1997 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 ..................................... 17


         Consolidated Financial Statements ................................ 18


         Corporate Information ............................................ 52







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

Dear Fellow Stockholders:

     On behalf of the Board of Directors, Officers and Employees of SFS Bancorp,
Inc.  (the  "Company")  and its wholly  owned  subsidiary,  Schenectady  Federal
Savings Bank (the "Bank"), I am pleased to submit to you our 1997 Annual Report.

     First and most  importantly,  the market value of our stock reached  record
levels during 1997.  When  combined  with an increase in the quarterly  dividend
rate  announced in April 1997,  it resulted in an  annualized  equivalent  total
return on the Company's  stock of 41.6% since  converting to a public company in
1995.  During 1997, we repurchased over 77,000 shares of our outstanding  common
stock  which is  consistent  with our  ongoing  capital  management  strategy to
increase  our  earnings  per share.  As we go forward,  it is our  intention  to
continue  providing our  shareholders  with a generous  dividend  policy.  These
strategies clearly highlight the continuing commitment of the Board of Directors
and management team towards enhancing shareholder value.

     Another  significant  occurrence  during  the past year was the  opening in
March of our new Union Street  branch.  This new location has  strengthened  our
branch network and has increased our market penetration. It has proven to be one
of the main reasons for the significant growth in our deposits last year. In the
lending  area,  our efforts  have  resulted in yet another  year where we report
increases  in loans.  We  attribute  our success in this area to  competent  and
friendly customer  service,  competitive rates and products and prompt response.
During 1997,  our efforts to grow the assets of the Company  proved  successful.
Total assets grew $9.5 million,  or 5.8%. This was accomplished  through deposit
growth from the  expansion of our branch  network and the  expansion of our core
business in the residential  mortgage and consumer  lending areas.  Net loans at
December 31, 1997  totaled  $133.8  million,  an increase of 13.0% over 1996 and
32.6%  over  1995.  By  establishing  a  mortgage  origination  sales  staff and
utilizing sales compensation initiatives,  we expect to further enhance the core
relationship  with  our  customers.  We  continue  striving  to  build a  strong
foundation from which to initiate future growth.

     The Company reported net earnings of $1,068,000 or $0.96 basic earnings per
share for 1997.  This  represented  an  increase of  $238,000,  or 29% over 1996
earnings. We positively affected our operations in 1997 with net interest income
increasing primarily from our efforts in the lending area and noninterest income
increasing  over 1996  without a  dramatic  increase  in fees to our  customers.
Finally,  we have successfully  managed to minimize increases in the noninterest
expense of the Company.

     On behalf of the Board of  Directors  and  management  team of SFS Bancorp,
Inc.,  please be assured that maximizing  shareholder  value will continue to be
our primary  strategic focus. I wish to express my sincere  appreciation to you,
our stockholders, for your loyalty, support and confidence in our Company.


                                                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,
                                                ------------------------------------------------------------
                                                  1997          1996         1995         1994         1993
                                                --------     --------     --------     --------     --------
                                                                       (In Thousands)
<S>                                             <C>          <C>          <C>          <C>          <C>
Selected Financial Condition Data

Total assets ..............................     $174,428     $164,888     $166,529     $150,837     $146,260
Cash and cash equivalents .................        2,176        2,896       10,453        6,468        3,481
Securities available for sale .............        4,067        1,990        7,976        7,776           --
Investment securities:
  Mortgage-backed securities ..............       16,966       20,434       24,418       21,991       25,397
Debt securities ...........................       12,013       15,746       18,658       16,902       20,842
FHLB stock ................................        1,338        1,215        1,117        1,123        1,092
Loans receivable, net .....................      133,786      118,455      100,921       93,703       92,601
Real estate owned .........................          111          178          200          204          128
Deposits ..................................      150,469      140,616      139,671      138,299      134,653
Advance payments by borrowers
   for taxes and insurance ................        1,281        1,160        1,402        1,270        1,129
Stockholders' equity ......................       21,431       21,671       24,261       10,046        9,642

<CAPTION>

                                                                            December 31,
                                                 --------------------------------------------------------------
                                                   1997          1996           1995        1994         1993
                                                 --------      --------      --------     ---------    --------
                                                                          (In Thousands)
<S>                                              <C>           <C>           <C>          <C>          <C>
Selected Operations Data

Total interest income .....................      $ 12,368      $ 11,867      $ 11,523     $  9,849     $  9,774
Total interest expense ....................         6,623         6,187         6,236        5,077        5,275
                                                 --------      --------      --------     --------     --------
  Net interest income .....................         5,745         5,680         5,287        4,772        4,499
Provision for loan losses .................           120           120           370          120          440
                                                 --------      --------      --------     --------     --------
Net interest income after
  provision for loan losses ...............         5,625         5,560         4,917        4,652        4,059
Noninterest income ........................           504           403           321          170          599
Noninterest expense .......................         4,369         5,239         4,027        4,096        4,239
                                                 --------      --------      --------     --------     --------
Income before taxes .......................         1,760           724         1,211          726          419
Income tax expense (benefit) ..............           692          (106)          356          215           13
                                                 --------      --------      --------     --------     --------
Net income ................................      $  1,068      $    830      $    855     $    511     $    406
                                                 ========      ========      ========     ========     ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                 SELECTED CONSOLIDATED FINANCIAL INFORMATION, continued



                                                                                Year Ended December 31,
                                                               --------------------------------------------------------
                                                                 1997        1996         1995       1994         1993
                                                               --------     -------     -------     -------     -------
<S>                                                             <C>         <C>         <C>         <C>         <C>
Selected Financial Ratios and Other Data

Performance Ratios:

 Return on assets (ratio of net income to
    average total assets) ..............................          0.63%       0.50%       0.53%       0.34%       0.28%
 Net interest rate spread ..............................          2.96        2.95        2.93        3.06        2.96
 Net interest margin ...................................          3.46        3.51        3.36        3.26        3.15
 Ratio of noninterest expense to average total assets ..          2.56        3.17        2.51        2.74        2.90
 Ratio of net interest income to noninterest expense ...        131.49      108.41      131.29      116.50      106.13
 Return on equity (ratio of net income to average equity          5.04        3.73        5.07        5.31        4.33
 Liquidity ratio at end of year ........................         19.72       22.58       32.45       19.57       12.99
 Efficiency ratio ......................................         69.92       86.13       71.81       82.88       83.15


Asset Quality Ratios:

 Non-performing assets to total assets, at end of year .          0.84        0.61        0.62        1.93        1.80
 Allowance for loan losses to non-performing loans,
    at year end ........................................         57.78       77.07       68.18       31.79       32.02
 Allowance for loan losses to total loans ..............          0.58        0.54        0.56        0.91        0.86


Capital Ratios:

 Stockholders' equity to total assets at end of year ...         12.29       13.14       14.57        6.66        6.59
 Average stockholders' equity to average total assets ..         12.43       13.48       10.50        6.43        6.40
 Ratio of average interest-earning assets to average
   interest-bearing liabilities ........................        112.68      114.72      110.84      105.75      105.09

 Number of full service offices ........................             4           3           3           3           3

</TABLE>
<PAGE>
                           MANAGEMENT'S DISCUSSION AND
                       ANALYSIS OF FINANCIAL CONDITION AND
                              RESULTS OF OPERATIONS

General

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

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

Business Strategy

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

         The operations of financial  institutions,  including the Company,  are
significantly  affected by prevailing economic  conditions,  competition and the
monetary and fiscal policies of governmental  agencies.  Lending  activities are
influenced by the demand for the supply of housing,  competition  among lenders,
the level of interest  rates and the  availability  of funds.  Deposit flows and
cost of funds are influenced by prevailing market rates of interest primarily on
competing  investments,  account maturities and the level of personal income and
savings in the Company's market area.
<PAGE>
         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  77.9% and 76.5% of total loans at December  31,
1997 and 1996, 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 0.8% and 0.6% as of December 31, 1997
and 1996, 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 ARM loans and maintaining a
short- and medium-term investment portfolio. The level of adjustable or floating
rate  loans  included  in  total  loans  was  70.5%  as of  December  31,  1997.
Additionally,  23.6% of the Company's  interest-earning assets carried remaining
terms of five years or less.

         The  Company's   management   believes  that  a  portion  of  passbook,
transaction and other  non-certificate  accounts  representing core deposits can
have a  lower  cost  and  be  more  resistant  to  interest  rate  changes  than
certificate  accounts.  Accordingly,  the Company has used customer  service and
marketing initiatives to maintain and expand its core deposits. In addition, the
Bank opened its fourth  branch in early 1997 which is  expected to increase  the
level of core deposits over time.  While the Company  believes that a portion of
these non-certificate accounts are interest rate sensitive and may flow to other
investments if interest  rates  continue to rise, the Company  believes that the
balance of these accounts  represent core deposits.  At December 31, 1997, 37.0%
of the Company's  total deposits  consisted of passbook,  transaction  and other
non-certificate accounts.

Asset/Liability Management

         The principal  financial  objective of the Company's interest rate risk
management is to achieve long-term  profitability while limiting its exposure to
fluctuating  interest  rates.  The Company has sought to reduce  exposure of its
earnings to changes in market  interest  rates by managing the mismatch  between
assets and liability  maturities and interest  rates.  The principal  element in
achieving  this  objective is to increase the  interest-rate  sensitivity of the
Company's  assets by  holding  loans with  interest  rates  subject to  periodic
adjustment  to  market  conditions.   In  addition,  the  Company  maintains  an
investment  portfolio which primarily  consists of securities that mature within
five years.  The  Company  relies on retail  deposits  as its primary  source of
funds. Management believes retail deposits, compared to brokered deposits, limit
the effects of interest rate fluctuation because they generally represent a more
stable source of funds. As part of its interest rate risk strategy,  the Company
promotes  transaction accounts and certificates of deposit with terms up to five
years.
<PAGE>
         The  following  table  is  provided  by the OTS and  sets  forth  as of
December 31, 1997 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               $15,434              $(7,588)             (33)%
         +300                17,932               (5,090)             (22)
         +200                20,166               (2,856)             (12)
         +100                21,956               (1,067)              (5)
           0                 23,022                   --               --
         -100                23,620                  598                3
         -200                24,227                1,024                5
         -300                24,854                1,832                8
         -400                26,008                2,986               13
</TABLE>

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

Financial Condition

         Total  assets  increased  $9.5  million  (5.8%)  to $174.4  million  at
December  31,  1997 from $164.9  million at December  31,  1996.  This  increase
consisted  primarily of an increase in loans  receivable,  net of $15.3  million
(12.9%) to $133.8  million at December  31,  1997 and  increases  in  securities
available for sale, at fair value,  of $2.1 million  (104.4%) to $4.1 million at
December  31, 1997.  These  increases  were offset by  decreases  in  investment
securities  of $7.2 million  (19.9%) to $29.0  million and federal funds sold of
$1.3 million (81.3%) to $300,000 at December 31, 1997.
<PAGE>
         At  December  31,  1997,   total   liabilities   were  $153.0   million
representing  an increase of $9.8 million  (6.8%) from  December  31, 1996.  The
increase was  entirely  attributable  to  increases in total  deposits to $150.5
million as of December 31, 1997 from $140.6 million a year earlier.

         Stockholders'  equity  decreased  $240,000 to $21.4 million at December
31, 1997 as compared to $21.7 million at December 31, 1996  primarily due to the
Company's stock repurchase program.  As a result of the repurchase program,  the
Company purchased $1.5 million of treasury stock during 1997.  Retained earnings
increased  by  $735,000  as a result of net income of the  Company  for the year
ended  December 31, 1997 offset by the  declaration  and payment of dividends of
$333,000.

         Nonperforming  assets totaled $1.5 million and $1.0 million at December
31, 1997 and 1996,  respectively.  The increase in nonperforming assets resulted
from an increase in the number of loans  comprising the balance combined with an
increase  in  the  average  balance  of  each  loan.  All  loans  classified  as
nonperforming  are  secured by real  estate  with 45.0%  secured by  one-to-four
family residential property.  Management of the Bank does not view this increase
as a significant  adverse trend since  subsequent to December 31, 1997, three of
the loans  comprising the balance as of that date totaling  $389,000 have either
paid off the entire outstanding balance or paid all past due amounts.  The ratio
of nonperforming loans to loans receivable,  net was 1.01% at December 31, 1997,
compared with .70% at December 31, 1996.  The ratio of  nonperforming  assets to
total  assets was .84% at December 31, 1997  compared  with .61% at December 31,
1996.

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.
<PAGE>
<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                        -----------------------------------------------------------------------------------
                                                            1997                                       1996
                                        ----------------------------------------     --------------------------------------
                                            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) ............      $124,994      $  9,757         7.81%       $111,524      $  8,758         7.85%
 Mortgage-backed securities ..........        18,807         1,189         6.32          22,403         1,418         6.33
 Securities available for sale .......         4,368           286         6.55           5,169           307         5.94
 Investment securities ...............        13,779           896         6.50          16,698         1,059         6.34
Other interest-earning assets
   including cash equivalents ........         2,845           153         5.38           4,698           247         5.26
 FHLB stock ..........................         1,322            87         6.58           1,204            78         6.48
                                            --------      --------                     --------      --------
     Total interest-earning assets ...      $166,115        12,368         7.45        $161,696        11,867         7.34
                                            ========      --------                     ========      --------
Interest-Bearing Liabilities:
 Savings accounts ....................        36,982         1,113         3.01          38,857         1,173         3.02
 Money market accounts ...............         7,197           251         3.49           5,195           161         3.10
 Demand and NOW accounts(2) ..........        10,660           159         1.49          10,102           148         1.47
 Certificate accounts ................        91,420         5,075         5.55          85,642         4,680         5.46
 Escrow ..............................         1,162            25         2.15           1,155            25         2.16
                                            --------      --------                     --------      --------
    Total interest-bearing liabilities      $147,421         6,623         4.49        $140,951         6,187         4.39
                                            ========      --------         ----        ========      --------         ----
Net interest income ..................                     $ 5,745                                    $ 5,680

Net interest rate spread .............                                     2.96%                                      2.95%
                                                                           ====                                       ====
Net earning assets ...................      $18,694                                    $ 20,745
                                            =======                                    ========
Net yield on average interest-
  earning assets .....................                                     3.46%                                       3.51%
                                                                           ====                                        ====
Average interest-earning assets to
  average interest-bearing liabilities         1.13                                        1.15
                                            =======                                    ========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                                       Year Ended December 31,
                                               -----------------------------------
                                                                1995
                                               -----------------------------------
                                                 Average      Interest
                                               Outstanding     Earned/       Yield/
                                                 Balance        Paid          Rate
                                               --------      --------         -----
                                                       (Dollars in Thousands)
<S>                                            <C>           <C>             <C>
Interest-Earning Assets:
 Loans receivable, net(1) ...............      $ 97,120      $  7,800         8.03%
 Mortgage-backed securities .............        23,199         1,464         6.31
 Securities available for sale ..........         7,911           492         6.22
 Investment securities ..................        17,227         1,041         6.04
Other interest-earning assets
   including cash equivalents ...........        10,948           640         5.85
 FHLB stock .............................         1,118            86         7.69
                                               --------      --------
     Total interest-earning assets ......      $157,523        11,523         7.32
                                               ========      --------
Interest-Bearing Liabilities:
 Savings accounts .......................        44,054         1,325         3.01
 Money market accounts ..................         4,809           129         2.68
 Demand and NOW accounts(2) .............         9,090           133         1.46
 Certificate accounts ...................        82,893         4,620         5.57
 Escrow .................................         1,266            29         2.29
                                               --------      --------
    Total interest-bearing liabilities ..      $142,112         6,236         4.39
                                               ========      --------
Net interest income .....................                    $  5,287
                                                             ========
Net interest rate spread ................                                     2.93%
                                                                              ====
Net earning assets ......................      $ 15,411
                                               ========
Net yield on average interest-
  earning assets ........................                                     3.36%
                                                                              ====
Average interest-earning assets to
  average interest-bearing liabilities ..          1.11

</TABLE>

              (1)  Calculated net of deferred loan fees.
              (2)  Includes noninterest-bearing demand accounts.
<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,
                                            -------------------------------------------------------------------------------
                                                       1997 vs. 1996                              1996 vs. 1995
                                            -------------------------------------     -------------------------------------
                                              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 ...............      $ 1,051       $   (52)      $   999       $ 1,127       $  (169)      $   958
 Mortgage-backed securities ..........         (227)           (2)         (229)          (50)            4           (46)
 Securities available for sale .......          (51)           30           (21)         (165)          (20)         (185)
 Investment securities ...............         (190)           27          (163)          (29)           47            18
 Other interest-earning  assets ......         (100)            6           (94)         (334)          (59)         (393)
 FHLB stock ..........................            8             1             9             8           (16)           (8)
                                            -------       -------       -------       -------       -------       -------
   Total interest-earning  assets ....      $   491       $    10       $   501       $   557       $  (213)      $   344
                                            =======       =======       =======       =======       =======       =======
Interest-bearing liabilities:
 Savings accounts ....................      $   (56)      $    (4)      $   (60)      $  (157)      $     5       $  (152)
 Money market accounts ...............           74            16            90             9            23            32
 Demand and NOW accounts .............            8             3            11            15          --              15
 Certificate accounts ................          320            75           395           146           (86)           60
 Escrow ..............................            0             0             0            (2)           (2)           (4)
                                            -------       -------       -------       -------       -------       -------
   Total interest-bearing  liabilities      $   346       $    90       $   436       $    11       $   (60)      $   (49)
                                            =======       =======       =======       =======       =======       =======

Net interest income ..................                                  $    65                                   $   393
                                                                        =======                                   =======

</TABLE>
<PAGE>
Results of Operations

         General.  The Company's  results of operations  depend primarily on net
interest income,  noninterest expense, and to a lesser extent,  income taxes and
noninterest  income.  Net  interest  income  is a  function  of  the  volume  of
interest-earning assets and interest-bearing  liabilities and the interest rates
earned or paid on such assets and liabilities, respectively. Noninterest expense
consists  primarily  of  general  and  administrative  expenses.  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, 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 $870,000, an increase in noninterest
income of  $101,000  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.
<PAGE>
         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  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 potential 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 $101,000,  or
25.1% from  $403,000 in 1996 to $504,000 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 $870,000,  or
16.6%  from $5.2  million  in 1996 to $4.4  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
$198,000 (7.9%) 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 employee
stock ownership plan 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 3.17% for 1996 to 2.56%
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.
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1996 and 1995

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

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

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

         Net Interest Income.  Net interest income increased  $393,000,  or 7.4%
from $5.3 million in 1995 to $5.7 million in 1996 due to a $5.3 million increase
in average  net  interest-earning  assets in 1996 as  compared  to 1995 and a 15
basis point increase in margin. The increase in net interest-earning  assets was
primarily a result of the proceeds  received in the initial  public  offering of
the Company during 1995.

         Provision  For Loan  Losses.  The  decrease of $250,000 or 67.6% in the
provision  for loan losses  from 1995 to 1996  reflects  primarily  management's
evaluation of the loan  portfolio.  When  determining the level of provision for
loan losses,  management  considers  historical charge off ratios as well as the
then current  regulatory and the general economic  environment.  Net charge-offs
decreased  from  $659,000  in  1995 to  $50,000  in  1996  due to the  Company's
resolution of certain non-performing loans in 1995. The Company will continue to
monitor and modify its allowance for loan losses as conditions dictate. Although
the Company  maintains  its  allowance  for loan losses at a level it  considers
adequate to provide for potential  losses,  there can be no assurance  that such
losses will not exceed the estimated  amounts or that additional  provisions for
loan losses will not be required in future periods.
<PAGE>
         Noninterest  Income.  Total noninterest income increased by $82,000, or
25.5% from  $321,000 in 1995 to $403,000 in 1996.  Other loan charges  increased
$35,000 or 31.8% as a result of  increased  originations  and other  noninterest
income  increased  $46,000 or 97.9% as a result of  increased  other real estate
income,  income from the Bank's service  corporation and gains taken on the sale
of certain fixed assets.

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

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

Liquidity and Capital Resources

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

         The Company must maintain an adequate  level of liquidity to ensure the
availability of sufficient funds to support loan growth and deposit withdrawals,
to  satisfy   financial   commitments   and  to  take  advantage  of  investment
opportunities.  The Company  generally  maintains  sufficient cash and overnight
deposits to meet short-term liquidity needs. At December 31, 1997, cash and cash
equivalents  totaled $2.2  million,  or 1.2% 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,  1997,  there were no
advances  under this credit  facility.  Depending on market  conditions  and the
pricing of deposit  products  and FHLB  borrowings,  the Company may continue to
rely on FHLB borrowings for its liquidity needs.
<PAGE>
         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%.

         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, 1997, 1996 and 1995, the Company's mortgage loan originations
and  purchases  totaled  $35.4  million,   $31.4  million,  and  $23.6  million,
respectively.  The  Company  purchased  securities  available  for  sale of $6.1
million for the year ended  December 31, 1997.  The Company did not purchase any
securities  available  for sale  during  1996 and 1995.  The  Company  purchased
investment securities during the years ended December 31, 1997, 1996 and 1995 of
$1.7 million, $6.0 million and $15.4 million, respectively.

         The primary  financing  activity of the  Company is the  attraction  of
deposits and the issuance and  subsequent  repurchase of the  Company's  shares.
During  the  years  ended  December  31,  1997,  1996,  and  1995,  the  Company
experienced  a net  increase  in deposits of $9.9  million,  $945,000,  and $1.4
million,  respectively.  During  1995 the  Company  received  $13.0  million net
proceeds  from the sale of common  stock  during its  initial  public  offering.
During the year ended December 31, 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 Office of Thrift  Supervision  (OTS)  restricts the number of
shares  which  may  be  repurchased  during  the  three  year  period  following
conversion. Generally, only 5% of shares outstanding may be repurchased annually
during the first three years following conversion.  However, the OTS has allowed
additional  share  repurchases  of 5% annually  based on  extenuating  facts and
circumstances.

         At December 31, 1997, the Bank's  capital  exceeded each of the capital
requirements  of the OTS. At December  31,  1997,  the Bank's  tangible and core
capital levels were both $19.0 million (10.88% of total adjusted assets) and its
risk-based  capital  level  was $19.8  million  (21.16%  of total  risk-weighted
assets).  The current minimum regulatory capital ratio requirements are 1.5% for
tangible capital, 3.0% for core capital and 8.0% for risk-weighted capital.

         The Company anticipates that it will have sufficient funds available to
meet its current commitments.  At December 31, 1997, the Company had commitments
to  originate  loans of $3.5  million  as well as undrawn  commitments  of $10.4
million on home equity and other lines of credit. Certificates of deposits which
are  scheduled to mature in one year or less at December 31, 1997 totaled  $65.3
million.  Management  believes that a significant portion of these deposits will
remain with the Company.
<PAGE>
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  1997,  the  Financial   Accounting  Standards  Board  issued
Statement of Financial  Accounting  Standard No. 130,  "Reporting  Comprehensive
Income" ("SFAS No. 130").  SFAS No. 130 establishes  standards for reporting and
displaying  of  comprehensive  income.  SFAS No. 130 states  that  comprehensive
income includes the reported net income of a company adjusted for items that are
currently  accounted for as direct entries to equity, such as the mark to market
adjustment on securities  available for sale, foreign currency items and minimum
pension  liability  adjustments.  This  Statement is effective  for fiscal years
beginning  after  December  15,  1997.  Management  will  include  the  required
information in the Company's 1998 consolidated financial statements.

         In June  1997,  the  FASB  issued  Statement  of  Financial  Accounting
Standards No. 131,  "Disclosures  about  Segments of an  Enterprise  and Related
Information"  ("SFAS No.  131"),  which  establishes  standards for reporting by
public companies about operating  segments of their business.  SFAS No. 131 also
establishes  standards  for related  disclosures  about  products and  services,
geographic  areas, and major customers.  This Statement is effective for periods
beginning  after  December  15, 1997.  As  required,  the Company will adopt the
reporting requirements of this Statement in 1998.

Impact of the Year 2000

         The Company is aware of the issues associated with the programming code
in existing  computer systems as the millennium  ("Year 2000")  approaches.  The
Year 2000 problem is pervasive and complex as virtually every computer operation
will be affected in some way by the  rollover of the two digit year value to 00.
The issue is whether  computer  systems will properly  recognize  date sensitive
information  when  the  year  changes  to  2000.  Systems  that do not  properly
recognize such  information  could generate  erroneous data or cause a system to
fail.
<PAGE>
         The Company is  utilizing  both  internal  and  external  resources  to
identify,  correct or reprogram,  and test its systems for Year 2000 compliance.
It is anticipated that all  reprogramming  efforts will be completed by December
31, 1998, allowing adequate time for testing.  To date,  confirmations have been
received  from the  Company's  primary  processing  vendors that plans are being
developed to address  processing of transactions  in the year 2000.  Incremental
expenses related to this issue are not, at this time, expected to be material to
the performance of the Company.

         The risks of this issue go beyond the  Company's  own  ability to solve
the Year 2000  issues.  Should  suppliers  of  critical  services  fail in their
efforts to become Year 2000 compliant,  or if significant third party interfaces
fail to be compatible with SFS Bancorp,  Inc. or fail to be Year 2000 compliant,
it could have  significant  adverse  affects  on the  operations  and  financial
results  of the  Company.  Accordingly,  the  Company  has  begun a  process  of
assessing and monitoring the progress of all vendors of services and third party
interfaces for  compatibility  and Year 2000 compliance.  Management  intends to
develop   contingency   plans  for  all  vendors  and/or  interfaces  deemed  to
inadequately address the problems of the Year 2000.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

                         Consolidated Financial Statements

                          As of December 31, 1997 and 1996
                 and for each of the years in the three-year period
                              ended December 31, 1997


                    (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, 1997 and 1996,  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,
1997. 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,  1997 and 1996,  and the  results of their
operations and their cash flows for each of the years in the  three-year  period
ended  December 31, 1997,  in  conformity  with  generally  accepted  accounting
principles.



Albany, New York                                  /s/ KPMG Peat Marwick LLP
January 23, 1998                                  -------------------------
                                                      KPMG Peat Marwick LLP


<PAGE>
<TABLE>
<CAPTION>
                                    Consolidated Balance Sheets

                                     December 31, 1997 and 1996



               Assets                                                         1997            1996
               ------                                                         ----            ----
                                                                     (in thousands, except share data)
<S>                                                                       <C>            <C>
Cash and due from banks .............................................     $   1,876          1,296
Federal funds sold ..................................................           300          1,600
                                                                          ---------      ---------
              Total cash and cash equivalents .......................         2,176          2,896

Securities available for sale, at fair value (note 5) ...............         4,067          1,990
Investment securities (estimated fair value of $29,095
  and $35,964 at December 31, 1997 and 1996, respectively)(note 6) ..        28,979         36,180
Stock in Federal Home Loan Bank of New York, at cost ................         1,338          1,215
Loans receivable, net (note 7) ......................................       133,786        118,455
Accrued interest receivable (note 8) ................................         1,130          1,137
Premises and equipment, net (note 9) ................................         2,242          1,921
Real estate owned (note 10) .........................................           111            178
Prepaid expenses and other assets ...................................           599            916
                                                                          ---------      ---------
              Total assets ..........................................     $ 174,428        164,888
                                                                          =========      =========

         Liabilities and Stockholders' Equity

Liabilities:
     Due to depositors (note 11):
         Non-interest bearing .......................................         2,265          1,392
         Interest bearing ...........................................       148,204        139,224
                                                                          ---------      ---------
              Total deposits ........................................       150,469        140,616
                                                                          ---------      ---------

     Advance payments by borrowers for taxes and insurance ..........         1,281          1,160
     Accrued expenses and other liabilities .........................         1,247          1,441
                                                                          ---------      ---------
              Total liabilities .....................................       152,997        143,217
                                                                          ---------      ---------

Commitments and contingent liabilities (notes 12 and 16)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                    Consolidated Balance Sheets

                                     December 31, 1997 and 1996
                                            (continued)



                                                                             1997            1996
                                                                             ----            ----
                                                                     (in thousands, except share data)
<S>                                                                       <C>            <C>
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, 1997 and 1996 ........            15             15
     Additional paid-in capital .....................................        14,365         14,260
     Retained earnings, substantially restricted ....................        12,422         11,687
     Treasury stock, at cost (286,528 shares at December 31, 1997,
       224,003 at December 31, 1996) ................................        (4,089)        (2,840)
     Common stock acquired by employee stock ownership plan (ESOP) ..          (837)          (957)
     Unearned recognition and retention plan (RRP) ..................          (455)          (540)
     Net unrealized gain on securities available for sale, net of tax            10             46
                                                                          ---------      ---------

              Total stockholdersi equity ............................        21,431         21,671
                                                                          ---------      ---------

              Total liabilities and stockholders' equity ............     $ 174,428        164,888
                                                                          =========      =========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                   Consolidated Statements of Income

                         For the years ended December 31, 1997, 1996 and 1995

                                                                        1997        1996         1995
                                                                        ----        ----         ----
                                                              (in thousands, except for per share amounts)
<S>                                                                   <C>         <C>          <C>
Interest income:
     Loans ......................................................     $ 9,757       8,758        7,800
     Investment securities ......................................       2,085       2,477        2,505
     Securities available for sale ..............................         286         307          492
     Federal funds sold and cash deposits .......................         153         247          640
     Stock in Federal Home Loan Bank of New York ................          87          78           86
                                                                      -------     -------      -------
              Total interest income .............................      12,368      11,867       11,523

Interest expense:
     Deposits (note 11) .........................................       6,623       6,187        6,236
                                                                      -------     -------      -------
              Net interest income ...............................       5,745       5,680        5,287

Provision for loan losses (note 7) ..............................         120         120          370
                                                                      -------     -------      -------
              Net interest income after provision for loan losses       5,625       5,560        4,917
                                                                      -------     -------      -------
Noninterest income:
     Other loan charges .........................................         207         145          110
     Bank fees and service charges ..............................         160         138          143
     Net gain on security transactions ..........................          56           8         --
     Other income ...............................................          81         112           68
                                                                      -------     -------      -------
              Total noninterest income ..........................         504         403          321
                                                                      -------     -------      -------

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                   Consolidated Statements of Income

                         For the years ended December 31, 1997, 1996 and 1995
                                             (continued)

                                                                        1997        1996         1995
                                                                        ----        ----         ----
                                                              (in thousands, except for per share amounts)
<S>                                                                   <C>         <C>          <C>
Noninterest expense:
     Compensation and benefits ..................................       2,710       2,512        2,250
     Office occupancy and equipment expenses ....................         620         522          523
     Professional service fees ..................................         270         242          189
     Data processing fees .......................................         175         166          157
     Advertising and business promotion .........................          86         108          106
     Federal deposit insurance premiums .........................          74         322          323
     Federal deposit insurance special SAIF assessment ..........        --           930         --
     Other expense ..............................................         434         437          479
                                                                      -------     -------      -------
              Total noninterest expense .........................       4,369       5,239        4,027
                                                                      -------     -------      -------

              Income before taxes ...............................       1,760         724        1,211

Income tax expense (benefit) (note 12) ..........................         692        (106)         356
                                                                      -------     -------      -------
Net income ......................................................     $ 1,068         830          855
                                                                      =======     =======      =======

Basic earnings per share ........................................     $   .96         .68          .41
                                                                      =======     =======      =======

Diluted earnings per share ......................................     $   .93         .67          .41
                                                                      =======     =======      =======
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                     Consolidated Statements of Changes in Stockholdersi Equity

                                            Years ended December 31, 1997, 1996 and 1995


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

Balance at December 31, 1995 ............................     1,495,000            15        14,221        11,013           --
Net income ..............................................          --            --            --             830           --
Adjustment of securities available for sale to fair value          --            --            --            --             --
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)
Net income ..............................................          --            --            --           1,068           --
Adjustment of securities available for sale to fair value          --            --            --            --             --
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)
                                                              =========     =========     =========     =========      =========

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                                     Consolidated Statements of Changes in Stockholdersi Equity

                                            Years ended December 31, 1997, 1996 and 1995


                                                                                              Net unrealized
                                                                                              gain (loss) on
                                                                   Common        Unearned      securities
                                                                    stock       recognition     available
                                                                   acquired   and retention     for sale,
                                                                   by ESOP        plan         net of tax     Total
                                                                   -------        ----         ----------     -----

<S>                                                                <C>            <C>            <C>          <C>
Balance at December 31, 1994 ............................          --             --             (112)        10,046
Net income ..............................................          --             --             --              855
Adjustment of securities available for sale to fair value          --             --              200            200
Common stock issued .....................................          --             --             --           14,200
Acquisition of common stock by ESOP (119,600 shares) ....        (1,196)          --             --           (1,196)
Allocation of ESOP stock (11,960 shares) ................           120           --             --              156
                                                              ---------      ---------      ---------      ---------

Balance at December 31, 1995 ............................        (1,076)          --               88         24,261
Net income ..............................................          --             --             --              830
Adjustment of securities available for sale to fair value          --             --              (42)           (42)
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
Net income ..............................................          --             --             --            1,068
Adjustment of securities available for sale to fair value          --             --              (36)           (36)
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
                                                              =========      =========      =========      =========

</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
                                        Consolidated Statements of Cash Flows

                                For the years ended December 31, 1997, 1996 and 1995


                                                                                  1997          1996           1995
                                                                                  ----          ----           ----
                                                                                          (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 .......................................................     $  1,068           830           855
         Adjustments to reconcile net income to net
       cash provided by operating activities:
              Depreciation ................................................          190           140           143
              Net accretion on securities .................................          (75)          (12)          (30)
              ESOP compensation expense ...................................          225           158           156
              Amortization of RRP .........................................          228            38          --
              Provision for loan losses ...................................          120           120           370
              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 ..........            7            24          (109)
              (Increase) decrease in prepaid expenses and other assets ....          317          (705)          (60)
              (Decrease) increase in accrued expenses and other liabilities         (200)          246           (27)
                                                                                --------      --------      --------
                  Net cash provided by operating activities ...............        1,827           838         1,298
                                                                                --------      --------      --------

Cash flows from investing activities:
     Proceeds from maturities and paydowns of
       investment securities ..............................................        8,976        12,908        11,223
     Proceeds from the sales and calls of securities
       available for sale .................................................        4,000         5,952            --
     Purchases of investment securities ...................................       (1,700)       (6,000)      (15,376)
     Purchases of securities available for sale ...........................       (6,051)           --            --
     Redemptions (purchases) of FHLB Stock ................................         (123)          (98)            6
     Net increase in loans made to customers ..............................      (11,923)      (10,859)       (2,717)
     Capital expenditures, net of disposals ...............................         (511)         (647)          (90)
     Purchases of loans receivable ........................................       (3,550)       (6,973)       (5,245)
     Proceeds from the sales of real estate owned .........................           86           193           378
                                                                                --------      --------      --------
                  Net cash used by investing activities ...................      (10,796)       (5,524)      (11,821)
                                                                                --------      --------      --------
</TABLE>
 <PAGE>
<TABLE>
<CAPTION>
                                  Consolidated Statements of Cash Flows, Continued

                                For the years ended December 31, 1997, 1996 and 1995



                                                                                   1997          1996         1995
                                                                                   ----          ----         ----
                                                                                           (in thousands)
<S>                                                                             <C>           <C>           <C>
Cash flows from financing activities:
     Net increase in deposits ............................................      $ 9,853           945         1,372
     Net increase (decrease) in advance payments by
       borrowers for property taxes and insurance ........................          121          (242)          132
     Purchases of common stock for treasury ..............................       (1,486)       (3,418)         --
     Cash dividends paid .................................................         (333)         (156)         --
     Proceeds from exercise of stock options .............................           94          --            --
     Net proceeds from common stock issued in stock conversion ...........         --            --          14,200
     Acquisition of common stock by ESOP .................................         --            --          (1,196)
                                                                                -------       -------       -------
                  Net cash provided (used) in financing activities .......        8,249        (2,871)       14,508
                                                                                -------       -------       -------

Net increase (decrease) in cash and cash equivalents .....................         (720)       (7,557)        3,985
Cash and cash equivalents at beginning of year ...........................        2,896        10,453         6,468
                                                                                -------       -------       -------
Cash and cash equivalents at end of year .................................      $ 2,176         2,896        10,453
                                                                                =======       =======       =======

Supplemental disclosures of cash flow information:
Cash paid during the year for:
         Interest paid ...................................................      $ 6,623         6,187         6,264
                                                                                =======       =======       =======

         Taxes paid ......................................................      $   538           509           520
                                                                                =======       =======       =======

Supplemental schedule of noncash investing activities:
     Transfer of loans to other real estate owned ........................      $    22           178           367
                                                                                =======       =======       =======

Adjustment of securities available for sale to fair value,
 net of increase in deferred tax liability of $6 in 1997 .................      $   (36)          (42)          200
                                                                                =======       =======       =======

</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

               Notes to Consolidated Financial Statements, Continued


(1)    Summary of Significant Accounting Policies

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

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

       (a)    Basis of Presentation

              The accompanying  consolidated  financial  statements  include the
              accounts of the Holding  Company,  its wholly owned subsidiary the
              Bank,  and the Bankis  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 Only" financial  statements,  the
              investment  in the wholly owned  subsidiary  is carried  under the
              equity method of accounting.

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

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

       (b)    Business

              A substantial portion of the Companyis 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
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued


(1)    Summary of Significant Accounting Policies (continued)

              substantial  portion of the Bankis 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.

              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 Bankis  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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued

(1)    Summary of Significant Accounting Policies

              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.

       (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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued


(1)    Summary of Significant Accounting Policies

              Impaired  loans are  identified  and measured in  accordance  with
              Statement  of  Financial  Accounting  Standards  (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. The adoption of these Statements did
              not have a material effect on the Company's consolidated financial
              statements.

              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.

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

              Foreclosed  assets,  including  in-substance   foreclosures,   are
              recorded  on an  individual  asset basis at net  realizable  value
              which is the lower of fair value minus  estimated costs to sell or
              "cost" (defined as the fair value at initial foreclosure).  When a
              property is acquired or  identified as  in-substance  foreclosure,
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued


(1)    Summary of Significant Accounting Policies

              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
              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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued

(1)    Summary of Significant Accounting Policies

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

              In June,  1996, the Financial  Accounting  Standards  Board (FASB)
              issued SFAS No. 125,  "Accounting  for  Transfers and Servicing of
              Financial  Assets  and   Extinguishments  of  Liabilities,"  which
              provides  accounting  and  reporting  standards  for transfers and
              servicing of financial  assets and  extinguishment  of liabilities
              based on consistent application of a financial-components approach
              that  focuses on control.  The Company  adopted SFAS No. 125 as of
              January 1, 1997.  Certain  aspects of SFAS No. 125 were amended by
              SFAS  No.  127,   "Deferral  of  the  Effective  Date  of  Certain
              Provisions  of FASB  Statement  No. 125." The adoption of SFAS No.
              125 did not have a material  impact on the Company's  consolidated
              financial statements.

       (k)    Borrowings

              The  Company  has an  overnight  line of  credit  and a  one-month
              overnight repricing line of credit with the Federal Home Loan Bank
              of New York as of December 31, 1997 totaling  approximately  $16.6
              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,
              1997.

       (l)    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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued


(1)    Summary of Significant Accounting Policies

              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.

       (m)    Earnings per Share

              In February,  1997,  the FASB issued 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.  The Company adopted SFAS No. 128 as of December 31, 1997.
              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.

       (n)    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)    Conversion to Stock Ownership

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

              As part of the  conversion,  the Bank  established  a  liquidation
              account  for the benefit of eligible  depositors  who  continue to
              maintain their deposit accounts in the Bank after  conversion.  In
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued


(1)    Summary of Significant Accounting Policies

              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 Bankis
              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 is 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  isurplus  capital
              ratioi  (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, 1997, the maximum amount that could have
              been paid by the Bank to the  Holding  Company  was  approximately
              $7.3 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.

(3)    Earnings Per Share

              The  following  is  a   reconciliation   of  the   numerators  and
              denominators  for the basic and diluted  earnings  per share (EPS)
              calculations for the years ended December 31:
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

<TABLE>
<CAPTION>
                                      (in thousands except share and per share information)
                                                               1997
                                                              Weighted
                                                               Average
                                              Net Income       Shares        Per-Share
                                             (Numerator)    (Denominator)       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
                                                ======       ===========     ==========
<CAPTION>

                                                                 1996
                                                               Weighted
                                                                Average
                                              Net Income        Shares        Per-Share
                                             (Numerator)    (Denominator)      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>
              There were no potential  common  shares  outstanding  during 1995.
              Earnings per share in 1995 were  compiled on earnings and weighted
              average  shares  from  the  date of the  initial  public  offering
              through December 31, 1995. Weighted average shares outstanding and
              net  income  for  this  period  were   1,495,000   and   $613,000,
              respectively.

(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 $164,000 and $171,000 at December 31, 1997 and 1996,
              respectively.

              The Company is also required to maintain  certain  levels of stock
              in the Federal Home Loan Bank of New York.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

(5)    Securities Available for Sale

              The  amortized  cost and  estimated  fair  value are as follows at
              December 31:
<TABLE>
<CAPTION>

                                                                                     1997
                                                              -----------------------------------------------------
                                                                               Gross          Gross       Estimated
                                                              Amortized     Unrealized     Unrealized       Fair
                                                                Cost           Gains         Losses         Value
                                                                ----           -----         ------         -----
                                                                                  (in thousands)
<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
                                                               =======        =====          ======       ========

<CAPTION>

                                                                                     1996
                                                              -----------------------------------------------------
                                                                               Gross          Gross       Estimated
                                                              Amortized     Unrealized     Unrealized       Fair
                                                                Cost           Gains         Losses         Value
                                                                                  (in thousands)
<S>                                                          <C>              <C>            <C>          <C>
           Mutual funds                                      $   1,944           46            -             1,990
                                                               -------        -----          ------       --------
               Total securities available for sale           $   1,944           46            -             1,990
                                                               =======        =====          ======       ========
</TABLE>
              The  securities  available for sale portfolio at December 31, 1996
              consists  of  mutual  funds   representing   investments  in  both
              adjustable  and fixed rate  mortgage-related  securities  and U.S.
              Government obligations.

              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.  There were no sales
              of securities available for sale during 1995.

              All securities  available for sale at December 31, 1997 are due to
              contractually   mature  in  approximately  five  years.   Expected
              maturities will differ from contractual maturities because certain
              issuers may have the right to call or prepay  obligations  with or
              without call or prepayment penalties.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

(6)    Investment Securities

              The  amortized  cost  and  estimated  fair  values  of  investment
              securities are as follows at December 31:
<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
                                      =======     =======     =======      =======
<CAPTION>

                                                          1996
                                     -----------------------------------------------
                                                    Gross        Gross     Estimated
                                     Amortized   Unrealized    Unrealized      Fair
                                       Cost         Gains        Losses       Value
                                       ----         -----        ------       -----
                                                      (in thousands)
<S>                                    <C>         <C>          <C>         <C>
Mortgage backed
    securities ......................  $20,434         232        (344)      20,322
U.S. Government
    securities and agencies .........   13,461           1         (98)      13,364
States and political subdivisions ...       84        --          --             84
Public utilities ....................    2,201        --            (7)       2,194
                                       -------     -------     -------      -------
      Total investment securities$ ..   36,180         233        (449)      35,964
                                       =======     =======     =======      =======
</TABLE>


              There were no sales of investment  securities during 1997, 1996 or
              1995.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

              The  amortized   cost  and  estimated  fair  value  of  investment
              securities  at December 31, 1997,  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 ..........................          $ 4,118            4,114
Due one year to five years ...................           16,625           16,544
Due five years to ten years ..................            1,381            1,384
Due after ten years ..........................            6,855            7,053
                                                        -------          -------
     Total investment securities .............          $28,979           29,095
                                                        =======          =======
</TABLE>
(7)    Loans Receivable, Net

       A summary of loans receivable is as follows at December 31:
<TABLE>
<CAPTION>
                                                              1997        1996
                                                              ----        ----
                                                              (in thousands)
<S>                                                        <C>          <C>
Loans secured by real estate:
     Residential:
         Conventional ................................     $100,277       84,840
         Home equity .................................       22,658       22,904
         FHA insured .................................        2,772        3,511
         VA guaranteed ...............................        2,028        2,810
     Commercial and multi family .....................        6,130        4,532
                                                           --------     --------
                                                            133,865      118,597
                                                            -------     --------
Other loans:
     Loans on savings accounts .......................          573          478
     Personal ........................................          143           34
     Other ...........................................            5           11
                                                           --------     --------
                                                                721          523
                                                           --------     --------
Less:
     Unearned discount and net deferred loan fees ....           22           23
     Allowance for loan losses .......................          778          642
                                                           --------     --------
                                                                800          665
                                                           --------     --------
         Loans receivable, net .......................     $133,786      118,455
                                                           ========     ========
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

              Not included in the  Company's  loans  receivable  are real estate
              mortgages   serviced  by  the  Bank  for  other   institutions  of
              approximately $3.5 and $4.2 million at December 31, 1997 and 1996,
              respectively.

              At December 31, 1997 and 1996,  the recorded  investment  in loans
              that were  considered  to be  impaired  under SFAS No. 114 totaled
              approximately $691,000 and $744,000,  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, 1997,  1996 and 1995 was  approximately
              $718,000, $744,000 and $1,091,000, respectively.

              For the years ended December 31, 1997,  1996 and 1995, the Company
              recognized  approximately  $0,  $74,000  and  $50,000 of  interest
              income on impaired loans, respectively.

              The  following  table sets forth the  information  with  regard to
              non-performing loans at December 31:
<TABLE>
<CAPTION>
                                                            1997           1996
                                                            ----           ----
                                                               (in thousands)
<S>                                                        <C>            <C>
Loans on a nonaccrual status .....................         $1,328            801
Loans contractually past due 90 days
    or more and still accruing interest ..........             19             32
Restructured loans ...............................           --             --
                                                           ------         ------
         Total non-performing loans ..............         $1,347            833
                                                           ======         ======
</TABLE>
              Interest on nonaccrual  loans of approximately  $89,000,  $81,000,
              and $99,000 would have been earned in accordance with the original
              contractual   terms  of  the   loans  in  1997,   1996  and  1995,
              respectively.  Approximately $0, $74,000,  and $38,000 of interest
              was  collected and  recognized  as income in 1997,  1996 and 1995,
              respectively. There are no commitments to extend further credit on
              the restructured 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  Companyis  normal  credit
              terms,   including  interest  rate  and   collateralization.   The
              aggregate  of  such  loans  totaled  approximately   $127,000  and
              $145,000 at December 31, 1997 and 1996,  respectively.  There were
              no advances to the  directors and  executive  officers  during the
              year ended  December 31, 1997.  Total payments made on these loans
              were approximately $18,000 during 1997.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

              Changes in the  allowance  for loan losses were as follows for the
              years ended December 31:
<TABLE>
<CAPTION>
                                                     1997       1996       1995
                                                     ----       ----       ----
                                                            (in thousands)
<S>                                                 <C>        <C>        <C>
Balance, beginning of year ....................     $ 642        572        861
Provision charged to operations ...............       120        120        370
Loans charged off .............................       (26)       (87)      (718)
Recoveries on loans previously charged off ....        42         37         59
                                                    -----      -----      -----
Balance, end of year ..........................     $ 778        642        572
                                                    =====      =====      =====
</TABLE>
(8)    Accrued Interest Receivable

              A summary of accrued interest receivable by type was as follows at
              December 31:
<TABLE>
<CAPTION>
                                                            1997           1996
                                                               (in thousands)
<S>                                                        <C>             <C>
Loans ............................................         $  766            693
Securities available for sale ....................             68           --
Investment securities ............................            296            444
                                                           ------         ------
    Total accrued interest receivable ............         $1,130          1,137
                                                           ======         ======
</TABLE>
(9)    Premises and Equipment, Net

              Premises and equipment are summarized by major  classification  as
              follows at December 31:
<TABLE>
<CAPTION>
                                                              1997         1996
                                                              ----         ----
                                                                (in thousands)
<S>                                                          <C>           <C>

Land .................................................       $  338          305
Leasehold improvements ...............................          241          240
Office buildings .....................................        2,550        2,338
Furniture, fixtures and equipment ....................        1,135          889
                                                             ------       ------
        Total ........................................        4,264        3,772

Less accumulated depreciation and amortization .......        2,022        1,851
                                                             ------       ------
        Premises and equipment, net ..................       $2,242        1,921
                                                             ======       ======
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

              Depreciation  expense  included in office  occupancy and equipment
              expense amounted to approximately $190,000, $140,000, and $143,000
              for  the  years  ended   December   31,   1997,   1996  and  1995,
              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:
<TABLE>
<CAPTION>
                                                             1997          1996
                                                             ----          ----
                                                               (in thousands)
<S>                                                         <C>             <C>
Residential (1 - 4 family) .....................            $ 26              93
Commercial property ............................              85              85
                                                            ----            ----
    Total real estate owned ....................            $111             178
                                                            ====            ====
</TABLE>

(11)   Due to Depositors

              Due to depositors  account  balances are  summarized as follows at
              December 31:
<TABLE>
<CAPTION>
                                                               Stated
                                                                rate            1997          1996
                                                             -----------      --------    ---------
                                                                          (in thousands)
<S>                                                          <C>              <C>          <C>
Savings deposit accounts:
     Passbook and statement deposit accounts ...........            3.00%     $ 36,681       37,152
     Money market deposit accounts .....................     2.60 - 4.30         7,619        6,074
                                                                              --------     --------
                                                                                44,300       43,226
Time deposit accounts:
                                                             4.00 - 4.99           801       23,244
                                                             5.00 - 5.99        84,451       50,815
                                                             6.00 - 6.99         9,489       12,835
                                                                              --------     --------
                                                                                94,741       86,894
NOW deposit accounts ...................................            1.75         9,163        9,104
Demand deposit accounts ................................               0         2,265        1,392
                                                                              --------     --------
         Total deposits ................................                      $150,469      140,616
                                                                              ========     ========
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)

              The approximate  amount of contractual  maturities of time deposit
              accounts at December 31, 1997 are as follows:

                Year ended December 31,                      (in thousands)
                -----------------------                      --------------

                         1998                                  $    65,273
                         1999                                       22,314
                         2000                                        3,247
                         2001                                        1,508
                         2002                                        2,399
                                                               -----------
                                                               $    94,741

              At  December  31,  1997 and  1996,  the  aggregate  amount of time
              deposit  accounts with balances  equal to or in excess of $100,000
              was approximately $8.4 million and $6.2 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>
                                                  1997        1996         1995
                                                  ----        ----         ----
                                                      (in thousands)
<S>                                              <C>         <C>         <C>
Escrow balances ............................     $   25          25          29
Passbook and statement savings .............      1,113       1,173       1,325
Money market accounts ......................        251         161         129
Time deposits ..............................      5,075       4,680       4,620
NOW accounts ...............................        159         148         133
                                                 ------      ------      ------

     Total interest on deposits and advance
       payments by borrowers for property
        taxes and insurance ................     $6,623       6,187       6,236
                                                 ======      ======      ======

         Weighted average interest rates ...       4.59%       4.37%       4.56%
                                                 ======      ======      ======
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


 (12)  Income Taxes

              The following is a summary of the components of income tax expense
              for the years ended December 31:
<TABLE>
<CAPTION>
                                                1997          1996           1995
                                                ----          ----           ----
                                                        (in thousands)
<S>                                            <C>           <C>           <C>
Current tax expense:
    Federal ...........................        $ 583           372           306
    State .............................          121            76            50
    Deferred benefit ..................          (12)         (554)         --
                                               -----         -----         -----
Income tax expense (benefit) ..........        $ 692          (106)          356
                                               =====         =====         =====
</TABLE>
              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>
                                                1997                     1996                 1995
                                         -------------------     -------------------    --------------------
                                                        % 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 .......     $ 598         34.0%    $ 246         34.0%    $ 412         34.0%
State income tax, net of
    federal tax benefit .............       105          5.9        45          6.2        33          2.7
Change in beginning of year
    balance of the valuation
    allowance for deferred tax assets        --           --      (396)       (54.7)      (78)        (6.4)
Other, net ..........................       (11)         (.6)       (1)         (.1)      (11)         (.9)
                                          -----         ----     -----         ----     -----         ----
                                          $ 692         39.3%    $(106)       (14.6)%   $ 356         29.4%
                                          =====         ====     =====         ====     =====         ====
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              The tax effects of  significant  temporary  differences  that give
              rise to the deferred tax assets and liabilities were as follows at
              December 31:

<TABLE>
<CAPTION>

                                                               1997        1996
                                                               ----        ----
                                                                (in thousands)
<S>                                                           <C>         <C>
Deferred tax assets:
    Allowance for loan losses ..........................      $ 334         276
    Deferred compensation and pension costs ............        430         406
    Recognition and retention plan expense .............         52          62
    Securities basis adjustment ........................         22          46
                                                              -----       -----
         Total gross deferred tax assets ...............        838         790
         Less valuation allowance ......................        (96)        (96)
                                                              -----       -----
         Net deferred tax assets .......................        742         694
                                                              -----       -----

Deferred tax liabilities:
    Depreciation differences ...........................         72          74
    Accretion of discount on securities ................         53          19
    Other items ........................................         51          47
                                                              -----       -----
         Total gross deferred tax liabilities ..........        176         140
                                                              -----       -----

         Net deferred tax asset at year-end ............        566         554

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

         Deferred tax benefit for the years ended ......      $  12         554
                                                              =====       =====
</TABLE>

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

              The valuation allowance for deferred tax assets as of December 31,
              1997 and 1996 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
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements (continued)


              certain  deferred  items which were  previously  considered  to be
              uncertain. In evaluating the valuation allowance the Company takes
              into consideration the nature and timing of the deferred tax asset
              items as well as the amount of available open tax carrybacks.  The
              Company has fully  reserved its New York State deferred tax asset,
              which is a  significant  component of deferred tax assets,  due to
              the lack of carryback and carryforward provisions available in New
              York  State.  Any  changes  in the  deferred  tax asset  valuation
              allowance is based upon the 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 December 31, 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  December  31,  1997 with  respect to the  base-year
              reserve was approximately $1.6 million.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


(13)   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.

              The  following  table  sets  forth the  Plan's  funded  status and
              amounts  recognized  in  the  Company is  consolidated   financial
              statements at December 31:
<TABLE>
<CAPTION>
                                                                   1997         1996
                                                                   ----         ----
                                                                    (in thousands)
<S>                                                               <C>          <C>
Actuarial present value of benefit obligations:
   Accumulated benefit obligation, including
      vested benefits of approximately $3,357,000
      in 1997 and $2,828,000 in 1996 ........................     $(3,436)      (2,927)
                                                                  =======      =======

   Projected benefit obligation for service rendered to date       (4,662)      (3,936)
   Plan assets at fair value ................................       3,636        3,190
                                                                  -------      -------
   Projected benefit obligations in excess of plan assets ...      (1,026)        (746)
   Unrecognized net loss from past experience different
      from that assumed of effects and changes in assumptions         704          359
   Unrecognized prior service costs .........................           2            2
   Unrecognized net obligation at January 1, 1989 being
      recognized over 19.66 years ...........................         246          269
                                                                  -------      -------
   Accrued pension liability ................................     $   (74)        (116)
                                                                  =======      =======
</TABLE>
                  Net  pension  cost  for  1997,  1996  and  1995  included  the
following components:
<TABLE>
<CAPTION>
                                                     1997        1996       1995
                                                     ----        ----       ----
<S>                                                  <C>        <C>        <C>
Service cost - benefits earned during the period     $ 171        171        139
Interest cost on projected benefit obligations .       288        265        237
Actual return on plan assets ...................      (295)      (171)      (352)
Net amortization and deferral ..................        26        (67)       151
                                                     -----      -----      -----
Net periodic pension cost ......................     $ 190        198        175
                                                     =====      =====      =====
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              Significant assumptions used in determining pension expense of the
              Plan are as follows for the years ended December 31:
<TABLE>
<CAPTION>


                                                      1997        1996        1995
                                                      ----        ----        ----
<S>                                                   <C>         <C>         <C>
Discount rate ..............................          7.0%        7.5%        7.5%
Expected long-term rate of return ..........          9.0%        9.0%        9.0%
Compensation increase rate .................          6.0%        6.0%        6.0%
</TABLE>

       (b)    Executive Supplemental Retirement Plan

              The Company  maintains an Executive  Supplemental  Retirement Plan
              for key management personnel. An expense of approximately $72,000,
              $72,000,  and  $107,000  was  recorded  in 1997,  1996  and  1995,
              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
              employeeis  salary.  Total expense  recorded during 1997, 1996 and
              1995   was   approximately   $27,000,    $23,000,   and   $24,000,
              respectively.


(14)   Stock-Based Compensation Plans

       (a)    Employee Stock Ownership Plan

              As part of the  conversion  discussed in note 2, an employee stock
              ownership plan (ESOP) was established to provide substantially all
              employees   of  the  Company  the   opportunity   to  also  become
              stockholders.  The  ESOP  borrowed  $1,196,000  from  the  Holding
              Company  and used the  funds to  purchase  119,600  shares  of the
              common  stock of the Company  issued in the  conversion.  The loan
              will  be  repaid   principally   from  the  Bankis   discretionary
              contributions  to the ESOP over a period of ten years. At December
              31, 1997 and 1996, the loan had an outstanding balance of $837,200
              and $956,800,  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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              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  $225,000  and  $158,000  of
              compensation   expense   under   the  ESOP  in  1997   and   1996,
              respectively.

              The ESOP shares as of December 31, 1997 were as follows:

                  Allocated shares                                        23,920
                  Shares released for allocation                          11,960
                  Unallocated shares                                      83,720
                                                                    ------------
                                                                         119,600
                                                                    ============
                  Market value of unallocated shares at
                     December 31, 1997                              $  2,250,000
                                                                    ============
       (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.

              The Company applies APB Opinion No. 25 and related Interpretations
              in accounting for its plans. Accordingly, no compensation cost has
              been  recognized for its stock option plans.  In October 1995, the
              FASB   issued   SFAS  No.   123,   "Accounting   for   Stock-Based
              Compensation."  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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              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)
                                                      1997             1996
                                                      ----             ----
<S>                                                 <C>                 <C>
Net income:
     As reported ..........................         $1,068              830
     Pro forma ............................            976              744
Basic earnings per share:
     As reported ..........................            .96              .68
     Pro forma ............................            .88              .61
Diluted earnings per share:
     As reported ..........................            .93              .67
     Pro forma ............................            .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>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements (continued)


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

   Estimated weighted-average
       fair value of options granted
       during the year                            $   6.29                   $   4.08
                                                   =======                   ========
</TABLE>

              The following  table  summarizes  information  about the Company's
              stock options at December 31, 1997:
<TABLE>
<CAPTION>
                                                       Options Outstanding                  Options Exercisable
                                            -----------------------------------------     -------------------------
                                                            Weighted
                                                             Average        Weighted-                     Weighted-
                                              Number        Remaining        Average        Number         Average
                    Exercise                Outstanding    Contractual      Exercise      Exercisable     Exercise
                      Price                 at 12/31/97       Life            Price       at 12/31/97       Price
                      -----                 -----------       ----            -----       -----------       -----
<S>                                           <C>            <C>           <C>                <C>          <C>
                 $  12.625                    106,892          8 years     $  12.63           21,379       $  12.63
                    14.75                       7,475          9 years        14.75               -             -
                    22.03                      11,212        9.8 years        22.03               -             -
</TABLE>

       (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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              During   1997  and  1996,   7,475   shares  and   53,222   shares,
              respectively,  were  awarded  under the RRP.  During  1996,  7,475
              shares were forfeited under the RRP. 2,990 shares and 8,691 shares
              vested under the RRP during 1997 and 1996, respectively.

(15)   Fair Value of Financial Instruments

              SFAS  No.  107,   iDisclosures   about  Fair  Value  of  Financial
              Instrumentsi  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 Companyis
              entire holdings of a particular financial  instrument.  Because no
              ready market  exists for a  significant  portion of the  Companyis
              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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              The following  tables  present the carrying  amounts and estimated
              fair values of the Company is  financial  instruments  at December
              31, 1997 and 1996:
<TABLE>
<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

  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

<CAPTION>
                                                                             1996
                                                                    ----------------------
                                                                         (in thousands)
                                                                    Carrying    Estimated
                                                                     Amount     Fair Value
                                                                     ------     ----------
<S>                                                                 <C>          <C>
Financial assets:
  Cash and cash equivalents ...................................     $  2,896        2,896
  Securities available for sale ...............................        1,990        1,990
  Investment securities .......................................       36,180       35,964

  Loans .......................................................      119,120      118,903
       Less:  allowance for loan losses .......................          642         --
                 unearned discount, and deferred loan fees, net           23         --
                                                                    --------     --------
           Net loans ..........................................      118,455      118,903

  Accrued interest receivable .................................        1,137        1,137

Financial liabilities:
  Savings, now, and demand deposit accounts ...................       53,722       53,722
  Time deposit accounts .......................................       86,894       86,968
  Advance payments by borrowers for property taxes
       and insurance ..........................................        1,160        1,160
  Accrued interest on depositors accounts .....................            7            7

</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              Financial Instruments with Carrying Amount Equal to Fair Value

              The carrying  amount of cash and due from banks and fed eral funds
              sold  (collectively  defined  as  icash  and  cash  equivalentsi),
              accrued interest receivable, accrued interest payable, and advance
              payments  by  borrowers  for  property   taxes  and  insurance  is
              considered  to be  equal  to  fair  value  as a  result  of  their
              short-term nature.

              Securities Available for Sale, Debt Securities and Mortgage-Backed
              Securities

              The fair value of  securities  available  for sale 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, 1997 and 1996.
              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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


              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, 1997 and
              1996.

(16)   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,  1997  and 1996 at  fixed  and  variable
              interest rates are as follows:
<TABLE>
<CAPTION>
                                                            1997
                                             ----------------------------------
                                              Fixed        Variable       Total
                                              -----        --------       -----
                                                        (in thousands)
<S>                                          <C>           <C>            <C>
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
                                             =======       =======       =======
</TABLE>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


<TABLE>
<CAPTION>
                                                            1996
                                             ----------------------------------
                                              Fixed        Variable       Total
                                              -----        --------       -----
                                                         (in thousands)
<S>                                          <C>           <C>            <C>
Financial instruments
  whose contract amounts
  represent credit risk:
    Conventional mortgage loans ......       $   316         1,572         1,888
    Home equity ......................          --          10,278        10,278
    Commercial loans .................           306          --             306
    Overdraft loans ..................           114          --             114
                                             -------       -------       -------
                                             $   736        11,850        12,586
                                             =======       =======       =======
</TABLE>

              The range of interest rates on fixed rate commitments was 7.13% to
              18.00% at December  31,  1997 and 5.0% to 18.00% at  December  31,
              1996. 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, 1997 and 1996 has a 2.00%
              annual  interest rate  adjustment cap, and uses the weekly average
              from the one-year Treasury Constant Maturity Series, plus a margin
              of 3.00%,  as an index for rate  adjustments.  The  lifetime  rate
              ceiling for the one-year ARM product at December 31, 1997 and 1996
              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,  1997 and 1996,  was a jumbo ARM
              with a  lifetime  ceiling of 6.00%  above the  initial  rate.  The
              Company  does not  originate  loans  which  provide  for  negative
              amortization. Mortgage loan terms vary from 10 to 30 years.

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

              The Company does not engage in investments  in futures  contracts,
              forwards,  swaps, option contracts or other derivative investments
              with similar characteristics.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

             Notes to Consolidated Financial Statements (continued)


       (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,  1997,  1996  and  1995  were
              approximately  $53,000,  $45,000,  and  $42,000,  respectively.  A
              summary  of the  future  minimum  commitments  required  under the
              noncancelable facility lease are as follows:

                     Years ending December 31:                 (in thousands)

                               1998                                $   52,000
                               1999                                    52,000
                               2000                                    52,000
                               2001                                    52,000
                               2002                                    52,000
                               Thereafter                             203,000
                                                                   ----------
                                                                   $  463,000
                                                                   ==========

(17)   Regulatory Capital Requirements

              OTS regulations  require savings  institutions to maintain minimum
              levels of regulatory  capital.  Under the regulations in effect at
              December  31,  1997,  the Bank was  required to maintain a minimum
              ratio of  tangible  capital to total  adjusted  assets of 1.5%;  a
              minimum ratio of Tier 1 (core) capital to total adjusted assets of
              3.0%;  and a  minimum  ratio of  total  (core  and  supplementary)
              capital to risk-weighted assets of 8.0%.

              Under  its  prompt  corrective  action  regulations,  the  OTS  is
              required  to  take  certain  supervisory  actions  (and  may  take
              additional    discretionary    actions)   with   respect   to   an
              undercapitalized  institution.  Such  actions  could have a direct
              material  effect on an  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%.

              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.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued


              Management  believes that, as of December 31, 1997, 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>

                                                                           1997
                                        -------------------------------------------------------------------------
                                                                       Minimum Capital            Classification
                                                  Actual                  Adequacy            as Well Capitalized
                                            Amount       Ratio             Ratio                        Ratio
                                           ------       -----             -----                        -----
 <S>                                     <C>             <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
                                            ------       -----
<S>                                     <C>             <C>
              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>
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued

<TABLE>
<CAPTION>
                                                                           1996
                                        -------------------------------------------------------------------------
                                                                       Minimum Capital            Classification
                                                  Actual                  Adequacy            as Well Capitalized
                                            Amount       Ratio             Ratio                        Ratio
                                            ------       -----             -----                        -----
<S>                                     <C>             <C>                <C>                         <C>
              Bank
              Tangible capital          $    17,762     10.77%             1.50%                         -
              Tier 1 (core) capital          17,762     10.77              3.00                          5.00
              Risk-based capital:
                  Tier 1                     17,762     20.19                -                           6.00
                  Total                      18,405     20.92              8.00                         10.00
<CAPTION>


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

</TABLE>

(18)   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  Bankis  mutual-to-stock   conversion  and  the  Holding
              Company's initial public offering of its common stock.
<PAGE>
                         SFS Bancorp, Inc. and Subsidiary

              Notes to Consolidated Financial Statements, Continued
<TABLE>
<CAPTION>
                                             Balance Sheets
                                     as of December 31, 1997 and 1996

                                  Assets                                     1997          1996
                                                                    (in thousands, except share data)
<S>                                                                       <C>           <C>
Cash and cash equivalents ...........................................     $     76            96
Loan receivable from subsidiary .....................................        2,337         3,757
Equity in net assets of subsidiary ..................................       18,987        17,808
Other assets ........................................................           60            58
                                                                          --------      --------

                  Total assets ......................................     $ 21,460        21,719
                                                                          ========      ========

     Liabilities and Stockholders' Equity

Liabilities:
     Other liabilities ..............................................     $     29            48
                                                                          --------      --------

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, 1997 and 1996 ......           15            15
     Additional paid-in capital .....................................       14,365        14,260
     Retained earnings, substantially restricted ....................       12,422        11,687
     Treasury stock, at cost (286,528 shares at
          December 31, 1997, 224,003 at December 31, 1996) ..........       (4,089)       (2,840)
     Common stock acquired by employee stock ownership plan (ESOP) ..         (837)         (957)
     Unearned recognition and retention plan (RRP) ..................         (455)         (540)
     Net unrealized gain on securities available for sale, net of tax           10            46
                                                                          --------      --------

                  Total stockholders' equity ........................       21,431        21,671
                                                                          --------      --------

                  Total liabilities and stockholders' equity ........     $ 21,460        21,719
                                                                          ========      ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                              Statements of Income
                 For the years ended December 31, 1997 and 1996


                                                                  1997        1996
                                                                  ----        ----
                                                                  (in thousands)
<S>                                                              <C>        <C>

Interest income ............................................     $  245        384
Interest expense ...........................................        --         --
                                                                 ------     ------
     Net interest income ...................................        245        384

Noninterest expense ........................................        115        104
                                                                 ------     ------

Income before income taxes and equity in undistributed
     earnings of subsidiary ................................        130        280
                                                                 ------     ------

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

Income before equity in undistributed earnings of subsidiary         78        168
Equity in undistributed earnings of subsidiary
     (for the years ended December 31, 1997 and 1996) ......        990        662
                                                                 ------     ------

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

</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                            Statements of Cash Flows
                 For the years ended December 31, 1997 and 1996

                                                               1997          1996
                                                                ----          ----
                                                                  (in thousands)
<S>                                                           <C>          <C>
Cash flows from operating activities:
     Net income .........................................     $ 1,068          830
     Adjustment to reconcile net income to net cash
         provided by operating activities:
           Equity in undistributed earnings of subsidiary        (990)        (662)
           Increase in other assets .....................          (2)         (17)
           Increase (decrease) in liabilities ...........         (19)          27
           Amortization of RRP ..........................         228           38
                                                              -------      -------
              Net cash provided by operating activities .         285          216
                                                              -------      -------

Cash flows from investing activities:
     Net (increase) decrease in loans ...................       1,420        3,319
                                                              -------      -------
              Net cash provided in investing activities .       1,420        3,319
                                                              -------      -------

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

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

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

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


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



Annual Meeting

         The annual meeting of SFS Bancorp,  Inc. will be held on April 22, 1998
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 4, 1998 there  were  approximately  299
holders of record and  approximately 422 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.

               1997                                      1996
--------------------------------------       -----------------------------------
                    High       Low                              High       Low

First Quarter      $18.125    $14.75         First Quarter    $ 13.00    $ 11.50
Second Quarter     $17.50     $16.00         Second Quarter   $ 13.00    $ 11.75
Third Quarter      $23.25     $16.875        Third Quarter    $ 14.25    $ 12.00
Fourth Quarter     $28.00     $21.50         Fourth Quarter   $ 16.25    $ 13.50



         During 1997, the Company declared  dividends totaling $333,000 or $0.27
per  share on its  Common  Stock.  Dividend  payment  decisions  are  made  with
consideration of a variety of factors including earnings,  financial  condition,
market  considerations  and regulatory  restrictions.  Restrictions  on dividend
payments  are  described  in  Note  2 of the  Notes  to  Consolidated  Financial
Statements included in this Annual Report.
<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, 1997 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 Peat Marwick 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