000.  Total payments made on
       these loans were approximately $6,000 during 1998.

       Changes in the  allowance  for loan  losses were as follows for the years
       ended December 31:
<TABLE>
<CAPTION>
                                                               1998             1997             1996
                                                              -----            -----            -----   
                                                                           (in thousands)
<S>                                                           <C>                <C>              <C>   
         Balance, beginning of year ...............           $ 778              642              572   
         Provision charged to operations ..........             120              120              120   
         Loans charged off ........................             (45)             (26)             (87)  
         Recoveries on loans previously charged off             100               42               37   
                                                              -----            -----            -----   
         Balance, end of year .....................           $ 953              778              642   
                                                              =====            =====            =====   
</TABLE>
<PAGE>  
(8)    Accrued Interest Receivable

       A summary  of  accrued  interest  receivable  by type was as  follows  at
       December 31:
<TABLE>
<CAPTION>

                                                            1998           1997
                                                               (in thousands)

<S>                                                        <C>               <C>
Loans ............................................         $  774            766
Securities available for sale ....................            246             68
Investment securities ............................            113            296
                                                           ------         ------
      Total accrued interest receivable ..........         $1,133          1,130
                                                           ======         ======
</TABLE>
                                        35                           (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

(9)    Premises and Equipment, Net

       Premises and equipment are summarized by major  classification as follows
       at December 31:
 
                                                              1998         1997
                                                             ------       ------
                                                                (in thousands)
Land .................................................      $   338          338
Leasehold improvements ...............................          241          241
Office buildings .....................................        2,559        2,550
Furniture, fixtures and equipment ....................        1,278        1,135
                                                             ------       ------
      Total ..........................................        4,416        4,264

Less accumulated depreciation and amortization .......        2,225        2,022
                                                             ------       ------
      Premises and equipment, net ....................       $2,191        2,242
                                                             ======       ======
 
       Depreciation  expense included in office occupancy and equipment  expense
       amounted to approximately $204,000,  $190,000, and $140,000 for the years
       ended December 31, 1998, 1997 and 1996, respectively.

(10)   Real Estate Owned

       A summary of real estate acquired  through  foreclosure by the Company or
       classified as in-substance foreclosure is as follows at December 31:  
       
 
                                                            1998            1997
                                                            ----            ----
                                                                (in thousands)

Residential (1 - 4 family) .....................            $ 67              26
Commercial property ............................             204              85
                                                            ----            ----
      Total real estate owned ..................            $271             111
                                                            ====            ====
<PAGE>
(11)   Due to Depositors

       Due to depositors  account balances are summarized as follows at December
       31:
<TABLE>
<CAPTION>
                                                            Stated
                                                             rate                1998                      1997
                                                          ------------        ---------                   ------
                                                                                          (in thousands)
<S>                                                       <C>                 <C>                         <C>   
         Savings deposit accounts:
              Passbook and statement deposit accounts     2.50%               $  36,394                   36,681
              Money market deposit accounts               2.60 - 4.30             8,263                    7,619
                                                                              ---------                   ------ 
                                                                                 44,657                   44,300
         Time deposit accounts:
                                                          3.00 - 3.99             1,047                       -
                                                          4.00 - 4.99            20,367                      801
                                                          5.00 - 5.99            66,818                   84,451
                                                          6.00 - 6.99             4,719                    9,489
                                                                              ---------                   ------ 
                                                                                 92,951                   94,741
         NOW deposit accounts                                    1.25            10,867                    9,163
         Demand deposit accounts                                    0             2,103                    2,265
                                                                              ---------                  ------- 
                  Total deposits                                              $ 150,578                  150,469
                                                                              =========                  ======= 
</TABLE>
                                        36                           (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       The approximate amount of contractual maturities of time deposit accounts
       at December 31, 1998 are as follows:

          Year ended December 31,                      (in thousands)
                1999                                    $  68,098
                2000                                       15,129
                2001                                        3,603
                2002                                        2,930
                2003                                        3,191
                                                        ---------
                                                        $  92,951
                                                        =========

       At  December  31, 1998 and 1997,  the  aggregate  amount of time  deposit
       accounts   with   balances   equal  to  or  in  excess  of  $100,000  was
       approximately $8.9 million and $8.4 million, respectively.

       Interest  expense on deposits  and  advance  payments  by  borrowers  for
       property taxes and insurance is summarized as follows for the years ended
       December 31:
<TABLE>
<CAPTION>
                                             1998           1997            1996
                                            ------         ------         ------
                                                       (in thousands)
<S>                                         <C>           <C>             <C>  
Passbook and statement savings .....        $1,069          1,113          1,173
Money market accounts ..............           249            251            161
Time deposits ......................         5,390          5,075          4,680
NOW accounts .......................           158            159            148
Escrow balances ....................            29             25             25
                                            ------         ------         ------
     Total interest on deposits and
        advance payments by
        borrowers for property taxes
        and insurance ..............        $6,895          6,623          6,187
                                            ======         ======         ======

Weighted average interest rates ....          4.18%          4.59%          4.37%
                                            ======         ======         ======

</TABLE>
<PAGE>
(12)   Income Taxes

       The  following is a summary of the  components  of income tax expense for
       the years ended December 31:
<TABLE>
<CAPTION>
                                          1998            1997             1996
                                        -------         -------         -------
                                                     (in thousands)
<S>                                     <C>             <C>             <C>
Current tax expense:
     Federal ...................        $ 1,250             583             372
     State .....................            280             121              76
     Deferred benefit ..........            (92)            (12)           (554)
                                        -------         -------         -------
Income tax expense (benefit) ...        $ 1,438             692            (106)
                                        =======         =======         =======

</TABLE>
                                        37                           (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       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>
                                                               1998                          1997                     1996
                                                      ----------------------        --------------------       -------------------
                                                                       % 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                  $ 1,208          34.0%        $   598        34.0%      $    246        34.0%
       State income tax, net of federal tax
           benefit                                        172           4.9             105         5.9             45         6.2
           
       Change in beginning of year 
           balance of the valuation 
           allowance for deferred tax assets                -             -               -           -           (396)      (54.7)
       Other, net                                          58           1.6             (11)        (.6)            (1)        (.1)
                                                      -------          ----         -------        ----       --------       ----- 
                                                      $ 1,438          40.5%        $   692        39.3%      $   (106)      (14.6)%
                                                      =======          ====         =======        ====       ========       ===== 
</TABLE>




       The tax effects of significant  temporary  differences  that give rise to
       the deferred tax assets and liabilities were as follows at December 31:
<PAGE>
<TABLE>
<CAPTION>
                                                             1998          1997
                                                            -----         -----
                                                               (in thousands)
<S>                                                         <C>             <C>
Deferred tax assets:
     Allowance for loan losses .....................        $ 410           334
     Deferred compensation and pension costs .......          448           430
     Recognition and retention plan expense ........           59            52
     Securities basis adjustment ...................           22            22
                                                            -----         -----
         Total gross deferred tax assets ...........          939           838
         Less valuation allowance ..................          (96)          (96)
                                                            -----         -----
         Net deferred tax assets ...................          843           742
                                                            -----         -----

Deferred tax liabilities:
     Depreciation differences ......................           71            72
     Accretion of discount on securities ...........           54            53
     Other items ...................................           60            51
                                                            -----         -----
         Total gross deferred tax liabilities ......          185           176
                                                            -----         -----

         Net deferred tax asset at year-end ........          658           566

         Net deferred tax asset at beginning of year          566           554
                                                            -----         -----

         Deferred tax benefit for the years ended ..        $  92            12
                                                            =====         =====
</TABLE>


       In addition to the deferred tax amounts described above, the Company also
       had a deferred tax asset of approximately $4,000 at December 31, 1998 and
       a deferred tax  liability of  approximately  $6,000 at December 31, 1997,
       related to the net unrealized gains on securities available for sale.



                                        38                           (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       The  valuation  allowance for deferred tax assets as of December 31, 1998
       and 1997 was  $96,000.  During  the year ended  December  31,  1996,  the
       valuation allowance was reduced by $396,000. 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  reserved  a portion of 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 Company's continuing  evaluation of
       the  level  of such  allowance  and the  realizability  of the  temporary
       differences  creating the deferred tax asset.  Based on recent historical
       and anticipated future pre-tax earnings,  management  believes it is more
       likely  than not that the  Company  will  realize  its net  deferred  tax
       assets.

       As a thrift institution, the Bank is subject to special provisions in the
       Federal and New York State tax laws  regarding its allowable tax bad debt
       deductions   and  related  tax  bad  debt  reserves.   These   deductions
       historically  have been determined using methods based on loss experience
       or a percentage of taxable  income.  Tax bad debt reserves are maintained
       equal to the excess of allowable  deductions  over actual bad debt losses
       and  other  reserve  reductions.  These  reserves  consist  of a  defined
       base-year amount, plus additional amounts ("excess reserves") accumulated
       after the base year.  SFAS No. 109 requires  recognition  of deferred tax
       liabilities with respect to such excess reserves,  as well as any portion
       of  the  base-year  amount  which  is  expected  to  become  taxable  (or
       "recaptured") in the foreseeable future.

       Certain  amendments to the Federal and New York State tax laws  regarding
       bad debt  deductions  were enacted in July and August  1996.  The Federal
       amendments include elimination of the percentage of taxable income method
       for tax years  beginning  after  December 31, 1995,  and  imposition of a
       requirement   to  recapture   into  taxable  income  (over  a  period  of
       approximately six years) the bad debt reserves in excess of the base-year
       amounts. The Bank previously established,  and will continue to maintain,
       a deferred tax liability  with respect to such excess  Federal  reserves.
       The New York  State  amendments  redesignate  the  Bank's  state bad debt
       reserves at December  31, 1995 as the  base-year  amount and also provide
       for future  additions to the base-year  reserve  using the  percentage of
       taxable income method.

       In  accordance  with SFAS No. 109, a deferred tax  liability has not been
       recognized  at both  December  31,  1998 and  1997  with  respect  to the
       base-year  reserve of $4.6  million,  since the Bank does not expect that
       this amount will become taxable in the foreseeable future. Under New York
       State tax law, as amended,  events that would  result in taxation of this
       reserve  include  the  failure  of  the  Bank  to  maintain  a  specified
       qualifying  assets  ratio or meet other thrift  definition  tests for tax
       purposes.  The  unrecognized  deferred tax liability at both December 31,
       1998 and 1997 with  respect to the  base-year  reserve was  approximately
       $1.8 million.


                                       39                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(13)   Borrowings

       (a)    Line of Credit

              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, 1998 totaling  approximately  $17.4
              million.  The interest rate may fluctuate based on existing market
              conditions  and  customers'  demands  for  credit.  There  were no
              amounts outstanding under this line of credit at December 31, 1998
              or 1997.

       (b)    Long-Term Borrowings

              The Company utilizes long-term borrowings as a source of funds for
              its asset growth and  asset/liability  management.  Collateralized
              advances are available  from the FHLB provided  certain  standards
              related to  creditworthiness  have been met. Long-term  borrowings
              from the FHLB as of December 31, 1998 had a weighted  average rate
              of 4.98%.  The Company had no long-term  borrowings  in 1997.  The
              Company has pledged mortgage loans and FHLB stock as collateral on
              these borrowings. The maturity of advances as of December 31, 1998
              is as follows:

                                                                Amount
                                                            -----------
                                                            (in thousands)

                    Due in 1999                             $       100
                    Due in 2000                                     200
                    Due in 2001                                     300
                    Due in 2002                                      -
                    Due in 2003                                     100
                                                            -----------
                         Total                              $       700
                                                            ===========

(14)   Employee Benefit Plans

       (a)    Pension Plan

              The Company's defined benefit, non-contributory, pension plan (the
              "Plan")  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.

                                       40                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              The  following  table  sets  forth the  Plan's  change in  benefit
              obligation, the change in plan assets and reconciliation of funded
              status at December 31:
<TABLE>
<CAPTION>
                                                                              1998            1997
                                                                            -------         -------
                                                                                 (in thousands)
<S>                                                                         <C>               <C>  
                  Change in benefit obligation:
                      Benefit obligation at beginning of year ......        $ 4,662           3,936
                      Service cost .................................            179             171
                      Interest cost ................................            284             288
                      Actuarial (gain)/loss ........................           (190)            331
                      Benefits paid ................................            (65)            (64)
                                                                            -------         -------
                           Benefit obligations at end of year ......          4,870           4,662
                                                                            -------         -------
                  Change in plan assets:
                      Fair value of plan assets at beginning of year          3,636           3,190
                      Actual return on plan assets .................            322             295
                      Employer contribution ........................            211             215
                      Benefits paid ................................            (65)            (64)
                                                                            -------         -------
                           Fair value of plan assets at end of year           4,104           3,636
                                                                            -------         -------
                  Reconciliation of funded status:
                      Funded status ................................           (766)         (1,026)
                      Unrecognized net actuarial loss ..............            488             704
                      Unrecognized prior service cost ..............              1               2
                      Unrecognized net transition asset ............            223             246
                                                                            -------         -------
                           Accrued pension cost ....................        $   (54)            (74)
                                                                            =======         =======
</TABLE>
<PAGE>
              Net pension cost for 1998,  1997 and 1996  included the  following
              components:
<TABLE>
<CAPTION>
                                                         1998          1997          1996
                                                        -----         -----         -----
                                                                  (in thousands)
<S>                                                     <C>             <C>           <C>
Service cost - benefits earned during the period        $ 179           171           171

Interest cost on projected benefit obligations .          285           288           265
Actual return on plan assets ...................         (296)         (295)         (171)
Net amortization and deferral ..................           23            26           (67)
                                                        -----         -----         -----
Net periodic pension cost ......................        $ 191           190           198
                                                        =====         =====         =====
</TABLE>
<PAGE>
              Significant assumptions used in determining pension expense of the
              Plan are as follows  for the years  ended  December  31: 
<TABLE>
<CAPTION>
                                                            1998                   1997                    1996
                                                            ----                   ----                    ----
<S>                                                         <C>                     <C>                     <C> 
              Discount rate                                 6.50%                   7.0%                    7.5%
              Expected long-term rate of return             8.00%                   9.0%                    9.0%
              Compensation increase rate                    5.00%                   6.0%                    6.0%

</TABLE>
                                       41                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


       (b)    Executive Supplemental Retirement Plan

              The Company  maintains an executive  supplemental  retirement plan
              for key management personnel. An expense of approximately $61,000,
              $72,000,  and  $72,000  was  recorded  in  1998,  1997  and  1996,
              respectively.

       (c)    401(k) Savings Plan

              The Company 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 1998, 1997 and
              1996   was   approximately   $32,000,    $27,000,   and   $23,000,
              respectively.

(15)   Stock-Based Compensation Plans

       (a)    Employee Stock Ownership Plan

              The Company established an employee stock ownership plan (ESOP) to
              provide substantially all employees of the Company the opportunity
              to also become stockholders. The ESOP borrowed $1,196,000 from the
              Holding  Company and used the funds to purchase  119,600 shares of
              the  common  stock of the  Company  issued  during  the  Company's
              initial public offering.  The loan will be repaid principally from
              the Bank's  discretionary  contributions to the ESOP over a period
              of ten  years.  At  December  31,  1998 and 1997,  the loan had an
              outstanding balance of $717,600 and $837,200, 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.

              Unallocated  ESOP shares are pledged as collateral on the loan and
              are reported in stockholders'  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 $281,000, $225,000 and $158,000
              of  compensation  expense  under the ESOP in 1998,  1997 and 1996,
              respectively.
<PAGE>
              The ESOP shares as of December 31, 1998 were as follows:

                  Allocated shares                                      35,880
                  Shares released for allocation                        11,960
                  Unallocated shares                                    71,760
                                                                    ----------
                                                                       119,600
                  Market value of unallocated shares at             ----------
                      December 31, 1998                             $1,525,000
                                                                    ==========


                                       42                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       (b)    Stock Option Plan

              On January 16, 1996, the Company's  stockholders  approved the SFS
              Bancorp,  Inc. 1996 Stock Option and Incentive  Plan (Stock Option
              Plan).  The  primary  objective  of the  Stock  Option  Plan is to
              provide officers and directors with a proprietary  interest in the
              Company and as an incentive  to  encourage  such persons to remain
              with the Company.

              Under the Stock  Option Plan,  149,500  shares of  authorized  but
              unissued  stock are reserved for issuance  upon option  exercises.
              The Company also has the alternative to fund the stock option plan
              with  treasury  stock.  Options  under  the  plan  may  be  either
              non-qualified  stock  options or  incentive  stock  options.  Each
              option  entitles  the holder to purchase one share of common stock
              at an exercise price equal to the fair market value on the date of
              grant.  Options expire no later than ten years  following the date
              of grant.

              In January,  1996,  133,054  options  were  awarded at an exercise
              price of $12.63 per share;  in January,  1997,  7,475 options were
              awarded at an exercise price of $14.75 per share;  and in October,
              1997 11,212  options were  awarded at an exercise  price of $22.03
              per share. These shares have a ten-year term and vest at a rate of
              20% per year from  their  respective  grant  dates.  There were no
              options awarded during 1998.

              A summary of the status of the Company's  stock option plans as of
              December  31,  1998,  1997 and 1996 and  changes  during the years
              ended on those dates is presented below:
<TABLE>
<CAPTION>
                                              1998                          1997                         1996
                                      -----------------------         ---------------------        ----------------------
                                                    Weighted-                    Weighted-                      Weighted-
                                                     Average                      Average                        Average
                                                    Exercise                     Exercise                       Exercise
                                       Shares         Price            Shares      Price            Shares        Price
                                       ------         -----            ------      -----            ------        -----
<S>                                   <C>          <C>                <C>        <C>               <C>         <C>     
Options:
  Outstanding at January 1            125,579      $   13.59          114,367    $   12.63               -     $      -
  Granted                                   -              -           18,687        19.12         133,054        12.63
  Exercised                                 -              -           (7,475)       12.63               -            -
  Forfeited                                 -              -                -            -         (18,687)           -
  Outstanding at year-end             125,579          13.59          125,579        13.59         114,367        12.63
  Exercisable at year-end              46,496          12.63           21,379        12.63               -        12.63
Estimated weighted-average 
  fair value of options 
  granted during
  the year                                                             $ 6.29                      $ 4.08
                                                                       ======                      ======

</TABLE>
                                       43                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

              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 1997 and 1996:
<TABLE>
<CAPTION>
                                                            October                January                 January
                                                              1997                   1997                    1996
                                                           ---------               --------                -------- 
<S>                                                        <C>                     <C>                     <C> 
                  Dividend yield                            1.3%                    1.9%                    1.7%
                  Expected volatility                      22.0%                   22.0%                   25.0%
                  Risk-free interest rate                   6.0%                    6.5%                    5.6%
                  Expected life                             7 years                 7 years                 7 years
</TABLE>

              Had the Company recorded compensation cost based on the fair value
              at grant  date for its  stock  options  under  SFAS No.  123,  the
              company's  consolidated  net income and basic and diluted earnings
              per  share  would  have  been  reduced  to the pro  forma  amounts
              indicated below:
<TABLE>
<CAPTION>
                                                                   (in thousands except per share data)
                                                          1998                      1997                    1996
                                                          ----                      ----                    ---- 
<S>                                                     <C>                        <C>                       <C>
                  Net income:
                      As reported                       $  2,115                   1,068                     830
                      Pro forma                            2,009                     976                     744
                  Basic earnings per share:
                      As reported                           1.94                     .96                     .68
                      Pro forma                             1.84                     .88                     .61
                  Diluted earnings per share:
                      As reported                           1.83                     .93                     .67
                      Pro forma                             1.74                     .86                     .62
</TABLE>

              Because the Company's employee stock options have  characteristics
              significantly different from those of traded options for which the
              Black-Scholes  model was  developed,  and  because  changes in the
              subjective input  assumptions can materially affect the fair value
              estimate,  the existing models,  in management's  opinion,  do not
              necessarily provide a reliable single measure of the fair value of
              its employee stock options.
<PAGE>
       (c)    Recognition and Retention Plan

              On January 16, 1996, the Company's  stockholders  approved the SFS
              Bancorp, Inc. Recognition and Retention Plan (RRP). The purpose of
              the plan is to promote the long-term  interests of the Company and
              its shareholders by providing a stock based  compensation  program
              to  attract  and retain  officers  and  directors.  Under the RRP,
              59,800 shares of authorized  but unissued  shares are reserved for
              issuance under the plan.  The Company also has the  alternative to
              fund the RRP with treasury stock.

              During   1997  and  1996,   7,475   shares  and   53,222   shares,
              respectively,  were  awarded  under the RRP.  There were no shares
              awarded  during  1998.  During 1996,  7,475 shares were  forfeited
              under the RRP. A total of 10,047  shares,  8,552  shares and 8,691
              shares   vested  under  the  RRP  during  1998,   1997  and  1996,
              respectively.


                                       44                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(16)   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
       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."


                                       45                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       The following  tables  present the carrying  amounts and  estimated  fair
       values of the Company's  financial  instruments  at December 31, 1998 and
       1997:
<TABLE>
<CAPTION>
                                                                                      1998
                                                                            -------------------------
                                                                                 (in thousands)
                                                                            Carrying        Estimated
                                                                              Amount        Fair Value
                                                                            --------        --------
<S>                                                                         <C>                <C>  
  Financial assets:
     Cash and cash equivalents .....................................        $  3,812           3,812
     Securities available for sale .................................          16,954          16,954
     Investment securities .........................................          11,661          11,758
     Stock in Federal Home Loan Bank ...............................           1,338           1,338
     Loans .........................................................         141,293         142,848
         Less:  allowance for loan losses ..........................             953            --
                unearned discount, and deferred loan fees, net .....             130            --
                                                                            --------        --------
             Net loans .............................................         140,210         142,848
     Accrued interest receivable ...................................           1,133           1,133

Financial liabilities:
     Savings, now, and demand deposit accounts .....................          57,627          57,627
     Time deposit accounts .........................................          92,951          93,936
     Advance payments by borrowers for property taxes
         and insurance .............................................           1,425           1,425
     Long-term borrowings ..........................................             700             694
     Accrued interest on depositors accounts .......................               6               6
<CAPTION>
                                                                                      1997
                                                                            -------------------------
                                                                                 (in thousands)
                                                                            Carrying        Estimated
                                                                              Amount        Fair Value
                                                                            --------        --------
<S>                                                                         <C>                <C>  
  Financial assets:
     Cash and cash equivalents .....................................        $  2,176           2,176
     Securities available for sale .................................           4,067           4,067
     Investment securities .........................................          28,979          29,095
     Stock in Federal Home Loan Bank ...............................           1,338           1,338
     Loans .........................................................         134,586         135,886
         Less:  allowance for loan losses ..........................             778            --
                unearned discount, and deferred loan fees, net .....              22            --
                                                                            --------        --------
             Net loans .............................................         133,786         135,886
     Accrued interest receivable ...................................           1,130           1,130

Financial liabilities:
     Savings, now, and demand deposit accounts .....................          55,728          55,728
     Time deposit accounts .........................................          94,741          94,880
     Advance payments by borrowers for property taxes
         and insurance .............................................           1,281           1,281
     Accrued interest on depositors accounts .......................               7               7
</TABLE>
                                       46                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

       Financial Instruments with Carrying Amount Equal to Fair Value
       --------------------------------------------------------------
       The carrying amount of cash and cash  equivalents,  stock in Federal Home
       Loan Bank,  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
       ----------
       The fair value of securities available for sale and investment 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.

       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,  1998  and  1997.  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.

       Long-Term Borrowings
       --------------------
       The fair value of the Company's  long-term  borrowings is estimated based
       on the quoted market prices for the same or similar issues.
<PAGE>
       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, 1998 and 1997.


                                       47                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

(17)   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.

              Contract  amounts of financial  instruments  that represent credit
              risk as of  December  31,  1998  and 1997 at  fixed  and  variable
              interest rates are as follows:

                                                        1998
                                        -------------------------------------
                                         Fixed        Variable          Total
                                        -------        -------        -------
                                                   (in thousands)
Financial  instruments  whose
  contract  amounts  represent
  credit risk:
    Conventional mortgage loans .....   $ 1,823            248          2,071
    Home equity .....................      --            9,733          9,733
    Commercial loans ................       359           --              359
    Overdraft loans .................       154           --              154
                                        -------        -------        -------
                                        $ 2,336          9,981         12,317
                                        =======        =======        =======

                                                        1997
                                        -------------------------------------
                                         Fixed        Variable          Total
                                        -------        -------        -------
                                                   (in thousands)

Financial  instruments  whose
  contract amounts represent
  credit risk:
    Conventional mortgage loans .....   $   921          2,296          3,217
    Home equity .....................      --           10,279         10,279
    Commercial loans ................       257           --              257
    Overdraft loans .................       135           --              135
                                        -------        -------        -------
                                        $ 1,313         12,575         13,888
                                        =======        =======        =======


                                       48                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

              The range of interest rates on fixed rate commitments was 6.50% to
              18.00% at December  31,  1998 and 7.13% to 18.00% at December  31,
              1997. 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, 1998 and 1997 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, 1998 and 1997
              was 6.00% above the initial rate.  The Company also offers 3/1 and
              5/1 ARM  products  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,  1998 and 1997,  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,  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,  1998,  1997  and  1996  were
              approximately  $52,000,  $53,000,  and  $45,000,  respectively.  A
              summary  of the  future  minimum  commitments  required  under the
              noncancelable facility lease are as follows:

                     Years ending December 31:           (in thousands)

                               1999                      $         52
                               2000                                52
                               2001                                52
                               2002                                52
                               2003                                52
                               Thereafter                         151
                                                         ------------
                                                         $        411
                                                         ============

                                       49                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(18)   Dividend Restrictions and Regulatory Capital Requirements

       (a)    Dividend Restrictions

              In connection with the Company's initial public offering, 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 distributions 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, 1998, the maximum amount that could have
              been paid by the Bank to the  Holding  Company  was  approximately
              $8.1 million.

              The Holding Company's ability to pay dividends to its stockholders
              is  dependent  on the ability of the Bank to pay  dividends to the
              Holding Company.

       (b)    Regulatory Capital Requirements

              OTS regulations  require savings  institutions to maintain minimum
              levels of regulatory  capital.  Under the regulations in effect at
              December  31,  1998,  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%.
<PAGE>

              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  institution's  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%.

                                       50                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


              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, 1998, 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 Bank's
              capital classification.

              The  following  is a summary of the Bank's  and  Company's  actual
              capital  amounts and ratios,  compared to the OTS minimum  capital
              adequacy  requirements and the OTS requirements for classification
              as a well capitalized institution, at December 31:
<TABLE>
<CAPTION>
                                                                           1998
                                        -------------------------------------------------------------------------
                                                                       Minimum Capital           Classification
                                                  Actual                  Adequacy            as Well Capitalized
                                        ----------------------         ---------------        -------------------
                                            Amount       Ratio             Ratio                        Ratio
                                            ------       -----             -----                        -----
<S>                                     <C>             <C>                <C>                            
              Bank
              ----
              Tangible capital          $    20,496     11.50%             1.50%                            -
              Tier 1 (core) capital          20,496     11.50              3.00                          5.00%
              Risk-based capital:
                  Tier 1                     20,496     21.64                -                           6.00
                  Total                      21,449     22.65              8.00                         10.00

<CAPTION>
                                                  Actual
                                        ----------------------
                                            Amount       Ratio
                                            ------       -----
<S>                                     <C>             <C>   
              Consolidated
              ------------
              Tangible capital          $    23,604     13.25%
              Tier 1 (core) capital          23,604     13.25
              Risk-based capital:
                  Tier 1                     23,604     24.93
                  Total                      24,557     25.93

</TABLE>
                                       51                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
                                                                           1997
                                        -------------------------------------------------------------------------
                                                                       Minimum Capital          Classification
                                                  Actual                  Adequacy            as Well Capitalized
                                        ----------------------         ---------------        -------------------
                                            Amount       Ratio             Ratio                        Ratio
                                            ------       -----             -----                        -----
<S>                                     <C>             <C>                <C>                            
              Bank
              ----
              Tangible capital          $    18,977     10.88%             1.50%                         -
              Tier 1 (core) capital          18,977     10.88              3.00                          5.00
              Risk-based capital:
                  Tier 1                     18,977     20.33                -                           6.00
                  Total                      19,755     21.16              8.00                         10.00
<CAPTION>
                                                  Actual
                                        ----------------------
                                            Amount       Ratio
                                            ------       -----
              Consolidated
              ------------
              Tangible capital          $    21,421     12.28%
              Tier 1 (core) capital          21,421     12.28
              Risk-based capital:
                  Tier 1                     21,421     22.95
                  Total                      22,199     23.78

</TABLE>
                                       52                            (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


(19)   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.
<TABLE>
<CAPTION>
                                            Balance Sheets
                                   as of December 31, 1998 and 1997

                                                                             1998              1997
                                                                          ---------          --------
                          Assets                                       (in thousands, except share data)

<S>                                                                       <C>                <C>
Cash and cash equivalents ........................................        $      79                76
Loan receivable from subsidiary ..................................            3,618             2,337
Equity in net assets of subsidiary ...............................           20,502            18,987
Other assets .....................................................             --                  60
                                                                          ---------          --------

         Total assets ............................................        $  24,199            21,460
                                                                          =========          ========

     Liabilities and Stockholders' Equity

Liabilities:
     Other liabilities ...........................................        $     589                29
                                                                          ---------          --------

Stockholders' Equity:
     Preferred  stock,  $.01 par  value, authorized 500,000 
          shares -
     Common  stock, $.01 par value, authorized 2,500,000 shares;
         1,495,000 shares issued at December 31,
         1998 and 1997 ...........................................               15                15
     Additional paid-in capital ..................................           14,576            14,365
     Retained earnings, substantially restricted .................           14,150            12,422
     Treasury stock, at cost (286,528 shares at
         December 31, 1998 and 1997) .............................           (4,089)           (4,089)
     Common stock acquired by employee stock ownership plan (ESOP)             (718)             (837)
     Unearned recognition and retention plan (RRP) ...............             (318)             (455)
     Accumulated other comprehensive income ......................               (6)               10
                                                                          ---------          --------
             Total stockholders' equity ..........................           23,610            21,431
                                                                          ---------          --------

             Total liabilities and stockholders' equity ..........        $  24,199            21,460
                                                                          =========          ========
</TABLE>
                                        53                           (Continued)
<PAGE>
                       SFS BANCORP, INC. AND SUBSIDIARY

                   Notes to Consolidated Financial Statements


<TABLE>
<CAPTION>

                              Statements of Income
                 For the years ended December 31, 1998 and 1997


                                                1998          1997          1996
                                               ------       -------        ------ 
                                                        (in thousands)
<S>                                            <C>              <C>           <C>
Interest income .......................        $  180           245           384
Interest expense ......................          --            --            --
                                               ------        ------        ------

     Net interest income ..............           180           245           384

Non interest income (note 2) ..........         2,000          --            --
Noninterest expense ...................           738           115           104
                                               ------        ------        ------

Income before income taxes and
   equity in undistributed
   earnings of subsidiary .............         1,442           130           280


Income tax expense ....................           576            52           112
                                               ------        ------        ------

Income before equity in
   undistributed earnings of subsidiary           866            78           168

Equity in undistributed earnings
   of subsidiary (for the years
   ended December 31,
   1998 and 1997) .....................         1,249           990           662
                                               ------        ------        ------

Net income ............................        $2,115         1,068           830
                                               ======        ======        ======

</TABLE>
                                        54                           (Continued)
<PAGE>
                                   SFS BANCORP, INC. AND SUBSIDIARY

                              Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
                                       Statements of Cash Flows
                            For the years ended December 31, 1998 and 1997
                                                                   1998            1997           1996
                                                                 -------         -------         -------
                                                                              (in thousands)
<S>                                                              <C>             <C>             <C>
         Cash flows from operating activities:
              Net income ................................        $ 2,115           1,068             830
              Adjustment to reconcile net
                 income to net cash provided
                 by operating activities:
                    Equity in undistributed
                      earnings of subsidiary ............         (1,249)           (990)           (662)
                    Decrease (increase) in other assets .             60              (2)            (17)
                    Increase (decrease) in liabilities ..            608             (19)             27
                    Amortization of RRP .................            137             228              38
                                                                 -------         -------         -------
                         Net cash provided by
                            operating activities ........          1,671             285             216
                                                                 -------         -------         -------

           Cash flows from investing activities:
              Net (increase) decrease in
                 loan receivable from subsidiary ........         (1,281)          1,420           3,319
                                                                 -------         -------         -------

                  Net cash provided (used)
                    in investing activities .............         (1,281)          1,420           3,319
                                                                 -------         -------         -------

           Cash flows from financing activities:
              Purchase of treasury stock ................           --            (1,486)         (3,418)
              Cash dividends paid .......................           (387)           (333)           (156)
              Proceeds from exercise of stock option ....           --                94            --
                                                                 -------         -------         -------
                  Net cash used from financing activities           (387)         (1,725)         (3,574)
                                                                 -------         -------         -------

           Net increase (decrease) in cash
              and cash equivalents ......................              3             (20)            (39)

           Cash and cash equivalents:
              Beginning of period .......................             76              96             135
                                                                 -------         -------         -------

              End of period .............................        $    79              76              96
                                                                 =======         =======         =======
</TABLE>

       These  financial  statements  should  be read  in  conjunction  with  the
Company's consolidated financial statements and notes thereto.


                                       55


<PAGE>
                             CORPORATE INFORMATION
================================================================================


Annual Meeting

         The annual meeting of SFS Bancorp,  Inc. will be held on April 14, 1999
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 March 5, 1999 there  were  approximately  276
holders of record and  approximately 551 additional  beneficial  shareholders of
SFS Bancorp,  Inc. Common Stock and 1,495,000  shares of common stock issued and
1,208,472 shares outstanding.



PRICE RANGE OF COMMON STOCK

         The table  below  shows the  range of high and low bid  prices  for the
Company's  Common  Stock.  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>
                    1998                                                  1997
-------------------------------------------           --------------------------------------------
                    High            Low                                   High            Low
<S>                <C>             <C>                <C>               <C>             <C>   
First Quarter      $28.00          $20.75             First Quarter     $18.125         $14.75
Second Quarter     $26.25          $21.00             Second Quarter    $17.50          $16.00
Third Quarter      $29.00          $19.75             Third Quarter     $23.25          $16.875
Fourth Quarter     $27.25          $20.25             Fourth Quarter    $28.00          $21.50                  
                                                                 

</TABLE>

         During 1998, the Company declared  dividends totaling $387,000 or $0.32
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 18 of the  Notes  to  Consolidated  Financial
Statements included in this Annual Report.



                                       56
<PAGE>
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, 1998 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

Transfer Agent and Registrar                         Independent Auditors

Registrar and Transfer Company                       KPMG LLP
10 Commerce Drive                                    515 Broadway
Cranford, NJ  07016                                  Albany, NY  12207

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                        Richard D. Ammian
  President and Chief Executive Officer      Senior Vice President and Secretary

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

William Pezzula
  Vice President


                                       57