<PAGE>



                           Little Falls Bancorp, Inc.
                              Annual Report - 1998

--------------------------------------------------------------------------------

TABLE OF CONTENTS
--------------------------------------------------------------------------------



Letter to Stockholders ........................................          1    
                                                                       
Corporate Profile and Stock Market Information.................          2
                                                                       
Selected Financial and Other Data..............................          3
                                                                       
Management's Discussion and Analysis of                                
  Financial Condition and Results of Operations................          4
                                                                       
Management Responsibility Statement............................         17
                                                                       
Independent Auditors' Report...................................         18
                                                                       
Consolidated Statements of Financial Condition.................         19
                                                                       
Consolidated Statements of Income..............................         20
                                                                       
Consolidated Statements of Comprehensive Income................         21
                                                                       
Consolidated Statements of Changes in Stockholders' Equity.....         22
                                                                       
Consolidated Statements of Cash Flows..........................         23
                                                                       
Notes to Consolidated Financial Statements.....................         26
                                                                       
Other Corporate Information....................................         59
                                                                       
                                                               
<PAGE>


                           Little Falls Bancorp, Inc.
                                 86 Main Street
                         Little Falls, New Jersey 07424







To Our Stockholders:


On behalf of our directors, officers and employees, we are pleased to present to
you our fourth annual stockholders' report. Last year was quite eventful. As you
know, we had initially  hoped to combine with Skylands  Community Bank to form a
more diversified institution with a wider customer base.
However, the agreement was mutually terminated in November 1998.

As previously reported,  on January 26, 1999, we signed an agreement with HUBCO,
Inc.,  Mahwah,  New Jersey,  whereby  HUBCO would acquire  Little Falls.  If the
required shareholder and regulatory  approvals are obtained,  we expect to close
the transaction in the second quarter of 1999.

We look  forward  to the  proposed  transaction  and the  opportunities  that it
presents.

Your Board of Directors and  management  team are  committed to  protecting  and
enhancing  the  value of your  investment  in the  Company.  We  appreciate  the
confidence, support and loyalty of our customers, employees, and stockholders.



Sincerely,

/s/Leonard G. Romaine
------------------------
Leonard G. Romaine
President


                                        1

<PAGE>



Little Falls Bancorp, Inc.

Corporate Profile

         Little Falls Bancorp,  Inc. (the "Company") is a New Jersey corporation
organized  in August  1995 at the  direction  of the Board of  Directors  of the
Little Falls Bank (the  "Bank") to acquire all of the capital  stock of the Bank
issued upon its conversion from the mutual to stock form of ownership on January
5, 1996 (the  "Conversion").  The Company is a unitary  savings and loan holding
company which, under existing laws,  generally is not restricted in the types of
business  activities  in which it may engage  provided  that the Bank  retains a
specified amount of its assets in  housing-related  investments.  At the present
time, because the Company does not conduct any active business, the Company does
not intend to employ any persons  other than  officers of the Bank but  utilizes
the support staff of the Bank from time to time.

         The Bank is a federally  chartered stock savings bank  headquartered in
Little  Falls,  New Jersey.  The Bank was founded in 1887 and its  deposits  are
federally  insured by the Savings  Association  Insurance  Fund ("SAIF") and the
Bank is a member of the Federal Home Loan Bank  ("FHLB")  System.  The Bank is a
community oriented, full service retail savings institution offering traditional
mortgage loan products.

         The Bank  attracts  deposits  from the  general  public  and uses  such
deposits   primarily  to  originate   loans   secured  by  first   mortgages  on
owner-occupied one- to four-family residences in its market area, purchase loans
to diversify its loan portfolio,  and to purchase mortgage-backed and investment
securities. The Bank also originates a limited number of commercial real estate,
residential  construction,  and consumer loans,  which consists mainly of second
mortgages and home equity lines of credit.

Stock Market Information

         Since its issuance on January 5, 1996,  the Company's  common stock has
traded on the Nasdaq  National  Market.  The following  table reflects the stock
price as  published  by the  Nasdaq  National  Market.  The  quotations  reflect
inter-dealer prices, without retail mark-up,  mark-down, or commission,  and may
not represent actual transactions.

                                                  HIGH              LOW
                                                 -------          -------

October 1, 1998 - December 31, 1998              $21 1/2          $11 1/2
July 1, 1998 - September 30, 1998                 22               14
April 1, 1998 - June 30, 1998                     22 1/4           18 1/4
January 1, 1998 - March 31, 1998                  20 1/2           17 1/2
October 1, 1997 - December 31, 1997               20 1/2           16 1/4
July 1, 1997 - September 30, 1997                 18 1/2           15 1/4
April 1, 1997 - June 30, 1997                     15 7/8           12 5/8
January 5, 1997 - March 31, 1997                  14 1/8           12 1/4



         The number of  stockholders  of record of common stock as of the record
date of March 19,  1999  ("Record  Date"),  was 376.  This does not  reflect the
number of persons or entities who held stock in nominee or "street" name through
various  brokerage  firms.  As of the Record Date,  there were 2,470,551  shares
outstanding.


                                        2

<PAGE>

         The Company's  ability to pay dividends to  stockholders  is subject to
the  requirements  of New Jersey  law.  No  dividend  may be paid by the Company
unless its board of  directors  determines  that the Company will be able to pay
its debts in the ordinary  course of business after payment of the dividend.  In
addition, the Company's ability to pay dividends is dependent, in part, upon the
dividends  it  receives  from the Bank.  The Bank may not  declare or pay a cash
dividend  on any of its stock if the  effect  thereof  would  cause  the  Bank's
regulatory  capital  to be  reduced  below  (1)  the  amount  required  for  the
liquidation  account  established in connection with the Bank's  conversion from
mutual to stock form, or (2) the regulatory capital  requirements imposed by the
Office of Thrift Supervision ("OTS").

Selected Financial Condition Data
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
December 31,                                             1998             1997             1996            1995            1994
------------------------------------------------------------------------------------------------------------------------------------
                                                                                (In Thousands)
<S>                                                      <C>            <C>              <C>               <C>             <C>     
  Total Assets.........................                   $350,617       $328,522         $303,518          $310,355        $193,385
  Loans receivable (net)...............                    149,062        147,033          117,116            96,230          94,754
  Mortgage-backed securities held
   to maturity.........................                     61,373         90,957          112,473           118,020          51,664
  Mortgage-backed securities
   available for sale..................                     13,971         13,929               --                --              --
  Investment securities - held to
   maturity............................                     40,577         57,988           51,370            29,999          36,146
  Investment securities - available
    for sale...........................                     39,423             --               --                --              --
  Cash and cash equivalents............                     33,393          6,788           10,374            53,419           4,065
  Deposits.............................                    243,048        230,133          228,312           247,851         176,173
  Stockholders' equity.................                     37,445         38,295           40,448            16,223          15,715

</TABLE>

Selected Operating Data
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                        1998               1997               1996              1995             1994
-----------------------------------------------------------------------------------------------------------------------------------
                                                                              (In Thousands)
<S>                                             <C>                <C>              <C>                 <C>             <C>    
Total interest income..................          $22,746            $ 21,064         $ 18,776             $13,813         $13,075
Total interest expense.................           14,695              12,920           11,258               9,314           7,170
                                                 -------             -------          -------              ------          ------
  Net interest income..................            8,051               8,144            7,518               4,499           5,905
Provision for loan losses..............              161                 240              183                 131             356
                                                 -------             -------          -------              ------          ------
  Net interest income after
   provision for loan losses...........            7,890               7,904            7,335               4,368           5,549
                                                 -------             -------          -------              ------          ------
  Total non-interest income............              404                 427              409                 178             143
                                                 -------             -------
  Total non-interest expense...........            5,702               5,403            6,747(1)            3,840(2)        2,912
                                                 -------             -------          -------              ------
Income before provision for
 income taxes .........................            2,592               2,928              996                 705           2,781
Income tax expense.....................              844               1,072              385                 241           1,066
                                                 -------             -------          -------              ------          ------
  Net income...........................         $  1,748            $  1,856         $    611             $   464         $ 1,715
                                                 =======             =======          =======              ======          ======
</TABLE>


                                           (footnotes on following page)

                                        3

<PAGE>



Other Selected Data
<TABLE>
<CAPTION>

-----------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                               1998             1997             1996             1995            1994
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>              <C>              <C>              <C>               <C>  
Return on average assets......................         0.51%            0.60%           0.21%(1)        0.22%(2)          0.86%
Return on average equity......................         4.65%            4.74%           1.44%(1)        2.89%(2)         11.62%
Average equity to average assets..............        10.92%           12.57%          14.78%           7.64%             7.62%
Net interest rate spread......................         2.03%            2.27%           2.22%           1.97%             2.86%

Per Share Information:
  Diluted earnings per share (1) (2) (3)......       $ 0.76           $ 0.75           $0.22             N/A               N/A

  Dividends per share (3).....................       $ 0.22           $ 0.155          $0.05             N/A               N/A

  Tangible book value per
  share (3)...................................       $14.11           $13.59          $13.56             N/A               N/A


Dividend payout ratio (1) (2) (3).............        28.94%           20.62%          22.28%            N/A               N/A
Non-performing assets to total assets.........         0.37%            0.57%          0.91%            1.27%             3.09%
Non-performing loans to total assets..........         0.29%            0.39%          0.63%            0.79%             2.18%
Allowance for loan losses to total loans......         0.88%            0.79%          0.92%            0.98%             1.21%

</TABLE>

------------------------
(1)      Includes one-time special  assessment of $1,167,000 to recapitalize the
         SAIF.
(2)      Includes a non-recurring  expense of $195,000 due to the implementation
         of a  directors'  medical  plan.  (3) No shares of  common  stock  were
         outstanding until January 5, 1996.


                                        4

<PAGE>


                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

General

         The  largest  components  of the Bank's  net  income  are net  interest
income,  which is the difference  between interest income and interest  expense,
and noninterest  income derived  primarily from fees.  Consequently,  the Bank's
earnings are dependent on its ability to originate  loans,  net interest income,
and  the  relative  amounts  of  interest-earning  assets  and  interest-bearing
liabilities.  The Bank's net income is also  affected by its  provision for loan
losses  and  foreclosed  real  estate  as well  as the  amount  of  non-interest
expenses,  such as  compensation  and benefit  expense,  occupancy and equipment
expense and deposit insurance  premium  expenses.  Earnings of the Bank also are
affected   significantly  by  general   economic  and  competitive   conditions,
particularly  changes in market interest rates,  government policies and actions
of regulatory authorities.

Financial Condition

         The Bank's total assets increased by $22.1 million to $350.6 million at
December  31,  1998 from  $328.5  million at  December  31,  1997.  Total  loans
receivable  increased by $2.0 million due to loan originations of $25.5 million,
offset  somewhat  by loan  repayments.  Investment  securities  held to maturity
decreased by $17.4 million due to maturing or called securities of $52.0 million
and the sale of $3.0  million of  securities  which were within  three months of
their  maturity,  offset  somewhat by  purchases  of $37.6  million.  Investment
securities  available  for sale  increased by $39.4  million due to purchases of
$45.9 million,  offset somewhat by maturing or called securities of $5.3 million
and the sale of $1.0 million of securities.  Mortgage-backed  securities held to
maturity  decreased by $29.6 million due to repayments of principal.  Total cash
and cash  equivalents  increased by $26.6 million due in part to the increase in
deposits of $12.9 million.

         Total deposits increased by $12.9 million.  Borrowed funds increased by
$9.8  million  as the  Bank  took  advantage  of  lower  interest  rates to fund
investing and lending activities.

         Total  stockholders'  equity decreased by $849,000 primarily due to the
repurchase of shares of Company stock pursuant to the Company's stock repurchase
program  (130,396  shares at a total price of  approximately  $2.6  million),  a
$247,000 unrealized loss on securities  available for sale net of deferred taxes
and dividends paid, offset somewhat by earnings for the year.


                                        5

<PAGE>



Average Balance, Net Interest Income, Yields Earned and Rates Paid

         The  following  table sets forth  certain  information  relating to the
Bank's  average  balance  sheet and  reflects  the  average  yield on assets and
average cost of  liabilities  for the periods  indicated and the average  yields
earned and rates paid.  Such yields and costs are derived by dividing  income or
expense by the average balance of assets or liabilities,  respectively,  for the
periods  presented.  Average  balances  are  derived  from  month-end  balances.
Management does not believe that the use of month-end  balances instead of daily
average  balances  has  caused  any  material   difference  in  the  information
presented.

<TABLE>
<CAPTION>

                                                  1998                             1997                           1996
                                     -------------------------------  -------------------------------  -----------------------------
                                     Average              Average     Average               Average    Average              Average
                                     Balance    Interest  Yield/Cost  Balance    Interest  Yield/Cost  Balance  Interest  Yield/Cost
                                     -------    --------  ----------  -------    --------  ----------  -------  --------  ----------
                                                                          (Dollars in Thousands)
<S>                                 <C>         <C>         <C>      <C>        <C>         <C>      <C>        <C>          <C>  
Interest-earning assets:
 Loans receivable(1)...............  $150,345    $11,381     7.57%    $131,625   $10,081      7.66%   $105,794   $ 8,255       7.80%
 Mortgage-backed securities(5).....    90,582      5,481     6.05      107,304     7,118      6.63     119,684     7,972       6.64
 Investment securities(2)(5).......    79,604      5,236     6.64       55,615     3,624      6.52      40,316     2,164       5.37
 Other interest-earning assets.....    11,390        598     5.25        4,596       241      5.24       7,431       385       5.18
                                      -------     ------               -------    ------               -------    ------
  Total interest-earning                                                                                        
    assets.........................   331,921     22,746     6.85      299,140    21,064      7.04     273,225    18,776       6.87
                                                  ------                          ------                          ------
Non-interest-earning assets........    12,284                           12,566                          14,223  
                                      -------                          -------                         -------  
  Total assets.....................  $344,205                         $311,706                        $287,448  
                                      =======                          =======                         =======  
                                                                                                                
Interest-bearing liabilities:                                                                                   
 Savings accounts..................  $ 42,848      1,277     2.98     $ 45,724     1,440      3.15    $ 51,633     1,860       3.60
 Now and money market..............    33,639        607     1.80       32,788       642      1.96      39,270     1,155       2.94
 Certificates of deposit...........   156,216      8,620     5.52      148,122     8,246      5.57     147,707     8,068       5.46
 Borrowed funds....................    72,357      4,191     5.79       43,975     2,592      5.89       3,173       175       5.52
                                      -------     ------               -------    ------               -------    ------
                                                                                                                
  Total interest-bearing                                                                                        
    liabilities....................   305,060     14,695     4.82      270,609    12,920      4.77     241,783    11,258       4.66
                                                  ------                          ------                          ------
Non-interest bearing                                                                                            
  liabilities......................     1,546                            1,928                           3,171  
                                      -------                          -------                         -------  
 Total liabilities.................   306,606                          272,537                         244,954  
Stockholders' equity...............    37,599                           39,169                          42,494  
                                      -------                          -------                         -------  
 Total liabilities and                                                                                          
  stockholders' equity.............  $344,205                         $311,706                        $287,448  
                                      =======                          =======                         =======  
Net interest income................              $ 8,051                         $ 8,144                         $ 7,518
                                                  ======                          ======                          ======
Interest rate spread(3)............                          2.03%                            2.27%                            2.21%
                                                             ====                             ====                             ====
Net yield on interest-                                                                                          
  earning assets(4)................                          2.42%                            2.72%                            2.75%
                                                             ====                             ====                             ====
Ratio of average interest-                                                                                      
  earning assets to average                                                                                     
  interest-bearing liabilities.....    108.81%                         110.54%                          111.00%              
                                      =======                          ======                           ======   
</TABLE>
                                                                             
---------------------------------
(1)      Average balances include non-performing loans.
(2)      Includes  interest-bearing deposits in other financial institutions and
         FHLB stock.
(3)      Interest-rate  spread  represents  the  difference  between the average
         yield   on   interest-earning   assets   and   the   average   cost  of
         interest-bearing liabilities.
(4)      Net yield on interest-earning  assets represents net interest income as
         a percentage of average interest-earning assets.
(5)      Includes both held to maturity and available for sale.

                                        6

<PAGE>


         The table below sets forth  certain  information  regarding  changes in
interest income and interest expense of the Bank for the periods indicated.  For
each  category  of  interest-earning  assets and  interest-bearing  liabilities,
information  is  provided  on  changes  attributable  to (i)  changes  in volume
(changes in average  volume  multiplied  by prior  rate);  (ii) changes in rates
(changes  in  rate  multiplied  by  prior  average  volume);  (iii)  changes  in
rate-volume (changes in rate multiplied by the change in average volume).

<TABLE>
<CAPTION>

                                                                       Year Ended December 31,
                                       ----------------------------------------------------------------------------------------
                                             1998         vs.         1997                  1997        vs.         1996
                                       -----------------------------------------    -------------------------------------------   
                                                   Increase (Decrease)                          Increase (Decrease)
                                                        Due to                                       Due to
                                       -----------------------------------------    ------------------------------------------- 
                                                              Rate/                                         Rate/
                                       Volume      Rate      Volume         Net      Volume      Rate      Volume         Net
                                       ------     ------     ------        -----     ------     ------     ------        -----
                                                                          (In Thousands)
<S>                                 <C>         <C>          <C>        <C>       <C>        <C>        <C>           <C>   
Interest income:
 Loans receivable................    $ 1,434     $ (117)      $ (17)     $ 1,300   $2,016     $(152)     $ (38)        $1,826
 Mortgage-backed securities......     (1,109)      (625)         97       (1,637)    (825)      (33)         4           (854)
 Investment securities...........      1,453        149          60        1,662      821       463        176          1,460
 Other interest-earning assets...        569        (63)       (149)         357     (147)        5         (2)          (144)
                                      ------      -----       -----       ------    -----      ----       ----          -----
  Total interest-earning assets..      2,347       (656)       (  9)       1,682    1,865       283        140          2,288
                                      ------      -----       -----       ------    -----      ----       ----          -----
                                                                       
Interest expense:                                                      
 Savings accounts................        (91)       (77)          5         (163)    (213)     (234)        27           (420)
 Now and money market............         17        (51)         (1)         (35)    (191)     (386)        64           (513)
 Certificates of deposit.........        450        (72)         (4)         374       23       155          -            178
 Borrowed funds..................      1,774       (104)        (71)       1,599    2,250        12        155          2,417
                                      ------      -----       -----       ------    -----      ----       ----          -----
   Total interest-bearing                                              
    liabilities..................      2,150       (304)        (71)       1,775    1,869      (453)       246          1,662
                                      ------      -----       -----       ------    -----      ----       ----          -----
Net change in net interest                                             
  income.........................    $   197     $ (352)      $  62      $   (93)  $   (4)    $ 736      $(106)        $  626
                                      ======      =====        =====      ======    =====      ====       ====          =====
</TABLE>


Comparison of Operating Results for the Years Ended December 31, 1998 and 1997

         General. Net income decreased by $108,000, or 5.84% to $1.7 million for
the year ended  December 31, 1998 from $1.9 million for the year ended  December
31, 1997.

         The  decrease  in  earnings  for the year was due in part to the  costs
associated with terminating a merger agreement with Skylands Community Bank, the
expense  incurred  due to the  immediate  vesting of stock  awards to a deceased
director  during the fourth quarter of fiscal 1998, and an increase in losses on
foreclosed real estate, offset somewhat by a decrease in taxes.

         Interest Income.  Interest income  increased $1.7 million,  or 7.99% to
$22.7  million for the year ended  December 31, 1998 from $21.1  million for the
year ended  December 31, 1997.  The increase was  primarily  due to increases of
$18.7 million,  $24.0 million and $6.8 million in the average  balance of loans,
investment  securities,  both held to maturity and  available for sale and other
interest  earning assets,  respectively,  offset somewhat by a decrease of $16.7
million in mortgage-backed  securities,  both held to maturity and available for
sale.  Also, the average yield on all interest  earning  assets  decreased by 19
basis points (100 basis points equals 1%) to 6.85%.


                                      7

<PAGE>


         Interest  Expense.  Interest  expense  increased  $1.8 million to $14.7
million for the year ended  December  31,  1998 from $12.9  million for the year
ended December 31, 1997.  This was due to an increase in the average  balance of
borrowed  funds of $28.4  million and an increase of $6.1 million in the average
balance  of  deposits  coupled  with an  increase  in the  average  rate paid on
interest-bearing liabilities of 5 basis points to 4.82%.

         Net Interest Income.  Net interest income decreased by $93,000 or 1.14%
for the year ended  December 31, 1998 as compared to the year ended December 31,
1997. The increase was due to the reasons noted above.

         Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's  periodic  evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience,  adverse situations that
may  affect  the  borrowers'  ability  to repay  loans,  estimated  value of the
underlying collateral and current and expected market conditions.  The provision
for loan  losses  decreased  $79,000  or 32.86% to  $161,000  for the year ended
December 31, 1998 from $240,000 for the year ended December 31, 1997,  primarily
due to a decrease in the Bank's  non-performing  loans. While the Bank maintains
its allowance for losses at a level which it considers to be adequate, there can
be no assurance that further  additions will not be made to the loss  allowances
and that such losses will not exceed the estimated amounts.

         Non-Interest Income.  Non-interest income decreased by $24,000 or 5.66%
to $403,000 at December  31, 1998 from  $428,000 at December 31, 1997. A gain of
$125,000 was recorded on the sale of the Bank's  Frenchtown  office  building in
1997.  The Frenchtown  branch was closed in 1996, and the related  deposits were
transferred to the Bank's other  Hunterdon  County  offices.  This was offset by
$47,000 of gains recorded in 1998 on the sales of investment and mortgage-backed
securities and an $81,000 increase in service fee income.

         Non-Interest Expense. Non-interest expense increased $299,000, or 5.53%
to $5.7  million  at  December  31,  1998 from $5.4  million  for the year ended
December  31,  1997.  This  increase  was due to the  recording  of  $106,000 of
expenses  connected with the terminated merger agreement with Skylands Community
Bank and  $140,000 of expense for the  immediate  vesting of stock  awards for a
director  who  died  during  the  fourth  quarter  of  1998.  Exclusive  of  the
aforementioned items, non-interest expense increased $53,000, or 0.98%.

         Income Tax Expense.  Income tax expense decreased $229,000 or 21.31% to
$844,000  for the year ended  December  31, 1998 from $1.1  million for the year
ended  December 31, 1997.  This increase was due to a decrease in pre-tax income
of $337,000 and an increase in investments in assets that are taxed at a reduced
federal income tax rate.

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

         General.  Net  income  increased  by $1.2  million,  or  203.8% to $1.9
million for the year ended  December  31, 1997 from  $611,000 for the year ended
December 31, 1996.

         The  increase  in  earnings  for the  year  was due in part to the $1.2
million  charge in the third quarter of 1996  connected  with a one time special
assessment from the Savings Association  Insurance Fund ("SAIF").  This one time
assessment  was the result of  legislation  that was  effective on September 30,
1996 for the purpose of recapitalizing  the SAIF. Other factors for the increase
in earnings

                                        8

<PAGE>


were an increase of $569,000 in net interest income after the provision for loan
losses,  a  decrease  of $62,000 in the loss on  foreclosed  real  estate and an
additional decrease of $270,000 in deposit insurance premiums offset somewhat by
increases  in the  provision  for income taxes of  $687,000,  and  miscellaneous
expense of $184,000.

         Interest Income.  Interest income  increased $2.3 million,  or 12.2% to
$21.1  million for the year ended  December 31, 1997 from $18.6  million for the
year ended  December 31, 1996.  The increase was  primarily  due to increases of
$25.8 million and $15.3 million in the average  balances of loans and investment
securities, respectively, offset somewhat by decreases of $12.4 million and $2.8
million in the average balances of mortgage-backed securities and other interest
earnings assets,  respectively.  Also, the average yield on all interest earning
assets  increased  by 17 basis points to 7.04%.  In addition,  the payoff of two
problem loans resulted in the recording of  approximately  of $170,000 of income
previously reserved for.

         Interest  Expense.  Interest  expense  increased  $1.7 million to $12.9
million for the year ended  December  31,  1997 from $11.3  million for the year
ended December 31, 1996.  This was due to an increase in the average  balance of
borrowed  funds of $40.8  million  coupled  with an increase in the average rate
paid on  interest-bearing  liabilities  of 11 basis  points to 4.77%  partially,
offset by a decrease  in the  average  balance of  interest-bearing  deposits of
$12.0 million.

         Net Interest Income. Net interest income increased by $626,000, or 8.3%
for the year ended  December 31, 1997 as compared to the year ended December 31,
1996. The increase was due to the reasons noted above.

         Provision for Losses on Loans. The Bank maintains an allowance for loan
losses based upon management's  periodic  evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience,  adverse situations that
may  affect  the  borrowers'  ability  to repay  loans,  estimated  value of the
underlying collateral and current and expected market conditions.  The provision
for loan  losses  increased  $57,000  or 31.2% to  $240,000  for the year  ended
December 31, 1997 from $183,000 for the year ended December 31, 1996,  primarily
due to the increase in the loan  portfolio.  The  allowance  for loan losses was
$1.2 million at December 31, 1997.  While the Bank  maintains  its allowance for
losses at a level which it considers  to be adequate,  there can be no assurance
that further  additions  will not be made to the loss  allowances  and that such
losses will not exceed the estimated amounts.

         Non-Interest Income.  Non-interest income increased by $19,000, or 4.7%
to $428,000 at December  31, 1997 from  $409,000 at December 31, 1996. A gain of
$125,000 was recorded on the sale of the Bank's  Frenchtown  office  building in
1997.  The Frenchtown  branch was closed in 1996, and the related  deposits were
transferred to the Bank's other Hunterdon County offices.  This offset a gain of
$138,000  recorded in 1996 on the sale of the deposits of the Bank's Mount Holly
office to an unaffiliated financial institution.

         Non-Interest  Expense.  Non-interest expense decreased $1.3 million, or
19.9% to $5.4  million at December 31, 1997 from $6.7 million for the year ended
December 31, 1996. This decrease was primarily due to the $1.2 million charge in
the third quarter of 1996 connected with a one time special  assessment from the
Savings  Association  Insurance Fund ("SAIF").  This one time assessment was the
result of  legislation  that was effective on September 30, 1996 for the purpose
of  recapitalizing  the SAIF.  Other  factors for the  decrease in  non-interest
expense were the additional  decrease in deposit insurance 

                                        9

<PAGE>


premiums  of  $270,000,  a decrease  of $62,000 in the loss on  foreclosed  real
estate offset somewhat by an increase of $184,000 in miscellaneous expense.

         The decrease on the loss on foreclosed real estate was primarily due to
a gain of $11,000 being recorded on the sales of a foreclosed properties for the
year  ended  December  31,  1997,  compared  to a loss of $28,000 on the sale of
foreclosed  properties  for the year  ended  December  31,  1996.  Miscellaneous
expense increased by $184,000 due in most part to the expense connected with the
director's management stock bonus plan, which increased to $139,000 in 1997 from
$39,000 for 1996 due to a full year of vesting,  an increase in legal expense of
$50,000 and a loss of $19,000 on the sale of the Bank's Mount Holly office.  The
deposits of this branch were sold in 1996.

         Income Tax Expense.  Income tax expense increased $687,000,  or $178.2%
to $1.1 million for the year ended  December 31, 1997 from $385,000 for the year
ended December 31, 1996.  This increase was due to an increase in pre-tax income
of $1.9 million.

Risk Management

         In an effort  to reduce  interest  rate  risk and  protect  it from the
negative effect of rapid increases and decreases in interest rates, the Bank has
instituted certain asset and liability management measures including emphasizing
the origination of three, five and ten year  adjustable-rate  mortgage loans and
investing excess funds in short- and medium-term  mortgage-backed and investment
securities.  The Bank retains an asset/liability  consultant,  FinPro,  Inc., to
assist it in  analyzing  its asset  liability  position.  With the  consultant's
assistance,  the Bank undertakes a quarterly  extensive study of various trends,
conducts   separate   deposit   and  asset   analyses   and   prepares   various
asset/liability  tables including  contractual  interest rate gap, interest rate
gap with prepayment  assumptions,  margin/spread  and duration tables.  Interest
rate gap analysis  measures the difference  between amounts of  interest-earning
assets and interest-bearing  liabilities which either reprice or mature within a
given period of times and their sensitivity to changing interest rates.

         The Bank, like many other thrift  institutions,  is exposed to interest
rate risk as a result of the  difference  in the  maturity  of  interest-bearing
liabilities  and  interest-earning  assets and the volatility of interest rates.
Most deposit  accounts react more quickly to market interest rate movements than
do the existing mortgage loans because of the deposit accounts' shorter terms to
maturity;  sharp decreases in interest rates would typically increase the Bank's
earnings.  Conversely,  this same mismatch will generally  adversely  affect the
Bank's  earnings  during  periods of increasing  interest  rates.  The extent of
movement of interest rates is an uncertainty  that could have a negative  impact
on the earnings of the Bank.

         Volatility  in  interest  rates can also  result in  disintermediation,
which is the flow of funds away from savings institutions (such as the Bank) and
into other  investments,  such as U.S.  Government and corporate  securities and
other investment vehicles.  Because of the absence of federal insurance premiums
and reserve  requirements,  such investments may pay higher rates of return than
investment vehicles offered by savings institutions.

         In order to  encourage  monitor  its  interest  rate risk,  the Company
utilizes the services of an outside  consultant to calculate the  sensitivity of
its net  portfolio  value  ("NPV")  to  changes in  interest  rates.  NPV is the
difference  between  incoming  and outgoing  discounted  cash flows from assets,

                                       10

<PAGE>

liabilities,  and off-balance sheet contracts.  The Company's interest rate risk
("IRR") is  measured  as the change to its NPV as a result of  hypothetical  100
basis point ("bp") changes in market interest rates.

<TABLE>
<CAPTION>


                                          Net Portfolio Equity Value                       NPV as % of PV of Assets
                               -----------------------------------------------------   ---------------------------------
       Change in
     Interest Rates                               $ Change
    in Basis Points                               in Market               % Change
      (Rate Shock)              Amount             Value(1)               From Base    NPV Ratio(2)          Changes(3)
    ---------------            --------           ----------             -----------   ------------         ------------
                                                     (Dollars in Thousands)

       <S>                     <C>                 <C>                    <C>          <C>                     <C>    
          300                    29,875              (12,238)                (29)        9.04%                   (287)bp

          200                    34,118               (7,995)                (19)       10.08%                   (183)bp

          100                    38,197               (3,916)                 (9)       11.04%                    (87)bp

           0                     42,113                   --                  --        11.91%                        --

         (100)                   45,866                3,753                   9        12.71%                     80 bp

         (200)                   49,454                7,341                  17        13.44%                    153 bp

         (300)                   52,879               10,766                  26        14.11%                    220 bp

</TABLE>
-------------------------------------------------------
(1)      Represents  the  increase  (decrease)  of  the  estimated  NPV  at  the
         indicated  change in interest  rates  compared  to the NPV  assuming no
         change in interest rates.
(2)      Calculated  as the  estimated NPV divided by the present value of total
         assets.  The  Company's  PV is the  estimated  present  value  of total
         assets.
(3)      Calculated  as the increase  (decrease)  of the NPV ratio  assuming the
         indicated  change  in  interest  rates  over the  estimated  NPV  ratio
         assuming no change in interest rates.

         Certain  assumptions  utilized by the Company in assessing its interest
rate risk were  employed in preparing  the  previous  table.  These  assumptions
related to interest rates, loan prepayment rates, core deposit duration, and the
market values of certain assets under the various  interest rate  scenarios.  It
was also assumed that  delinquency  rates will not change as a result of changes
in interest rates although there can be no assurance that this will be the case.
The calculation  methodology used by the Company has certain  shortcomings which
include,  among  others,  that the repricing of both loans and deposits is often
discretionary  and under the control of the Bank's  customers.  Even if interest
rates  change in the  designated  amounts,  there can be no  assurance  that the
Company's assets and liabilities would perform as projected.

         Generally,  net interest income should  decrease with an  instantaneous
100 basis point  increase in interest  rates while net  interest  income  should
increase  with  instantaneous  declines in  interest  rates.  Generally,  during
periods of increasing interest rates, the Company's  liabilities are expected to
reprice faster than its assets, causing a decline in the Company's interest rate
spread.  This would result from an increase in the Company's  cost of funds that
would not be immediately  offset by an increase in its

                                       11

<PAGE>

yield on earning assets.  An increase in the cost of funds without an equivalent
increase  in the yield on  interest-earning  assets  would  tend to  reduce  net
interest income.

Liquidity and Capital Resources

         The Bank is required under applicable  federal  regulations to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other  investments.  OTS  regulations  require that a savings
association  maintain  liquid  assets of not less than 4% of its  average  daily
balance of net withdrawable  deposit accounts and borrowings payable in one year
or less. At December 31, 1998, the Bank's liquidity was in excess of the minimum
requirement.   The  Bank   adjusts   liquidity  as   appropriate   to  meet  its
asset/liability objectives.

         The Bank's  primary  sources of funds are  deposits,  amortization  and
prepayment  of loans and  mortgage-backed  securities,  maturities of investment
securities and funds provided from  operations.  While scheduled loan repayments
are a  relatively  predictable  source  of  funds,  deposit  flows  and loan and
mortgage-backed  security  prepayments are  significantly  influenced by general
interest-rates,  economic  conditions  and  competition.  In addition,  the Bank
invests  excess  funds in overnight  deposits  which  provide  liquidity to meet
lending requirements.

         The Bank's most liquid asset is cash,  which  includes  investments  in
highly liquid short-term investments. The level of these assets are dependent on
the  Bank's  operating,  financing  and  investing  activities  during any given
period.  At December 31, 1998, cash and cash equivalents  totaled $33.4 million.
The Bank has other sources of liquidity if a need for  additional  funds arises.
Another source of liquidity is the repayment and  prepayment of  mortgage-backed
and investment  securities.  Additional  sources of funds include the ability to
utilize  FHLB  of  New  York   advances  and  the  ability  to  borrow   against
mortgage-backed and investment  securities.  At December 31, 1998 the Bank had a
$9.0 million repurchase agreement with a rate of 5.82%. The repurchase agreement
matures in December 1999 and is callable quarterly on interest payment dates. As
of March 6, 1999, the borrowing was still in place. The repurchase agreement was
used to fund the sale of the Mount  Holly  branch  deposits  which  were sold in
December 1996. In an effort to increase earnings,  reduce the Company's interest
rate  sensitivity,  and to better match its interest rate position,  in November
1998, the Company entered into a financial  transaction whereby it purchased two
fixed  rate  agency  securities  at an average  rate of 6.17%,  with terms of 15
years,  and each is callable after one year. The funds for the purchase of these
securities came from a Federal Home Loan Bank of New York  convertible  advance.
The borrowing has a rate of 4.93% and matures November 19, 2003, but is callable
quarterly on interest payment dates starting  November 19, 2001. At December 31,
1998,  the Bank had a 30-day $9.5 million  repurchase  agreement  with a rate of
5.29% and maturing on January 14, 1999. (This repurchase agreement  subsequently
rolled over in January 1999,  at a rate of 4.95%.  In February,  the  repurchase
agreement was paid down to $9.0 million and the rate became 4.92%.) On March 10,
1998,  the Bank took  advantage of low interest rates to increase its borrowings
to fund  investing  and lending  activities,  and to allow for the  maturing and
withdrawal of high yielding savings  deposits,  to borrow $25.0 million from the
Federal  Home Loan  Bank of New York.  This  convertible  advance  has a rate of
5.35%,  with a maturity date of March 11, 2008. On March 12, 2001, and quarterly
thereafter,  the  Federal  Home Loan Bank of New York has the right to call this
advance.

         The Bank's cash flows are comprised of three  primary  classifications:
cash  flows  from  operating  activities,  investing  activities  and  financing
activities.  Cash flows from operating  activities,  consisting primarily of net
income adjusted for depreciation,  amortization and provisions for loan and real
estate

                                       12

<PAGE>

owned  losses,  were $3.0,  $3.4  million  and $1.6  million for the years ended
December 31, 1998, 1997 and 1996,  respectively.  Net cash provided by (used in)
investing  activities,   which  consisted  primarily  of  disbursement  of  loan
originations, loan  purchases, mortgage-backed security purchases and investment
security purchases, offset by principal collections on loans and mortgage-backed
securities and proceeds from the maturities of investment securities,  were $3.9
million,  $(29.5)  million and $(37.2)  million for fiscal 1998,  1997 and 1996,
respectively.  Net cash  provided by (used in) financing  activities  consisting
primarily  of proceeds  from stock  subscriptions,  net  activity in deposit and
escrow  accounts,  and  activity in  borrowed  funds were $19.7  million,  $22.5
million and $(7.5) million for the years ended December 31, 1998, 1997 and 1996,
respectively.

         Operating  activities in 1998 provided $3.0 million in cash due in most
part to income of $1.7 million  adjusted for $180,000 in the  provision for loan
and real estate owned losses,  $361,000 of goodwill amortization and $352,000 in
the amortization of deferred fees, premiums and discounts.  Investing activities
in 1998  provided  funds of $3.9 million due to  maturities of $52.0 million and
$5.0 million of investment securities held to maturity and investment securities
available for sale, respectively, repayments of $29.4 million of mortgage backed
securities  held to maturity,  $6.6  million of  repayments  of  mortgage-backed
securities  available  for sale and $8.4  million in  proceeds  from the sale of
mortgage-backed  securities  available for sale, offset somewhat by purchases of
$45.9  million,  $37.6  million  and  $15.0  million  in  investment  securities
available for sale,  investment  securities held to maturity and mortgage-backed
securities  available  for  sale,  respectively.  Financing  activities  in 1998
provided  $19.7  million  primarily  due to an increase of $50.0 million in long
term  borrowed  funds  and a net  change of $13.0  million  in  deposits  offset
somewhat by a decrease of $40.2 million in short term borrowings.

         Operating  activities in 1997  provided $3.4 million in cash  primarily
due to income of $1.9 million adjusted for $149,000 in depreciation, $367,000 in
the  provision  for loan and real estate  owned  losses and $361,000 of goodwill
amortization.  Investing  activities  in 1997 used  $29.5  million  due to $16.0
million,  $14.0 million and $15.1 million in purchases of investment  securities
held to maturity,  mortgage-backed  securities  available  for sale,  and loans,
respectively,  and the  $15.0  million  increase  in  loans  receivable,  offset
somewhat  by  $21.4  million  from  principal   collections  on  mortgage-backed
securities  held to maturity and $9.3  million  from the maturity of  investment
securities held to maturity. Financing activities in 1997 provided $22.5 million
due to a $1.8 million change in deposits and $25.1 million  increase in borrowed
funds offset  somewhat by $1.7 million and $2.4  million for the  repurchase  of
stock for the MSBP program and stock repurchase program, respectively.

         Operating  activities in 1996  provided $1.6 million in cash  primarily
due to net income of $611,000 adjusted for $153,000 in depreciation,  a $183,000
provision  for  loan  and  real  estate  owned  losses,   $361,000  of  goodwill
amortization.  Investing  activities  in 1996 used  $37.2  million  due to $16.1
million  and $32.3  million  in  purchases  of  mortgage-backed  and  investment
securities,  respectively,  and a $21.3  million  increase in loans  receivable,
$11.0 million from the maturity of investment  securities held to maturity,  and
$21.5 million from principle  collections on mortgage-backed  securities held to
maturity.  Financing activities used $7.8 million due to a $7.5 million decrease
in deposits, a $19.7 million refunding of oversubscribed deposits related to the
initial public offering completed in January 1996, $9.1 million used to fund the
sale of the  deposits  of the  Mount  Holly  branch,  and $3.3  million  for the
repurchase of common stock,  offset somewhat by an increase in borrowed funds of
$33.6 million.

         The Bank  anticipates  that it will have sufficient  funds available to
meet its current  commitments.  As of December 31,  1998,  the Bank had mortgage
commitments  to fund loans of $5.1 million.  Also,  at December 31, 1998,  there
were commitments on unused lines of credit relating to home equity loans of $4.6
million.  Certificates  of  deposit  scheduled  to mature in one year or less at
December 31, 1998

                                       13

<PAGE>



totaled $125.7 million.  Based on historical  deposit  withdrawals and outflows,
and on internal  monthly  deposit  reports  monitored by management,  management
believes  that a majority  of such  deposits  will  remain  with the Bank.  As a
result, no adverse liquidity effects are expected.

         At December 31, 1998,  the Bank exceeded  each of the three  regulatory
capital requirements on a fully phased-in basis. See Note 11 to the Consolidated
Financial Statements.

Year 2000 Readiness

         The following  discussion of the  implications of the Year 2000 problem
for  the  Company,   contains  numerous  forward  looking  statements  based  on
inherently uncertain information.  The cost of the project and the date on which
the Company plans to complete the internal Year 2000  modifications are based on
management's  assumptions of future events including the continued  availability
of internal and external resources, third party modifications and other factors.
However,  there can be no guarantee that these  statements  will be achieved and
actual results could differ.  Moreover,  although management believes it will be
able to make the necessary  modifications in advance,  there can be no guarantee
that failure to modify the systems would not have a material  adverse  effect on
the Company.

         During fiscal 1998, the Bank adopted a Year 2000  Compliance  Plan (the
"Plan") and established a Year 2000 Compliance Committee (the "Committee").  The
objectives  of the  Plan  and the  Committee  are to  prepare  the  Bank for the
millennium.  As recommended by the Federal  Financial  Institutions  Examination
Council,  the Plan  encompasses  the following  phases:  Awareness,  Assessment,
Renovation, Validation and Implementation.  These phases will enable the Bank to
identify risks,  develop an action plan,  perform  adequate testing and complete
certification  that its processing  systems will be Year 2000 ready. The Bank is
currently in Phase 3,  Renovation,  (which includes code  enhancements,  program
changes,  hardware and software  upgrades,  system  replacements and third party
vendor  monitoring)  and  Phase  4,  Validation,   (which  includes  testing  of
incremental   changes  to  hardware  and  software,   testing  connections  with
third-party vendors and establishing controls to ensure timely completion of all
hardware and software prior to final implementation). Prioritization of the most
critical  applications  has been  addressed,  along with  contract  and  service
agreements.  The  primary  operating  software  for  the  Bank is  obtained  and
maintained by an external  provider of software (the "External  Provider").  The
Bank has maintained ongoing contact with this vendor so that modification of the
software is a top priority and is expected to be  accomplished,  though there is
no  assurance,  by March 31, 1999.  The Bank has  contacted  all other  material
vendors and suppliers  regarding their Year 2000 readiness.  Each of these third
parties has delivered  written assurance to the Bank that they expect to be Year
2000 compliant prior to the Year 2000. Due to the  announcement of the Company's
potential  acquisition by HUBCO,  the Renovation and Valuation  phases  targeted
completion  dates  have  been  changed  to  April  30,  1999  and May 31,  1999,
respectively.  The Implementation phase is to certify that systems are Year 2000
ready,  along with  assurances  that any new  systems are  compliant  on a going
forward basis. The implementation  phase is targeted for completion by September
30, 1999.

         The Bank  expects to incur  consulting  and other  expenses  related to
testing and enhancements to prepare the systems for the Year 2000. The Bank does
not  anticipate  that the related  costs will be material in any single year. In
total,  the  Bank  estimates  that  it's  cost for  compliance  will  amount  to
approximately $100,000 over the two year period from 1998 - 1999. As of December
31, 1998 approximately  $65,000 of these costs have been incurred.  No assurance
can be given that the Year 2000 Compliance  Plan will be completed  successfully
by the Year 2000, in which event the Bank could incur significant  costs. If the
External  Provider is unable to resolve the potential  problem in time, the Bank
would  likely  experience  significant  data  processing  delays,   mistakes  or
failures.  These delays,  mistakes or failures could have a significant  adverse
impact on the financial statements of the Company.

                                       14

<PAGE>


         The Company does not  separately  track the internal costs incurred for
the Year 2000 project  because such costs are  principally  the related  payroll
costs.

         Successful  and timely  completion of the Year 2000 project is based on
management's best estimates  derived from various  assumptions of future events,
which are inherently uncertain, including the progress and results of the Bank's
External  Provider,  testing  plans,  and all  vendors,  suppliers  and customer
readiness.

         Despite the best efforts of management to address this issue,  the vast
number of external entities that have direct and indirect business relationships
with the Company, such as public utilities,  customers, vendors, payment systems
providers and other financial institutions, makes it impossible to assure that a
failure to achieve  compliance by one or more of these  entities  would not have
material adverse impact on the operations of the Company.

Impact of Inflation and Changing Prices

         The  financial  statements  of the Bank and  notes  thereto,  presented
elsewhere  herein,  have been prepared in  accordance  with  generally  accepted
accounting  principles,  which require 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 and due to inflation.  The
impact of inflation is reflected in the increased cost of the Bank's operations.

         Unlike most industrial companies, nearly all the assets and liabilities
of the Bank are monetary.  As a result,  interest rates have a greater impact on
the Bank's  performance  than do the  effects of  general  levels of  inflation.
Interest rates do not necessary move in the same direction or to the same extent
as the price of goods and services.


                                       15

<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS
                   (With Independent Auditor's Report Thereon)

                                December 31, 1998
            --------------------------------------------------------

                                      INDEX
                                      -----

                                                                         Page
                                                                       ---------

Management Responsibility Statement                                        17


Independent Auditors' Report                                               18


Consolidated Statements of Financial Condition
     as of December 31, 1998 and 1997                                      19


Consolidated Statements of Income
     for Each of the Years in the Three Year
     Period Ended December 31, 1998                                        20


Consolidated Statements of Comprehensive Income                        
     for Each of the Years in the Three Year
     Period Ended December 31, 1998                                        21


Consolidated Statements of Changes in Stockholders' Equity
     for Each of the Years in the Three Year Period Ended
     December 31, 1998                                                     22


Consolidated Statements of Cash Flows
     for Each of the Years in the Three Year Period Ended
     December 31, 1998                                                   23 - 24


Notes to Consolidated Financial Statements                               25 - 58



All  schedules  are  omitted  because  the  required  information  is either not
applicable  or not  required  or the  required  information  is  included in the
consolidated financial statements or notes thereto.

                                       16

<PAGE>


[LOGO] LITTLE FALLS
       BANCORP, INC.

       Little Falls Bancorp, Inc.
       86 Main Street
       Little Falls, NJ 07424-1493   
       973-256-6100

       January 22, 1999


                      MANAGEMENT RESPONSIBILITY STATEMENT
                      -----------------------------------

Management of Little Falls Bancorp,  Inc. is responsible  for the preparation of
the  consolidated  financial  statements and all other financial  information in
this report. The consolidated  financial  statements were prepared in accordance
with generally accepted accounting principles applied on a consistent basis. All
financial  information  included  in the  report  agrees  with the  consolidated
financial  statements.  In  preparing  the  consolidated  financial  statements,
management makes informed estimates and judgments,  with consideration  given to
materiality, about the expected results of various events and transactions.

Management  maintains  a system of internal  accounting  control  that  includes
personnel  selection,  appropriate  division  of  responsibilities,  and  formal
procedures  and  policies  consistent  with high  standards  of  accounting  and
administrative  practice.  Consideration has been given to the necessary balance
between the costs of systems of accounting and internal control and the benefits
derived.

Management  reviews and modifies its systems of accounting and internal  control
in light of changes in  conditions  and  operations  as well as in  response  to
recommendations  from the independent  certified public accountants.  Management
believes  the  accounting  and  internal  control  systems  provide   reasonable
assurance that assets are safeguarded and financial information is reliable.

The Board of Directors is responsible for determining  that management  fulfills
its responsibilities in the preparation of the consolidated financial statements
and  the  control  of  operations.  The  Board  appoints  the  certified  public
accountants.  The Board  meets with  management  and the  independent  certified
public  accountants,  approves  the overall  scope of audit work and related fee
arrangements and reviews audit reports and findings.


/s/Leonard G. Romaine                      /s/Richard A. Capone
----------------------------------         -------------------------------------
Leonard G. Romaine                         Richard A. Capone     
President                                  Chief Financial Officer and Treasurer


                                       17

<PAGE>

                          INDEPENDENT AUDITORS' REPORT
                          ----------------------------


To The Board of Directors and Stockholders
Little Falls Bancorp, Inc.
Little Falls, New Jersey



We have audited the  consolidated  statements  of financial  condition of Little
Falls Bancorp,  Inc. (the  "Company") and subsidiary as of December 31, 1998 and
1997 and the related consolidated  statements of income,  comprehensive  income,
changes  in  stockholders'  equity  and cash  flows for each of the years in the
three-year  period  ended  December  31,  1998.  These  consolidated   financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to in the second
preceding  paragraph present fairly, in all material respects,  the consolidated
financial  position of Little Falls Bancorp,  Inc. and subsidiary as of December
31, 1998 and 1997 and the results of their operations and cash flows for each of
the years in the three-year  period ended December 31, 1998, in conformity  with
generally accepted accounting principles.



/s/Radics & Co., LLC
Pine Brook, New Jersey


January 22, 1999,  except for the last two paragraphs of Note 2, as to which the
date is January 26, 1999.


                                       18

<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                 ----------------------------------------------

<TABLE>
<CAPTION>
 
                                                                                                     December 31,
                                                                                         --------------------------------------
Assets                                                                    Notes                1998                1997
------                                                              ------------------   ------------------  ------------------
<S>                                                               <C>                      <C>                 <C>           
Cash and due from banks                                                                     $    5,780,361      $    2,737,709
Interest-bearing deposits in other banks                                                           612,931             550,522
Federal funds sold and securities purchased under
   agreements to resell                                                                         27,000,000           3,500,000
                                                                                            --------------      --------------      


      Total cash and cash equivalents                                   1 and 17                33,393,292           6,788,231
Investment securities available for sale                             1,4, 10 and 17             39,422,602            -
Investment securities held to maturity                               1,4, 10 and 17             40,577,457          57,987,644
Mortgage-backed securities available for sale                        1,5, 10 and 17             13,971,394          13,929,048
Mortgage-backed securities held to maturity                          1,5, 10 and 17             61,373,296          90,957,446
Loans receivable                                                     1,6, 10 and 17            149,061,512         147,033,259
Premises and equipment                                                   1 and 7                 2,601,679           2,617,175
Investment in real estate                                                1 and 8                    81,281             427,317
Foreclosed real estate                                                      1                      297,000             604,219
Interest receivable                                                     1 and 17                 1,961,170           2,079,091
Federal Home Loan Bank of New York stock                                   10                    3,767,600           2,517,600
Excess of cost over assets acquired                                         1                    2,495,443           2,856,230
Other assets                                                               13                    1,613,221             725,234
                                                                                            --------------      --------------      
      Total assets                                                                          $ 350,616,947       $ 328,522,494
                                                                                            =============       =============   

Liabilities and stockholders' equity
------------------------------------
Liabilities
-----------
Deposits                                                                9 and 17            $  243,048,053      $  230,132,675
Borrowed money                                                          10 and 17               68,500,000          58,719,500
Accounts payable and other liabilities                                  12 and 13                1,623,438           1,375,658
                                                                                            --------------      --------------      
      Total liabilities                                                                        313,171,491         290,227,833
                                                                                            --------------      --------------      
Commitments                                                             16 and 17                 -                   -

Stockholders' equity                                                1,2,3,11,12 and 13
--------------------
Preferred stock $.10 par value, 5,000,000 shares
 authorized; none issued and outstanding                                                          -                   -
Common stock $.10 par value, 10,000,000 shares
 authorized; 3,041,750 shares issued; shares outstanding
 2,477,525 (1998) and 2,607,921 (1997)                                                             304,175             304,175
Additional paid in capital                                                                      29,204,431          29,067,633
Retained earnings - substantially restricted                                                    19,517,521          18,275,517
Common stock acquired by employee
 stock ownership plan ("ESOP")                                                                  (1,936,741)         (2,106,432)
Unearned restricted Management Stock
 Bonus Plan ("MSBP") stock, at cost                                                               (855,791)         (1,329,167)
Treasury stock, at cost; 564,225 shares (1998)
 and 433,829 shares (1997)                                                                      (8,191,308)         (5,632,286)
Accumulated other comprehensive income                                                            (596,831)           (284,779)
                                                                                            --------------      --------------      
      Total stockholders' equity                                                                37,445,456          38,294,661
                                                                                            --------------      --------------      
      Total liabilities and stockholders' equity                                            $  350,616,947      $  328,522,494
                                                                                            ==============      ==============

</TABLE>

See notes to consolidated financial statements.

                                       19
                                                                              
<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------

<TABLE>
<CAPTION>


                                                                               Year Ended December 31,
                                                                -----------------------------------------------------
                                                   Notes            1998                1997                 1996
                                                 --------       -----------          -----------          -----------
<S>                                             <C>           <C>                  <C>                  <C>           
Interest income:
     Loans receivable                                5          $11,380,802          $10,081,393          $ 8,255,040   
     Mortgage-backed securities                                   5,481,359            7,117,907            7,972,069
     Investment securities and other                                                                    
       interest-earning assets                                    5,884,145            3,864,885            2,549,230
                                                                -----------          -----------          -----------
                                                                                                        
          Total interest income                                  22,746,306           21,064,185           18,776,339
                                                                -----------          -----------          -----------
Interest expense:                                                                                       
     Deposits                                        8           10,504,020           10,327,779           11,082,926
     Borrowings                                                   4,190,912            2,592,479              175,324
                                                                -----------          -----------          -----------
                                                                                                      
          Total interest expense                                 14,694,932           12,920,258           11,258,250
                                                                -----------          -----------          -----------
                                                                                                        
Net interest income                                               8,051,374            8,143,927            7,518,089
Provision for loan losses                            5              161,132              240,000              182,900
                                                                -----------          -----------          -----------
Net interest income after provision for                                                                 
  loan losses                                                     7,890,242            7,903,927            7,335,189
                                                                -----------          -----------          -----------
Non-interest income:                                                                                    
     Service fees                                                   228,722              147,818              169,678
     Other                                       4 and 5            174,774              279,877              238,893
                                                                -----------          -----------          -----------

          Total non-interest income                                 403,496              427,695              408,571
                                                                -----------          -----------          -----------
Non-interest expenses:                                                                                  
     Compensation and employee benefits             12            2,679,782            2,622,159            2,608,587
     Occupancy, net                                  6              290,877              295,305              334,406
     Equipment                                       6              432,893              430,366              401,510
     Deposit insurance premiums                     15              117,613              126,987            1,596,307
     Loss on foreclosed real estate                                  44,017               26,900               88,981
     Amortization of deposit premium                 1              360,787              360,787              360,783
     Other                                          12            1,776,203            1,540,603            1,356,853
                                                                -----------          -----------          -----------
                                                                                                        
          Total non-interest expenses                             5,702,172            5,403,107            6,747,427
                                                                -----------          -----------          -----------
                                                                                                        
Income before provision for income taxes                          2,591,566            2,928,515              996,333
Provision for income taxes                          13              843,850            1,072,400              385,444
                                                                -----------          -----------          -----------
                                                                                                        
Net income                                                      $ 1,747,716          $ 1,856,115          $   610,889    
                                                                ===========          ===========          ===========
Net income per common share:                     1 and 14                                                  
     Basic                                                      $      0.79          $      0.78          $      0.22
                                                                ===========          ===========          ===========
                                                                                                        
     Diluted                                                    $      0.76          $      0.75          $      0.22
                                                                ===========          ===========          ===========
</TABLE>

See notes to consolidated financial statements.

                                       20
<PAGE>



                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                 -----------------------------------------------

<TABLE>
<CAPTION>

                                                                                                Year Ended December 31,
                                                                                    ------------------------------------------------
                                                                                        1998               1997             1996
                                                                                    ------------       ------------      ----------
<S>                                                                                <C>                <C>                <C>      
Net income                                                                          $ 1,747,716        $ 1,856,115        $ 610,889
                                                                                    -----------        -----------        ---------

Other comprehensive income, net of income taxes:
     Unrealized holding gains on securities available for sale,
      net of income taxes of $134,235 and $39,938 in 1998 and 1997, respectively       (217,386)           (71,062)            -

     Reclassification adjustment for realized gains on securities
      available for sale, net of income taxes of $16,754 in 1998                        (29,810)              -                -
                                                                                    -----------        -----------        ---------

                                                                                       (247,196)           (71,062)            -

     Minimum pension liability adjustment, net of income taxes
      of $36,450, $72,590 and $(10,964), respectively                                   (64,856)          (129,162)          19,508
                                                                                    -----------        -----------        ---------

Other comprehensive income                                                             (312,052)          (200,224)          19,508
                                                                                    -----------        -----------        ---------
Comprehensive income                                                                $ 1,435,664        $ 1,655,891        $ 630,397
                                                                                    ===========        ===========        =========

</TABLE>

See notes to consolidated financial statements.

                                       21

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
           ----------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                              Retained           Common         
                                                                             Additional       Earnings -          Stock          
                                                           Common             Paid in       Substantially        Acquired        
                                                            Stock             Capital        Restricted          By ESOP         
                                                          ----------       ------------     -------------     --------------
<S>                                                       <C>              <C>              <C>              <C>           
Balance - December 31, 1995                                $     -          $     -          $ 16,327,286      $        -        
Net income                                                       -                -               610,889               -       
Net proceeds from
 issuance of common stock                                    304,175         28,959,347              -                  -       
Acquisition of common stock by ESOP                              -                -                  -            (2,433,400)   
ESOP shares committed to be released                             -               15,452              -               162,227    
Purchase of 296,570  shares of treasury stock                    -                -                  -                  -      
Decrease in minimum pension                                                                                  
 liability, net of deferred income taxes                         -                -                  -                  -      
Dividends paid                                                   -                -              (136,119)              -      
                                                           ---------        -----------      ------------      ------------- 
Balance - December 31, 1996                                  304,175         28,974,799        16,802,056         (2,271,173)   
Net income                                                       -                -             1,856,115               -      
Acquisition of common stock by MSBP                              -                -                  -                  -      
ESOP shares committed to be released                             -               92,834              -               164,741    
Amortization of MSBP stock                                       -                -                  -                  -      
Purchase of 137,259 shares of treasury stock                     -                -                  -                  -      
Unrealized (loss) on securities available for sale, net          -                -                  -                  -      
(Increase) in minimum pension
 liability, net of deferred income taxes                         -                -                  -                  -      
Dividends paid                                                   -                -              (382,654)              -      
                                                           ---------        -----------      ------------      ------------- 
Balance - December 31, 1997                                  304,175         29,067,633        18,275,517         (2,106,432)   
Net income                                                       -                -             1,747,716               -     
 ended December 31, 1998
ESOP shares committed to be released                             -              136,798              -               169,691    
Amortization of MSBP stock                                       -                -                  -                  -     
Purchase of 130,396 shares of treasury stock                     -                -                  -                  -     
Unrealized (loss) on securities available for sale, net          -                -                  -                  -     
(Increase) in minimum pension
 liability, net of deferred income taxes                         -                -                  -                  -     
Dividends paid                                                   -                -              (505,712)              -     
                                                           ---------        -----------      ------------      ------------- 
Balance - December 31, 1998                                $ 304,175        $29,204,431      $ 19,517,521      $  (1,936,741) 
                                                           =========        ===========      ============      ============= 
</TABLE>
                                       22
-----------------2nd half of table follows--------------------------------------


<PAGE>

-----------------2nd half of table below----------------------------------------
<TABLE>
<CAPTION>


                                                           Unearned                          Accumulated
                                                          Restricted                            Other
                                                             MSBP            Treasury       Comprehensive
                                                             Stock             Stock            Income              Total
                                                          ----------       ------------     -------------      -------------
<S>                                                       <C>              <C>              <C>              <C>           
Balance - December 31, 1995                                $     -          $     -          $   (104,063)     $  16,223,223
Net income                                                       -                -                  -               610,889
Net proceeds from issuance of common stock
 issuance of common stock                                        -                -                  -            29,263,522
Acquisition of common stock by ESOP                              -                -                  -            (2,433,400)
ESOP shares committed to be released                             -                -                  -               177,679
Purchase of 296,570  shares of treasury stock                    -           (3,277,004)             -            (3,277,004)
Decrease in minimum pension                            
 liability, net of deferred income taxes                         -                  -              19,508             19,508
Dividends paid                                                   -                  -                -              (136,119)
                                                           ---------        -----------      ------------      ------------- 
Balance - December 31, 1996                                      -           (3,277,004)          (84,555)        40,448,298
Net income                                                       -                 -                 -             1,856,115
Acquisition of common stock by MSBP                       (1,600,268)              -                 -            (1,600,268)
ESOP shares committed to be released                             -                 -                 -               257,575
Amortization of MSBP stock                                   271,101               -                 -               271,101
Purchase of 137,259 shares of treasury stock                     -           (2,355,282)             -            (2,355,282)
Unrealized (loss) on securities available for sale, net          -                -               (71,062)           (71,062)
(Increase) in minimum pension
 liability, net of deferred income taxes                         -                -              (129,162)          (129,162)
Dividends paid                                                   -                -                  -              (382,654)
                                                           ---------        -----------      ------------      ------------- 
Balance - December 31, 1997                               (1,329,167)        (5,632,286)         (284,779)        38,294,661
Net income ended December 31, 1998                               -                -                  -             1,747,716
ESOP shares committed to be released                             -                -                  -               306,489
Amortization of MSBP stock                                   473,376              -                  -               473,376
Purchase of 130,396 shares of treasury stock                     -           (2,559,022)             -            (2,559,022)
Unrealized (loss) on securities available for sale, net          -                -              (247,196)          (247,196)
(Increase) in minimum pension
 liability, net of deferred income taxes                         -                -               (64,856)           (64,856)
Dividends paid                                                   -                -                  -              (505,712)
                                                           ---------        -----------      ------------      ------------- 
Balance - December 31, 1998                                $(855,791)       $(8,191,308)     $   (596,831)    $   37,445,456
                                                           =========        ===========      ============      ============= 
</TABLE>
See notes to consolidated financial statements.   

                                       22

<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------

<TABLE>
<CAPTION>

                                                                                              Year Ended December 31,
                                                                                --------------------------------------------------
                                                                                   1998               1997                1996
                                                                                ------------      -------------        -----------
<S>                                                                            <C>                <C>                  <C>      
Cash flows from operating activities:
   Net income                                                                   $ 1,747,716        $ 1,856,115          $ 610,889
   Adjustments to reconcile net income to
    net cash provided by operating activities:
       Depreciation                                                                 131,395            149,187            153,207
       Provision for loan and real estate owned losses                              180,000            367,356            182,900
       Amortization of intangibles                                                  360,787            360,787            360,783
       Amortization of deferred fees, premiums and discounts, net                   352,432            117,732             40,903
       Gain on sales of investment securities available for sale                    (16,654)              -                  -
       Gain on sales of mortgage-backed seucrities available for sale               (29,910)              -                  -
       Gain on sale of branch                                                          -                  -              (138,320)
       Gain on sale of investment in real estate                                    (37,911)          (106,318)              -
       Loss (gain) on sale of foreclosed real estate                                 19,875            (11,086)            28,418
       Deferred income taxes                                                       (148,250)           (35,527)          (243,005)
       Decrease (increase) in interest receivable                                   117,921           (343,800)           (17,942)
       (Increase) decrease in other assets                                         (566,063)           366,147             (2,447)
       (Decrease) increase in interest payable                                      (54,160)            92,789            180,501
       Increase in accounts payable and other liabilities                           127,036             55,364            256,012
       ESOP shares committed to be released                                         306,489            257,575            177,679
       Amortization of MSBP cost                                                    501,237            271,101               -
                                                                                -----------        -----------          ---------

         Net cash provided by operating activities                                2,991,940          3,397,422          1,589,578
                                                                                -----------        -----------          ---------

Cash flows from investing activities:
   Purchases of:
       Investment securities available for sale                                 (45,929,794)              -                  -
       Investment securiites held to maturity                                   (37,583,247)       (15,977,500)       (32,347,937)
       Mortgage-backed seucriites available for sale                            (15,035,553)       (14,048,125)              -
       Mortgage-backed securities held to maturity                                     -                  -           (16,073,205)
       Loans                                                                           -           (15,096,510)              -
       Premises and equipment                                                      (112,479)          (102,193)          (159,246)
       Federal Home Loan Bank of New York stock                                  (1,250,000)          (441,900)          (680,500)
   Proceeds from maturities of and repayments on:
       Investment securities available for sale                                   5,000,000               -                  -
       Investment securities held to maturity                                    52,000,000          9,342,000         11,000,000
       Mortgage-backed securities available for sale                              6,615,242              -                   -
       Mortgage-backed securities held to maturity                               29,375,738         21,444,380         21,500,221
   Proceeds from sales of:
       Investment securities available for sale                                   1,028,100               -                  -
       Investment securities held to maturity                                     3,000,000               -                  -
       Mortgage-backed securities available for sale                              8,352,991               -                  -
       Investment in real estate                                                    380,527             42,125               -
       Foreclosed real estate                                                       268,476            394,486            849,629
   Net (increase) in loans receivable                                            (2,187,526)       (15,023,967)       (21,265,657)
                                                                                -----------        -----------          ---------
 
         Net cash provided by (used in) investing activities                      3,922,475        (29,467,204)       (37,176,695)
                                                                                -----------        -----------          ---------
</TABLE>

See notes to consolidated financial statements.


                                       23


<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENT OF CASH FLOWS
                      ------------------------------------

<TABLE>
<CAPTION>

                                                                                      Year Ended December 31,
                                                                        ---------------------------------------------------
                                                                             1998               1997               1996
                                                                        -------------      -------------      -------------
<S>                                                                    <C>                <C>               <C>         
Cash flows from financing activities:
     Net increase (decrease) in deposits                                 $12,974,880        $ 1,814,156       $(7,464,225)
     Decrease in advances from borrowers for taxes                              -                  -             (701,773)
     (Refunds of) proceeds from stock subscriptions                             -                  -           19,706,653)
     Net change in short-term borrowings                                 (40,219,500)        10,096,000        24,623,500
     Proceeds of long-term borrowings                                     50,000,000         15,000,000         9,000,000
     Costs of issuance of common stock                                          -                  -             (731,348)
     Dividends paid                                                         (505,712)          (382,654)         (136,119)
     Cash paid in connection with branch sales                                  -                  -           (9,064,385)
     Cost of MSBP shares                                                        -            (1,688,171)             -
     Treasury stock acquired                                              (2,559,022)        (2,355,282)       (3,277,004)
                                                                         -----------        -----------       -----------
           Net cash provided by (used in) financing activities            19,690,646         22,484,049        (7,458,007)
                                                                         -----------        -----------       -----------
Increase (decrease) in cash and cash equivalents                          26,605,061         (3,585,733)      (43,045,124)
Cash and cash equivalents - beginning                                      6,788,231         10,373,964        53,419,088
                                                                         -----------        -----------       -----------
Cash and cash equivalents - ending                                       $33,393,292        $ 6,788,231       $10,373,964
                                                                         ===========        ===========       ===========

Supplemental disclosures:
     Cash paid during the period for:
         Interest                                                        $14,749,082        $12,827,469       $11,077,749
                                                                         ===========        ===========       ===========
         Income taxes, net of refunds                                    $ 1,305,745        $   957,808       $   410,701
                                                                         ===========        ===========       ===========
     Unrealized loss on securities available
      for sale, net of deferred income taxes                             $   247,196        $    71,062       $      -
                                                                         ===========        ===========       ===========
     Loans to facilitate sales of investment in real estate              $      -           $   215,000       $      -
                                                                         ===========        ===========       ===========
     Loans receivable transferred to foreclosed real estate              $      -           $   157,818       $   406,379
                                                                         ===========        ===========       ===========
     Loans to facilitate sales of foreclosed real estate                 $      -           $      -          $   172,000
                                                                         ===========        ===========       ===========
     Increase (decrease) in minimum
      pension liability, net of deferred income taxes                    $    64,856        $   129,162       $   (19,508)
                                                                         ===========        ===========       ===========
     Property transferred to investment in real estate                   $      -           $     9,629       $   145,478
                                                                         ===========        ===========       ===========
     Issuance of common stock:
         Deposits used for stock purchases                               $      -           $      -          $ 2,859,458
         Stock subscriptions used for stock purchases                           -                  -           25,124,642
         Deferred costs                                                         -                  -             (422,630)
                                                                         -----------        -----------       -----------
                                                                         $      -           $      -          $27,561,470
     Reduction in MSBP liability in connection with purchase 
         of MSBP shares                                                  $      -           $   (87,903)      $      -
                                                                         ===========        ===========       ===========
     Liabilities assigned in connection with branch sales:
         Deposits                                                        $      -           $      -          $ 9,221,324
                                                                         ===========        ===========       ===========
     Assets sold in connection with branch sales:
         Loans                                                           $      -           $      -          $    18,619
                                                                         ===========        ===========       ===========

</TABLE>

See notes to consolidated financial statements.

                                       24
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------

         Basis of financial statement presentation
         -----------------------------------------

         The  consolidated  financial  statements,  which have been  prepared in
         conformity with generally accepted accounting  principles,  include the
         accounts of Little Falls Bancorp,  Inc. (the  "Company") and its wholly
         owned  subsidiary,  Little  Falls Bank (the  "Bank").  All  significant
         intercompany   accounts  and  transactions   have  been  eliminated  in
         consolidation.  In preparing  the  consolidated  financial  statements,
         management is required to make  estimates and  assumptions  that affect
         the reported  amount of assets and  liabilities  as of the dates of the
         consolidated   statements  of  financial  condition  and  revenues  and
         expenses  for the  periods  then ended.  Actual  results  could  differ
         significantly  from  those  estimates.   Material  estimates  that  are
         particularly   susceptible  to   significant   changes  relate  to  the
         determination  of the  allowance  for loan  losses,  the  valuation  of
         foreclosed real estate,  the assessment of prepayment  risks associated
         with mortgage-backed  securities and the determination of the amount of
         deferred  tax  assets  that are more  likely  than not to be  realized.
         Management  believes  that the  allowance  for loan losses is adequate,
         foreclosed  real  estate  is  appropriately  valued,  prepayment  risks
         associated with mortgage-backed  securities are properly recognized and
         all  deferred  tax assets are more  likely  than not to be  recognized.
         While  management  uses available  information  to recognize  losses on
         loans and  foreclosed  real estate,  future  additions to allowance for
         loan  losses or further  writedowns  of  foreclosed  real estate may be
         necessary  based on changes in economic  conditions in the market area.
         Additionally, assessments of prepayment  risks   related   to mortgage-
         backed securities are based upon current market  conditions,  which are
         subject to frequent  change.  Finally,  the assessment of the amount of
         deferred  tax assets  more  likely  than not to be realized is based on
         projected  future  taxable  income,   which  is  subject  to  continual
         revisions for updated information.

         In addition,  various regulatory agencies, as an integral part of their
         examination process,  periodically review the Bank's allowance for loan
         losses and foreclosed  real estate.  Such agencies may require the Bank
         to recognize  additions to the  allowance or  additional  writedowns on
         real estate based on their  judgments  about  information  available to
         them at the time of their examination.

         Comprehensive income
         --------------------
 
         Effective  January 1, 1998, the Company and the Bank adopted  Statement
         of Financial  Accounting  Standards  ("Statement") No. 130, " Reporting
         Comprehensive  Income".  Statement  No. 130 requires  the  reporting of
         comprehensive  income  in  addition  to  net  income  from  operations.
         Comprehensive   income  is  a  more   inclusive   financial   reporting
         methodology that includes  disclosure of certain financial  information
         that  historically  has not been  recognized in the  calculation of net
         income.  As required,  the  provisions  of Statement  No. 130 have been
         retroactively  applied to previously reported periods.  The application
         of  Statement  No.  130  had  no  material   effect  on  the  Company's
         consolidated financial condition or operations.

         At December 31, 1998 and 1997,  accumulated other comprehensive  income
         includes  unrealized  losses on securities  available for sale,  net of
         deferred income taxes, of $(318,258) and $(71,062),  respectively,  and
         additional minimum pension liability,  net of deferred income taxes, of
         $(213,717) and $(278,573), respectively.

                                       25

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-----------------------------------------------

         Cash and cash equivalents
         -------------------------

         Cash and cash  equivalents  include  cash and  amounts  due from banks,
         federal funds sold and interest-bearing  deposits in other banks having
         original maturities of three months or less.  Generally,  federal funds
         sold are sold for one day periods.

         Investment and mortgage-backed securities
         -----------------------------------------

         Debt  securities for which there is the positive  intent and ability to
         hold to maturity are  classified  as  held-to-maturity  securities  and
         reported at amortized cost. Debt and equity  securities that are bought
         and held  principally  for the purpose of selling them in the near term
         are classified as trading  securities and reported at fair value,  with
         unrealized  holding  gains and losses  included in  earnings.  Debt and
         equity  securities not classified as trading  securities nor as held-to
         maturity securities are classified as available for sale securities and
         reported at fair value, with unrealized holding gains or losses, net of
         deferred  income taxes,  included in  accumulated  other  comprehensive
         income.

         Premiums are amortized  and  discounts are accreted to interest  income
         using the interest  method.  Gains or losses on the sale of  securities
         are based on specifically  identifiable cost and are accounted for on a
         trade date basis.

         Loans receivable
         ----------------

         Loans  receivable  are stated at unpaid  principal  balances,  less the
         allowance  for loan losses and net deferred loan  origination  fees and
         costs and discounts.

         Loan fees and certain direct loan origination  costs are deferred,  and
         the net fee or cost  accreted or  amortized as an  adjustment  of yield
         using the  interest  method over the  contractual  lives of the related
         loans.  Unearned  interest on  consumer  loans is  recognized  over the
         contractual  lives of the loans using a method which  approximates  the
         interest method.

         Uncollectible  interest  on loans  that are  contractually  past due is
         charged  off, or an  allowance  is  established  based on  management's
         periodic  evaluation.  The  allowance  is  established  by a charge  to
         interest income equal to all interest previously accrued, and income is
         subsequently  recognized  only to the  extent  that cash  payments  are
         received  until, in management's  judgment,  the borrower's  ability to
         make periodic  interest and  principal  payments is  reestablished,  in
         which case the loan is returned to accrual status.

         Allowance for loans losses
         --------------------------

         An  allowance  for loan  losses  is  maintained  at a level  considered
         adequate  to absorb  future loan  losses.  Management  of the Bank,  in
         determining the allowance for loan losses, considers the risks inherent
         in its loan  portfolio and changes in the nature and volume of its loan
         activities,  along with the general  economic  and real  estate  market
         conditions.


                                       26
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-----------------------------------------------

         Allowance for loan losses (Cont'd.)
         -------------------------

         The Bank utilizes a two tier approach:  (1)  identification of impaired
         loans and the  establishment of specific loss allowances on such loans;
         and (2) establishment of general valuation  allowances on the remainder
         of its loan  portfolio.  The Bank  maintains a loan review system which
         allows  for a  periodic  review  of its loan  portfolio  and the  early
         identification  of  potential  impaired  loans.  Such system takes into
         consideration,  among other things,  delinquency status, size of loans,
         types of collateral and financial condition of the borrowers.  Specific
         loan loss allowances are  established  for identified  loans based on a
         review  of  such  information   and/or  appraisals  of  the  underlying
         collateral.  General loan loss  allowances are based upon a combination
         of factors including , but not limited to, actual loan loss experience,
         composition  of the loan  portfolio,  current  economic  conditions and
         management's  judgment.  Although  management  believes  that  adequate
         specific  and general  loan loss  allowances  are  established,  actual
         losses are dependent upon future events and, as such, further additions
         to the level of the loan loss allowance may be necessary.

         Impaired  loans are  measured  based on the  present  value of expected
         future cash flows discounted at the loan's effective  interest rate or,
         as a practical expedient,  at the loan's observable market price or the
         fair value of the  collateral  if the loan is collateral  dependent.  A
         loan evaluated for  impairment is deemed to be impaired when,  based on
         current  information  and events,  it is probable that the Bank will be
         unable to collect all amounts due according to the contractual terms of
         the loan agreement. An insignificant payment delay, which is defined by
         the Bank as up to ninety days,  will not cause a loan to be  classified
         as impaired. A loan is not impaired during a period of delay in payment
         if the Bank  expects to collect all  amounts  due,  including  interest
         accrued at the contractual interest rate for the period of delay. Thus,
         a demand loan or other loan with no stated  maturity is not impaired if
         the Bank expects to collect all amounts due, including interest accrued
         at the  contractual  interest  rate,  during  the  period  the  loan is
         outstanding.   All  loans   identified   as  impaired   are   evaluated
         independently.  The Bank does not aggregate  such loans for  evaluation
         purposes.  Payments  received  on impaired  loans are applied  first to
         interest receivable and then to principal.

         Premises and equipment
         ----------------------

         Land  is  carried  at  cost.  Buildings  and  improvements,   leasehold
         improvements and furniture,  fixtures and equipment are carried at cost
         less  accumulated  depreciation  and  amortization.   Depreciation  and
         amortization  are computed on a straight-line  basis over the lesser of
         the estimated useful lives of the assets or, if applicable, the term of
         lease.  Significant  renovations  and additions are  capitalized.  When
         assets  are  retired or  otherwise  disposed  of, the cost and  related
         accumulated   depreciation  are  removed  from  the  accounts  and  any
         resulting  gain or loss is  reflected  in  operations  for the  period.
         Maintenance  and  repairs are  charged to expense as  incurred.  Rental
         income is netted against occupancy expense.

         Investment in real estate
         -------------------------

         Investments  in real  estate  are  carried  at the  lower of cost  less
         accumulated depreciation or fair value less estimated disposal costs.

                                       27

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
------------------------------------------------

         Foreclosed real estate
         ----------------------

         Real  estate  properties   acquired  through,   or  in  lieu  of,  loan
         foreclosure  are initially  recorded at the lower of cost or fair value
         at the date of  foreclosure.  Subsequent  valuations  are  periodically
         performed  and an  allowance  for  losses  established  by a charge  to
         operations if the carrying  value of a property  exceeds its fair value
         less  estimated  selling  costs.  Costs  relating  to  development  and
         improvement of properties are capitalized,  whereas income and expenses
         relating to the  operating  and holding of  properties  are recorded in
         operations as earned or incurred.  Gains and losses from sales of these
         properties are recognized as they occur.

         Excess of cost over assets acquired
         -----------------------------------

         The cost in excess of the fair value of net assets acquired through the
         acquisition of certain assets and assumption of certain  liabilities of
         branch offices is being  amortized to expense over a ten year period by
         use of the straight-line method.

         Income taxes
         ------------

         The Company and its subsidiary  file a consolidated  federal income tax
         return  and  separate  state  income  tax  returns.  Income  taxes  are
         allocated to the Company and its subsidiary based upon the contribution
         of their respective income or loss to the consolidated return.  Federal
         and State  income  taxes have been  provided  on the basis of  reported
         income.  The amounts  reflected  on the tax  returns  differ from these
         provisions due principally to temporary differences in the reporting of
         certain  items for  financial  reporting  and tax  reporting  purposes.
         Deferred  income tax expense or benefit is  determined  by  recognizing
         deferred  tax  assets  and  liabilities  for the  estimated  future tax
         consequences   attributable  to  temporary   differences   between  the
         financial statement carrying amounts of existing assets and liabilities
         and their respective tax bases.

         Deferred  tax assets and  liabilities  are measured  using  enacted tax
         rates  expected to apply to taxable  income in the years in which those
         temporary  difference  are  expected to be  recovered  or settled.  The
         realization  of  deferred  tax  assets  is  assessed  and  a  valuation
         allowance provided, when necessary, for that portion of the asset which
         more likely than not will not be realized.  Management believes,  based
         upon current facts,  that it is more likely than not that there will be
         sufficient  taxable  income in future years to realize all deferred tax
         assets.  The effect on deferred tax assets and  liabilities of a change
         in tax rates is  recognized in earnings in the period that includes the
         enactment date.

         Accounting for stock-based compensation
         ---------------------------------------

         In October 1995,  the Financial  Accounting  Standards  Board  ("FASB")
         issued  Statement No. 123 "Accounting  for  Stock-Based  Compensation".
         Statement  No.  123  establishes  financial  accounting  and  reporting
         standards  for  stock-based  employees  compensation  plans.  While all
         entities  are  encouraged  to adopt the "fair  value  based  method" of
         accounting for employee  stock  compensation  plans,  Statement No. 123
         also allows an entity to continue  to measure  compensation  cost under
         such plans  using the  "intrinsic  value  based  method"  specified  in
         Accounting Principles Board Opinion No. 25.

                                       28
<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-----------------------------------------------

         Accounting for stock-based compensation (Cont'd.)
         ---------------------------------------

         Under the fair value based method, compensation cost is measured at the
         grant date based on the value of the award and is  recognized  over the
         service period,  usually the vesting  period.  Fair value is determined
         using an option  pricing  model that takes into account the stock price
         at the grant date, the exercise price, the expected life of the option,
         the  volatility of the underlying  stock and the expected  dividends on
         it,  and the risk  free  interest  rate over the  expected  life of the
         option.  Under the intrinsic value based method,  compensation  cost is
         the  excess,  if any,  of the quoted  market  price of the stock at the
         grant date or other  measurement  date over the amount an employee must
         pay to acquire the stock.

         The  accounting  requirements  of Statement  No. 123 are  effective for
         transactions entered into in fiscal years that begin after December 15,
         1995.  The Company has elected to account for  compensation  cost under
         the intrinsic  value based method.  Included in Note 12 to consolidated
         financial   statements  are  the  pro  forma  disclosures  required  by
         Statement No. 123.

         Net income per common share
         ---------------------------

         Basic net income per common share is  calculated by dividing net income
         by the weighted  average number of shares of common stock  outstanding,
         adjusted  for the  unallocated  portion  of shares  held by the ESOP in
         accordance with the American Institute of Certified Public Accountants'
         ("AICPA")  Statement of Position  ("SOP") 93-6.  Diluted net income per
         share is calculated by adjusting the weighted  average number of shares
         of common  stock  outstanding  to include the effect of stock  options,
         stock-based  compensation  grants and other  securities,  if  dilutive,
         using the treasury stock method. See Note 14 to consolidated  financial
         statements for a reconciliation of such amounts.

         Per  share  amounts  for the year  ended  December  31,  1996 have been
         calculated based on the net income for the entire year. The calculation
         of the weighted  average number of common shares  outstanding  from the
         date of conversion to stock form (January 5, 1996) through December 31,
         1996,  assumes such shares were  outstanding for the entire year (as if
         the conversion had taken place on January 1, 1996).

         Nature of operations and interest rate risk
         -------------------------------------------

         The  Company  is a holding  company  whose  principal  activity  is the
         ownership and management of the Bank.  The Bank is principally  engaged
         in the  business of  attracting  deposits  from the  customers  located
         primarily in northern New Jersey and using these  deposits,  along with
         borrowings  and other  funds,  to make  loans  secured  by real  estate
         located   primarily   in   northern   New   Jersey   and  to   purchase
         mortgage-backed   and   investment   securities.   The   potential  for
         interest-rate risk exists as a result of the generally shorter duration
         of the Bank's interest-sensitive  liabilities compared to the generally
         longer duration of its interest-sensitive  assets. In a rising interest
         rate environment,  liabilities will reprice faster than assets, thereby
         reducing the market value of long-term  assets and net interest income.
         For this reason,  management  regularly monitors the maturity structure
         of the Bank's interest-earning assets and interest-bearing  liabilities
         in order to  measure  its level of  interest-rate  risk and to plan for
         future volatility.

                                       29

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Cont'd.)
-----------------------------------------------

         Concentration of risk
         ---------------------

         The Bank's  lending and real estate  activity is  concentrated  in real
         estate  and loans  secured by real  estate  located in the State of New
         Jersey. In general, the Bank's loan portfolio  performance is dependent
         upon local economic conditions.

         Reclassification
         ----------------

         Certain amounts for the year ended December 31, 1997 and 1996 have been
         reclassified to conform to the current year's presentation.

2.   REORGANIZATION AND STOCKHOLDERS' EQUITY
--------------------------------------------

On January 5, 1996, the Bank converted from a federally chartered mutual savings
bank to a federally chartered stock savings bank, with the concurrent  formation
of a holding  company.  The holding company,  Little Falls Bancorp,  Inc., a New
Jersey corporation  organized in August 1995,  acquired all of the capital stock
of the Bank upon the  completion  of the  conversion.  On January  5, 1996,  the
conversion and initial public stock offering were completed with the issuance of
3,041,750  shares of the Company's  common stock,  par value $.10 per share, for
net proceeds,  after  conversion  costs and the effect of the shares acquired by
the ESOP, of $26,830,022. Concurrently with the issuance of the Company's common
stock, the Company  utilized  $14,671,962 of the net proceeds to purchase all of
the outstanding capital stock of the Bank.

At the time of the conversion,  the Bank, in order to grant priority to eligible
depositors in the event of future liquidation, established a liquidation account
of $15,488,000, an amount equal to its total net worth as of September 30, 1995,
the date of the latest statement of financial  condition  appearing in the final
prospectus.  The  liquidation  account  will be  maintained  for the  benefit of
eligible  account  holders who continue to maintain  their  accounts at the Bank
after the conversion.  The liquidation  account will be reduced  annually to the
extent that eligible  account  holders have reduced their  qualifying  deposits.
Subsequent increases in the deposit account will not restore an eligible account
holder's  interest  in the  liquidation  account.  In the  unlikely  event  of a
complete liquidation, each eligible account holder will be entitled to receive a
distribution  from the liquidation  account in an amount  proportionate to their
current adjusted qualifying balances.  The balance of the liquidation account on
December 31, 1998 has not been determined.

The ability of the Company to pay dividends to  stockholders  is dependent  upon
the receipt of income from the subsidiary  Bank. The Bank may not declare or pay
any dividend on or  repurchase  any of its capital  stock if the effect  thereof
would cause its net worth to be reduced below:  (1) the amount  required for the
liquidation  account,  or (2) the net worth  requirements  contained  in section
563.13 (b) of the rules and regulation of the Office of Thrift  Supervision (the
"OTS").

During the years ended December 31, 1998,  1997 and 1996,  the Company  approved
plans to repurchase 130,396,  137,259 and 296,570 shares,  respectively,  of its
common stock  outstanding,  up to five percent (5%) of the shares outstanding at
any single instance.  In accordance  therewith,  during the years ended December
31, 1998, 1997 and 1996, 130,396, 137,259 and 296,570 shares,  respectively,  at
an aggregate cost of $2,599,022, $2,355,282, and $3,277,004,  respectively, were
purchased in the open market.

                                       30

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

3.    PENDING MERGER
--------------------

On January 26, 1999,  the Company  signed a definitive  merger  agreement  under
which HUBCO, Inc.  ("HUBCO") will acquire the Company in a combination stock and
cash transaction.  Under the terms of the agreement,  Company  shareholders will
receive  either  0.65  shares  of  HUBCO  common  stock or  $20.64  in cash or a
combination of shares of HUBCO common stock and cash. The shares of HUBCO common
stock offered in this  transaction  will be in an amount equal to  approximately
51% of the outstanding  shares of the Company  multiplied by the exchange ratio.
The  remaining 49% of the  outstanding  shares will be purchased for cash at the
fixed per share  price of $20.64.  The  exchange  ratio of 0.65  shares of HUBCO
common  stock is based upon  HUBCO's  median  common  stock price being  between
$34.43  and  $29.23  during  a  pre-determined  pricing  period.  If the  median
pre-closing  price of HUBCO common stock is $29.00 or less,  the exchange  ratio
shall be increased in increments to a maximum  exchange  ratio of 0.70 effective
if the HUBCO  median  common  stock  price is $27.14  or  lower.  If the  median
pre-closing  price of HUBCO common stock is $34.50 or more,  the exchange  ratio
will be decreased in increments to a minimum exchange ratio of 0.60 at $37.50.

In connection with the execution of the merger agreement, the Company has issued
an option to HUBCO, which would enable HUBCO to purchase up to 493,000 shares of
Company common stock under certain  circumstances.  As part of the  transaction,
the Company  will be merged into Hudson  United  Bank.  The merger is subject to
approval,  by Federal and New Jersey  bank  regulatory  authorities  and Company
shareholders, as well as other customary conditions. The transaction is expected
to close in the second quarter of 1999.

4.   INVESTMENT SECURITIES
--------------------------

Available for sale:
<TABLE>
<CAPTION>
                                                                December 31, 1998                         
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Carrying
                                                  Cost          Gains        Losses        Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
U.S. Government (including agencies):
      Due after five years through ten years   $ 7,002,442   $    10,370   $     4,600   $ 7,008,212
      Due after ten years                        5,751,429        81,696          --       5,833,125
                                               -----------   -----------   -----------
                                                12,753,871        92,066         4,600    12,841,337
      Corporate bonds due after ten years        2,001,080          --          11,080     1,990,000
      Trust preferred securities                11,960,918        36,876       501,529    11,496,265
      Preferred stock                           13,199,307        10,000       114,307    13,095,000
                                               -----------   -----------   -----------   ----------- 
                                               $39,915,176   $   138,942   $   631,516   $39,422,602
                                               ===========   ===========   ===========   ===========
</TABLE>
Held to maturity:
<TABLE>
<CAPTION>

                                                                December 31, 1998                                         
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Estimated
                                                  Cost          Gains        Losses      Fair Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
U.S. Government (including agencies):
      Due after one year through five years    $ 5,685,303   $    47,187   $      --     $ 5,732,490
      Due after five years through ten years     5,002,894        14,606          --       5,017,500
      Due after ten years                       29,889,260          --         281,447    29,607,813
                                               -----------   -----------   -----------   -----------
                                               $40,577,457   $    61,793   $   281,447   $40,357,803
                                               ===========   ===========   ===========   ===========
</TABLE>

                                       31

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

4.    INVESTMENT SECURITIES (Cont'd.)
---------------------------     
<TABLE>
<CAPTION>
                                                                December 31, 1997                              
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Estimated
                                                  Cost          Gains        Losses      Fair Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
U.S. Government (including agencies):
      Due in one year or less                  $10,005,774   $      --     $    69,571   $ 9,936,203
      Due after one year through five years     11,000,000        26,270        46,875    10,979,395
      Due after five years through ten years    30,981,870       239,337          --      31,221,207
      Due after ten years                        6,000,000         2,500        10,000     5,992,500
                                               -----------   -----------   -----------   -----------
                                                                                         
                                               $57,987,644   $   268,107   $   126,446   $58,129,305
                                               ===========   ===========   ===========   ===========
</TABLE>
During the year ended  December  31,  1998,  proceeds  from sales of  investment
securities  available for sale totaled $1,028,100 and resulted in gross gains of
$16,654.  During the year ended December 31, 1998,  proceeds from the sale of an
investment  security  held to  maturity,  which was within three months of final
maturity,  totaled $3,000,000 and did not result in any gain or loss. There were
no sales of investment  securities available for sale or held to maturity during
the years ended December 31, 1997 and 1996.

Investment  securities  held to maturity with a carrying value of  approximately
$2,000,000  at both  December 31, 1998 and 1997,  were pledged to secure  public
funds.

5.   MORTGAGE-BACKED SECURITIES
-------------------------------

Available for sale:
<TABLE>
<CAPTION>
                                                                December 31, 1998        
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Carrying
                                                  Cost          Gains        Losses        Value
                                              ------------  ------------  ------------  ------------
<S>                                          <C>           <C>           <C>           <C>        

     Federal Home Loan Mortgage Corporation   $ 5,324,055   $      --     $     4,761   $ 5,319,294
     Federal National Mortgage Association      8,663,950            51        11,901     8,652,100
                                              -----------   -----------   -----------   -----------
  
                                              $13,988,005   $        51   $    16,662   $13,971,394
                                              ===========   ===========   ===========   ===========  
</TABLE>

<TABLE>
<CAPTION>
                                                                December 31, 1997                           
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Carrying
                                                  Cost          Gains        Losses        Value
                                              ------------  ------------  ------------  ------------
<S>                                          <C>           <C>           <C>           <C>        
     Federal Home Loan Mortgage Corporation   $12,512,965   $      --     $   104,516   $12,408,449
     Federal National Mortgage Association      1,527,083          --           6,484     1,520,599
                                              -----------   -----------   -----------   -----------                       

                                              $14,040,048   $      --         111,000    13,929,048
                                              ===========   ===========   ===========   ===========
</TABLE>
                                       32

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

5.   MORTGAGE-BACKED SECURITIES  (Cont'd.)
-------------------------------

Held to maturity:
<TABLE>
<CAPTION>
                                                                December 31, 1998                     
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Estimated
                                                  Cost          Gains        Losses      Fair Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
     Government National Mortgage Association   $17,643,283   $    37,940   $   183,033   $17,498,190
     Federal Home Loan Mortgage Corporation      14,963,351       119,208        48,363    15,034,196
     Federal National Mortgage Association       28,766,662       126,559       118,173    28,775,048
                                                -----------   -----------   -----------   ----------- 
                                                $61,373,296   $   283,707   $   349,569   $61,307,434
                                                ===========   ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                December 31, 1997                      
                                              ------------------------------------------------------
                                                                Gross Unrealized          
                                                Amortized   --------------------------   Estimated
                                                  Cost          Gains        Losses      Fair Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
     Government National Mortgage Association   $26,771,595   $   215,909   $    35,973   $26,951,531
     Federal Home Loan Mortgage Corporation      22,853,912       219,635       143,405    22,930,142
     Federal National Mortgage Association       41,331,939       200,891       168,976    41,363,854
                                                -----------   -----------   -----------   -----------
                                                $90,957,446   $   636,435   $   348,354   $91,245,527
                                                ===========   ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                December 31, 1998                    
                                              ------------------------------------------------------
                                                Principal    Unamortized    Unearned     Carrying
                                                 Balance       Premium      Discounts      Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
     Government National Mortgage Association   $17,293,334   $   355,946   $     5,997   $17,643,283
     Federal Home Loan Mortgage Corporation      14,856,408       119,872        12,929    14,963,351
     Federal National Mortgage Association       28,436,352       349,880        19,570    28,766,662
                                                -----------   -----------   -----------   -----------
                                                $60,586,094   $   825,698   $    38,496   $61,373,296
                                                ===========   ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                                December 31, 1997                         
                                              ------------------------------------------------------
                                                Principal    Unamortized    Unearned     Carrying
                                                 Balance       Premium      Discounts      Value
                                              ------------  ------------  ------------  ------------
<S>                                           <C>           <C>           <C>           <C>        
     Government National Mortgage Association   $26,336,892   $   442,503   $     7,800   $26,771,595
     Federal Home Loan Mortgage Corporation      22,725,681       185,390        57,159    22,853,912
     Federal National Mortgage Association       40,898,959       460,159        27,179    41,331,939
                                                -----------   -----------   -----------   -----------
                                                $89,961,532   $ 1,088,052   $    92,138   $90,957,446
                                                ===========   ===========   ===========   ===========
</TABLE>

During the year ended December 31, 1998,  proceeds from sales of mortgage-backed
securities  available for sale totaled $8,352,991 and resulted in gross gains of
$29,910.  There were no sales of mortgage-backed  securities  available for sale
during the years  ended  December  31,  1997 and 1996 and there were no sales of
mortgage-backed  securities held to maturity during the years ended December 31,
1998, 1997 and 1996.
                                       33

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

6.   LOANS RECEIVABLE
---------------------

                                                            December 31,
                                                  ------------------------------
                                                       1998               1997
                                                  -------------   --------------
Real estate mortgage:
   One-to-our family                              $ 117,232,070   $ 118,254,242
   Commercial and multi-family                       17,435,462      17,361,751
                                                   ------------    ------------ 

                                                    134,667,532     135,615,993
                                                   ------------    ------------ 

Construction                                               -            350,000
                                                   ------------    ------------ 
Consumer:
   Second mortgage                                   14,811,424      11,629,689
   Passbook or certificate                              752,217         807,062
   Other                                                 14,615          12,451
                                                   ------------    ------------ 
                                                     15,578,256      12,449,202
                                                   ------------    ------------ 
        Total loans                                 150,245,788     148,415,195
                                                   ------------    ------------ 
Less: Loans in process                                     -            233,125
    Allowance for loan losses                         1,329,292       1,168,160
    Deferred loan fees, costs and discounts, net       (145,016)        (19,349)
                                                   ------------    ------------ 
                                                      1,184,276       1,381,936
                                                   ------------    ------------ 
                                                   $149,061,512    $147,033,259
                                                   ============    ============
                                                   

An analysis of the allowance for loan losses follows: 


                                                  Year Ended December 31,
                                          --------------------------------------
                                             1998          1997          1996
                                          ----------    ----------   -----------
   Balance - beginning                    $1,168,160    $1,089,828   $  958,149
   Provisions charged to  operations         161,132       240,000      182,900
   Loans charged off, net of recoveries         -         (161,668)     (51,221)
                                          ----------    ----------   ----------
   Balance - ending                       $1,329,292    $1,168,160   $1,089,828
                                          ==========    ==========   ==========

                                       34
<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

6.   LOANS RECEIVABLE (Cont'd.)
---------------------

Impaired loans and related amounts recorded in the allowance for loan losses are
summarized as follows (in thousands):



                                                           December 31,
                                                --------------------------------
                                                   1998       1997      1996
                                                ---------   --------- ----------
Recorded investment in impaired loans:
    With recorded allowances                      $  367     $  744     $1,777 
    Without recorded allowance                       -          -          -
                                                                      
         Total impaired loans                        367        744      1,777
                                                  ------     ------     ------
                                                                      
    Related allowance for loan losses                 55        111        404
                                                  ------     ------     ------
                                                                      
         Net impaired loans                       $  312     $  633     $1,373
                                                  ======     ======     ======
                                                                      
Average recorded investment in impaired loans     $  596     $1,509     $1,717
                                                  ======     ======     ======
                                                                    
Interest income recognized on impaired loans
  during the period each loan was impaired:
    Total                                         $   43     $  214     $   57
                                                  ======     ======     ======

    Cash basis                                    $   43     $  197     $   57
                                                  ======     ======     ======

At December 31, 1998, 1997 and 1996,  nonaccrual  loans for which the accrual of
interest had been discontinued totaled approximately $1,003,000,  $1,284,000 and
$1,901,000,  respectively.  Interest  income that would have been recorded under
the original terms of such loans and the interest income actually  recognized is
summarized as follows (in thousands):


                                                     Year Ended December 31,
                                                    -------------------------
                                                     1998     1997     1996
                                                    -------  -------  -------

Interest income that would have been recorded        $ 89     $111     $198
Interest income recognized                             60       50       84


The  activity  with  respect  to  loans to  directors,  executive  officers  and
associates of such persons is as follows:


                                                 Year Ended December 31,
                                               ---------------------------   
                                                  1998            1997
                                               ------------   ------------
                                           
        Balance - beginning                    $ 1,448,625    $ 1,168,277
        Loans originated                            57,252        242,128
        Collection of principal                    (46,580)       (14,879)
        Other additions                               --           53,099
                                               -----------    -----------
                                           
        Balance - ending                       $ 1,459,297    $ 1,448,625
                                               ===========    ===========
                                 

                                       35

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                    NOTE TO CONSOLIDATED FINANCIAL STATEMENTS
                    -----------------------------------------


7.   PREMISES AND EQUIPMENT
---------------------------
                                                           December 31,
                                                  -----------------------------
                                                     1998             1997
                                                  -------------    ------------

Land                                                $  614,714      $  614,714
Buildings and improvements                           2,294,053       2,301,063
Furniture, fixture and equipment                     1,184,423       1,071,944
Leasehold improvements                                  61,132          54,122
                                                    ----------      ----------

                                                     4,154,322       4,041,843
Less accumulated depreciation and amortization       1,552,643       1,424,668
                                                    ----------      ----------

                                                    $2,601,679      $2,617,175
                                                    ==========      ==========


Depreciation and amortization  expense totaled  $127,975,  $134,628 and $143,997
for the years ended December 31, 1998, 1997 and 1996, respectively.


8.   INVESTMENT IN REAL ESTATE
------------------------------

The Bank owns real estate originally  acquired for a future office site which is
no longer to be used for that purpose.  During the year ended December 31, 1997,
a  $100,000  impairment  loss was  recorded  on a parcel of land to  reduce  its
carrying  value from  $243,667 to  $143,667.  A portion of that land was sold in
1998 for $62,386, with no gain or loss resulting.  Property adjoining the Bank's
main office,  which had been rented,  was sold in 1998 for proceeds of $318,141,
resulting  in a gain of $37,911.  During the years ended  December  31, 1997 and
1996, as a result of the  relocation of a branch office and the sale of deposits
in  another  branch  office,  properties  with a  carrying  value of $9,629  and
$145,478,   respectively,  were  transferred  from  premises  and  equipment  to
investment  in real  estate.  These  properties  were sold during the year ended
December  31,  1997  at a  gain  of  $106,318.  The  income  received  from  the
properties,  net of expenses,  is included in other income.  The  properties are
summarized as follows:

                                                         December 31,
                                                    -------------------------
                                                       1998          1997
                                                    ----------    -----------

Land                                                 $ 81,281       $143,667  
Buildings and improvements                               -           363,452
                                                     --------       --------
                                                                  
                                                       81,281        507,119
Less accumulated depreciation and amortization            -           79,802
                                                     --------       --------
             
                                                     $ 81,281       $427,317
                                                     ========       ======== 

                                       36
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


9.   DEPOSITS
-------------


                                                         December 31, 1998
                                                --------------------------------
                                                 Weighted
                                                  Average
                                                   Rate       Amount     Percent
                                                  ------   ------------  -------

NOW accounts and non-interest-bearing deposits     1.55 %   $ 29,110,521   11.98
Money Market accounts                              2.73        6,995,025    2.87
Passbook and club accounts                         2.97       41,427,787   17.05
Certificates of deposit                            5.44      165,514,720   68.10
                                                            ------------  ------
                                                   4.48     $243,048,053  100.00
                                                            ============  ======


                                                         December 31, 1997
                                                --------------------------------
                                                 Weighted
                                                  Average
                                                   Rate       Amount     Percent
                                                  ------   ------------  -------

NOW accounts and non-interest-bearing deposits     1.33 %  $ 21,338,938     9.27
Money Market accounts                              2.94       9,952,885     4.33
Passbook and club accounts                         3.08      44,468,893    19.32
Certificates of deposit                            5.63     154,371,959    67.08
                                                           ------------   ------
                                                   4.62    $230,132,675   100.00
                                                           ============   ======

The aggregate  amount of certificates of deposit with a minimum  denomination of
greater than $100,000 was approximately  $14,542,000 and $10,020,000 at December
31, 1998 and 1997, respectively.  These certificates of deposit do not receive a
preferential  interest  rate.  Deposits in excess of $100,000  are not federally
insured.

The scheduled maturities of certificates of deposit are as follows:

                                                         December 31,
                                                  --------------------------
                                                     1998           1997
                                                  ----------     -----------
                                                        (In Thousands)

           Three months or less                    $ 31,395       $ 40,847 
           Over three months to one year             94,352         89,942
           Over one year to three years              34,287         21,296
           Over three years                           5,481          2,287
                                                   --------       --------
                                                                
                                                   $165,515       $154,372
                                                   ========       ========
                                                        

                                       37

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

9.   DEPOSITS (Cont'd.)
-------------

A summary of interest on deposits follows:

                                             Year Ended December 31,
                                    ------------------------------------------
                                        1998          1997          1996
                                    ------------- ------------- --------------

        NOW accounts                 $   263,010   $   260,813   $   366,984  
        Money Market                     344,020       380,732       788,001
        Passbook and club              1,276,998     1,440,145     1,859,939
        Certificates of deposit        8,619,992     8,246,089     8,068,002
                                     -----------   -----------   -----------

                                     $10,504,020   $10,327,779   $11,082,926
                                     ===========   ===========   ===========

10.  BORROWED MONEY
-------------------

The Bank has an available  line of credit with the Federal Home Loan Bank of New
York  ("FHLB"),  subject to the terms and  conditions of the lenders'  overnight
advances program, in the amount of $34,807,900 at December 31, 1998.  Borrowings
under this line of credit,  which expires on November 23, 1999, are made for one
day  periods  and are  secured  by the  Bank's  investment  in FHLB stock and an
assignment  of the Bank's  unpledged,  qualifying  one-to-four  family  mortgage
loans.  During the year ended  December 31, 1998,  the Bank did not borrow funds
under this program.  The following  table  presents  borrowed money at the dates
indicated:

<TABLE>
<CAPTION>
                                                                                  Interest                  December 31,
                                                                                                 -----------------------------------
Lender                                                        Maturity              Rate               1998              1997
------                                                 -----------------------   ------------    -----------------  ----------------

Securities sold under agreement to repurchase:

<S>                                                   <C>                            <C>        <C>                  <C>         
       FHLB                                            January 30, 1998                6.05%      $         -          $ 10,000,000
       FHLB                                            February 17, 1998               5.74%                -             8,175,000
       Security broker dealer                          February 18, 1998               5.77%                -             8,368,500
       FHLB                                            February 19, 1998               5.76%                -             8,176,000
       FHLB                                            January 14, 1999                5.29%            9,500,000              -

Advance:

       FHLB                                            August 3, 1998                  5.80%                             15,000,000
       FHLB (a)                                        December 20, 1999               5.82%            9,000,000         9,000,000
       FHLB (b)                                        November 19, 2003               4.93%           25,000,000              -
       FHLB (b)                                        March 11, 2008                  5.35%           25,000,000              -
                                                                                                     ------------      ------------

                                                                                                     $ 68,500,000      $ 58,719,500
                                                                                                     ============      ============
</TABLE>



(a)  Lender has option to terminate the advance on March 20, 1999, and quarterly
     thereafter, upon four days advance notice.

(b)  Convertible at lender option to  replacement  funding at then current rates
     on November 19, 2001 and March 12, 2001.


                                       38

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



10.  BORROWED MONEY (Cont'd.)
-------------------

Certain information concerning borrowed money is summarized as follows:

<TABLE>
<CAPTION>


                                                                        Year Ended December 31,
                                                           ---------------------------------------------------
                                                              1998               1997                1996
                                                           --------------     -------------    ---------------
<S>                                                         <C>                <C>             <C>           
      Average balance during the year                       $ 72,357,000       $ 43,974,600    $    3,173,000
      Average interest rate during the year                         5.79%              5.89%             5.53%
      Maximum month-end balance during the year             $ 83,877,000       $ 58,719,500    $   33,625,000
      Average interest rate at year end                             5.25%              5.83%             6.02%

</TABLE>


At December 31, 1998 and 1997,  borrowed money is  collateralized  by the Bank's
investment  in  FHLB  stock,  a  blanket  assignment  of the  Bank's  unpledged,
qualifying one-to-four family mortgage loans and securities as follows:

<TABLE>
<CAPTION>

                                                                      December 31,
                                                           -----------------------------------
                                                                1998               1997
                                                           ----------------   ----------------
<S>                                                        <C>                 <C>         
      Investment securities held to maturity                $   5,002,894       $ 18,700,000
      Mortgage-backed securities available for sale               593,718          9,749,213
      Mortgage-backed securities held to maturity              41,425,704         21,500,903
                                                            -------------       ------------

                                                            $  47,022,316       $ 49,950,116
                                                            =============       ============
</TABLE>


11.  REGULATORY CAPITAL
-----------------------

The Bank is subject to various regulatory capital  requirements  administered by
the federal banking  agencies.  Failure to met minimum capital  requirements can
initiate certain mandatory,  and possibly additional  discretionary,  actions by
regulators  that, if undertaken,  could have a direct material adverse effect on
the Bank.  Under capital  adequacy  guidelines and the regulatory  framework for
prompt corrective  action,  the Bank must meet specific capital  guidelines that
involve  quantitative  measures of the Bank's assets,  liabilities,  and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's  capital  amounts  and  classification  are also  subject to  qualitative
judgments  by the  regulators  about  components,  risk  weightings,  and  other
factors.

Quantitative  measures  established  by  regulation to ensure  capital  adequacy
require the Bank to maintain  minimum amounts and ratios (set forth in the table
below) of total and Tier I  capital  (as  defined  in the  regulations)  to risk
weighted  assets (as  defined),  and of Tier 1 capital  (as  defined) to average
assets (as defined). Management believes, as of December 31, 1998, that the Bank
meets all capital adequacy requirements to which it is subject.


                                       39

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

11.  REGULATORY CAPITAL (Cont'd.)
-----------------------

The following table sets forth the capital position of the Bank:

<TABLE>
<CAPTION>
                                                                                                                 To Be Well
                                                                                                                 Capitalized
                                                                                                                Under Prompt
                                                                                      Minimum Capital            Corrective
                                                                 Actual                Requirements          Actions Provisions
                                                         -----------------------  ------------------------ ------------------------
                                                           Amount       Ratio       Amount        Ratio      Amount        Ratio
                                                         ------------ ----------  ------------  ---------- ------------  ----------
                                                                                   (Dollars in Thousands)
<S>                                                        <C>          <C>         <C>            <C>       <C>           <C>   
          December 31, 1998
          -----------------

          Total Capital
           (to risk-weighted assets)                        $ 29,988     20.45%      $ 11,729       8.00%     $ 14,661      10.00%

          Tier I Capital
           (to risk-weighted assets)                          28,740     19.60%            -          -          8,797       6.00%

          Core (Tier I) Capital
           (to adjusted total assets)                         28,740      8.33%        13,801       4.00%       17,252       5.00%

          Tangible Capital
           (to adjusted total assets)                         28,740      8.33%         5,176       1.50%            -         -

          December 31, 1997
          -----------------

          Total Capital
           (to risk-weighted assets)                          27,138     23.83%         9,112       8.00%       11,390      10.00%

          Tier I Capital
           (to risk-weighted assets)                          26,416     23.20%            -          -          6,834       6.00%

          Core (Tier I) Capital
           (to adjusted total assets)                         26,416      8.10%        13,040       4.00%       16,300       5.00%

          Tangible Capital
           (to adjusted total assets)                         26,416      8.10%         4,890       1.50%            -         -

</TABLE>


As of June 23,  1997,  the most recent  notification  from the OTS, the Bank was
categorized  as well  capitalized  under the  regulatory  framework  for  prompt
corrective  action.  There  are no  conditions  existing  or events  which  have
occurred  since   notification,   that  management  believes  have  changed  the
institution's category.


                                       40

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


12.      BENEFIT PLANS
----------------------

         Employee pension plan
         ---------------------

         The Bank has a defined  benefit  pension  plan  covering  all  eligible
         employees.  The benefits  are based on years of service and  employees'
         compensation.  The Bank's  funding  policy is to contribute the maximum
         amount  deductible for federal income tax purposes.  Contributions  are
         intended to provide not only for benefits attributed to service to date
         but also for those expected to be earned in the future.

         Plan assets are composed primarily of certificates of deposit,  savings
         accounts and  insurance  contracts.  The following  tables  present the
         plan's funded status and the components of net periodic pension cost:

<TABLE>
<CAPTION>

                                                                            December 31,
                                                                  ------------------------------
                                                                      1998              1997
                                                                  --------------  --------------
<S>                                                               <C>              <C>        
              Actuarial present value of benefit obligations:
                  Vested                                           $ 2,126,247      $ 1,873,615
                  Non-vested                                            37,156           16,195
                                                                   -----------      -----------
                      Total benefit obligation                     $ 2,163,403      $ 1,889,810
                                                                   ===========      =========== 


              Projected benefit obligation - beginning             $ 2,410,463      $ 1,919,617
              Service cost                                              88,844           94,253
              Interest cost                                            167,472          168,152
              Actuarial loss                                           101,359          280,229
              Benefits paid                                            (19,344)            -
              Settlements                                              (59,936)         (51,788)
                                                                   -----------      -----------

              Projected benefit obligation - ending                  2,688,858        2,410,463
                                                                   -----------      -----------

              Plan assets at fair value - beginning                  1,245,710        1,222,245
              Actual return on assets                                   37,126           26,654
              Employer's contributions                                 291,033           73,432
              Benefits paid                                            (19,344)            -
              Settlements                                              (59,936)         (51,788)
                                                                   -----------      -----------

              Plan assets at fair value - ending                     1,494,589        1,270,543
                                                                   -----------      -----------

              Plan benefit obligation in excess of plan assets       1,194,269        1,139,920
              Unrecognized net transition
               obligation being amortized over fifteen years           (68,820)         (82,585)
              Unrecognized net loss                                   (960,589)        (842,511)
              Additional minimum liability                             503,954          416,413
                                                                   -----------      -----------
              Accrued pension cost included
               in accounts payable and other liabilities           $   668,814      $   631,237
                                                                   ===========      =========== 
                                                                           
</TABLE>


                                       41

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

12.      BENEFIT PLANS  (Cont'd.)
----------------------

         Employee pension plan (Cont'd.)
         ---------------------

<TABLE>
<CAPTION>
                                                                     Year Ended December 31,
                                                             -------------------------------------
                                                                1998         1997         1996
                                                             -----------  ------------ -----------
<S>                                                         <C>          <C>          <C>      
            Net periodic pension cost included            
             the following components:
                Service cost                                  $  88,844    $  94,253    $  87,161
                Interest cost                                   167,472      168,152      127,080
                Expected return on plan assets                 (107,863)    (103,159)     (82,697)
                Amortization of transition obligation            13,765       13,765       13,765
                Amortization of unrecognized loss                54,018       67,904       55,419
                                                              ---------    ---------    ---------
            Net periodic pension cost included
             in compensation and employee benefits            $ 216,236    $ 240,915    $ 200,728
                                                              =========    =========    =========  
</TABLE>

     Significant actuarial assumptions used in determining plan benefits are:
<TABLE>
<CAPTION>
                                                                              Year Ended December 31,
                                                              -----------------------------------------------------
                                                                   1998                1997              1996
                                                              ----------------    ----------------  ---------------
<S>                                                              <C>                 <C>              <C>  
              Annual salary increase                               5.50%               5.50%            5.00%
              Long-term return on assets                           8.00%               8.00%            8.00%
              Discount rate                                        7.25%               7.50%            7.00%
</TABLE>

         Directors retirement plan
         ------------------------- 
         The Bank has a  directors  retirement  plan,  which  provides  that any
         director  with twenty or more years of service may retire and  continue
         to be paid at the rate of 50% of regular directors fees. These payments
         will continue for the directors' lifetime.  This plan is unfunded.  The
         following  tables  present the status of the plan and the components of
         net periodic plan cost:

<TABLE>
<CAPTION>

                                                                           December 31,
                                                                   -----------------------------
                                                                     1998                1997
                                                                   -------------     -----------
<S>                                                                 <C>                 <C>      
              Actuarial present value of benefit obligation:
                  Vested                                              $ 339,498        $ 253,159
                  Non-vested                                                  -           57,394

                                                                      $ 339,498        $ 310,553
                                                                      =========        =========

              Projected benefit obligation - begining                 $ 366,691        $ 357,661
              Service cost                                                  843              784
              Interest cost                                              26,585           26,825
              Actuarial gain                                            (16,753)         (18,579)
                                                                      ---------        ---------
              Projected benefit obligation - ending                     377,366          366,691
              Unrecognized past service cost                           (201,322)        (218,618)
              Unrecognized net (loss)                                    (6,805)         (23,558)

              Accrued plan cost included
               in accounts payable and other liabilities              $ 169,239        $ 124,515
                                                                      =========        =========
</TABLE>

                                       42

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

12.      BENEFIT PLANS (Cont'd.)
----------------------

         Directors retirement plan (Cont'd.)
         -------------------------
<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                                                ----------------------------------------------------
                                                                                    1998                1997              1996
                                                                                ---------------    ----------------  ---------------
<S>                                                                             <C>                  <C>              <C>     
              Net periodic plan cost included the following components:
                  Service cost                                                   $     843            $    784         $  6,380
                  Interest cost                                                     26,585              26,825           20,972
                  Amortization of past service cost                                 17,296              17,296           17,296
                  Amortization of unrecognized net loss                               -                  4,682               21
                                                                                 ---------            --------         --------
              Net periodic plan cost included in other expense                   $  44,724            $ 49,587         $ 44,669
                                                                                 =========            ========         ========
</TABLE>
     Significant actuarial assumptions used in determining plan benefits are:
<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                                                ----------------------------------------------------
                                                                                    1998                1997              1996
                                                                                ---------------    ----------------  ---------------
<S>                                                                                <C>                 <C>              <C>  
              Annual compensation increase                                          4.50%               7.00%            7.00%
              Discount rate                                                         6.50%               7.25%            7.50%
</TABLE>
         Directors health benefits plan
         ------------------------------

         The Bank has a directors  health  benefit  plan which  provides for the
         continuation  of the directors'  medical  insurance  coverage for their
         lifetime  after  retirement.  Benefits under this plan are available to
         directors  retiring  after  attainment  of age 60 and  twenty  years of
         service. This plan is unfunded. The following tables present the status
         of the plan and the net components of net periodic plan cost:
<TABLE>
<CAPTION>
                                                                           December 31,
                                                                      ----------------------
                                                                         1998        1997
                                                                      ----------  ----------
<S>                                                                   <C>         <C>        
          Accumulated postretirement benefit obligation - beginning    $ 158,388   $ 160,094  
          Service cost                                                       204         190
          Interest cost                                                   11,483      12,007
          Actuarial loss (gain)                                            4,987     (13,903)
                                                                       ---------   ---------      
          Accumulated postretirement benefit obligation - ending         175,062     158,388
          Unrecognized net gain                                           45,709      55,426
                                                                       ---------   ---------  
          Accrued plan cost included in                               
           accounts payable and other liabilities                      $ 220,771   $ 213,814
                                                                       =========   =========             
</TABLE>
<TABLE>
<CAPTION>
                                                                                               Year Ended December 31,
                                                                                ----------------------------------------------------
                                                                                    1998                1997              1996
                                                                                ----------------    ----------------  --------------
<S>                                                                              <C>                  <C>            <C>    
          Net periodic plan cost included the following components:
               Service cost                                                       $     204             $   190          $ 2,866
               Interest cost                                                         11,483              12,007           10,969
               Amortization of unrecognized gain                                     (4,730)             (3,384)          (4,016)
                                                                                  ---------             -------          ------- 
          Net periodic plan cost included in other expense                        $   6,957             $ 8,813          $ 9,819
                                                                                  =========             =======          ======= 
</TABLE>
                                       43

<PAGE>

                                                                            
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


12.  BENEFIT PLANS (Cont'd.)
------------------

         Directors health benefit plan (Cont'd.)
         -----------------------------

         A discount  rate of 6.50%,  7.25% and 7.50% was  assumed  for the years
         ended  December 31, 1998,  1997 and 1996,  respectively.  For the years
         ended  December  31, 1998  1997and  1996,  a medical cost trend rate of
         6.5%, 7.0% and 7.5%, respectively,  decreasing 0.5% per year thereafter
         until an  ultimate  rate of 5.0% is  reached,  was  used in the  plan's
         valuation.  Increasing the assumed medical cost trend by one percent in
         each  year  would  increase  the  accumulated   postretirement  benefit
         obligation as of December 31, 1998, by $15,335 and the aggregate of the
         service and interest components of net periodic  postretirement benefit
         cost  for the year  ended  December  31,  1998 by  $1,392,  while a one
         percent  decrease in the  assumed  medical  cost trend would  result in
         comparable decreases of $13,475 and $1,299, respectively.

         ESOP
         ----

         Effective upon  conversion,  an ESOP was  established  for all eligible
         employees.  The ESOP used  $2,433,400 of proceeds from a term loan from
         the Company to purchase  243,340  shares of Company common stock in the
         initial offering. The term loan from the Company to the ESOP, including
         interest,  is  payable  over  one-hundred-eighty  (180)  equal  monthly
         installments.  The  initial  interest  rate is 8.25% and is  subject to
         semi-annual  adjustment  based on the prime rate.  The Bank  intends to
         make contributions to the ESOP which will be equal to the principal and
         interest  payment  required  from  the ESOP on the  term  loan.  Shares
         purchased with the loan proceeds are pledged as collateral for the term
         loan and are held in a suspense  account  for future  allocation  among
         participants.  Contributions  to the ESOP and shares  released from the
         suspense  account will be allocated among the participants on the basis
         of  compensation,  as described by the plan, in the year of allocation.
         The ESOP is accounted for in accordance with SOP 93-6, which was issued
         by the AICPA in November 1993. Accordingly,  the ESOP shares pledged as
         collateral  are  reported as unearned  ESOP shares in the  consolidated
         statements  of  financial  condition.  As shares  are  committed  to be
         released from  collateral,  the Company  reports  compensation  expense
         equal to the current market price of the shares,  and the shares become
         outstanding  for basic net income per common share  computations.  ESOP
         compensation  expenses  were  $306,489,  $257,575  and $177,679 for the
         years ended December 31, 1998, 1997 and 1996, respectively.


                                       44

<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


12.  BENEFIT PLANS (Cont'd.)
------------------

         ESOP (Cont'd.)
         ----

         The ESOP shares were as follows:


                                                            December 31,
                                                   -----------------------------
                                                        1998             1997
                                                   -------------    ------------

              Allocated shares                           33,927           16,223
              Shares committed to be released            15,739           16,474
              Unreleased shares                         193,674          210,643
                                                    -----------      -----------
              Total ESOP shares                         243,340          243,340
                                                    ===========      ===========

              Fair value of unreleased shares       $ 3,873,480      $ 4,318,182
                                                    ===========      ===========
               
         MSBP
         ----
 
         On July 3,  1996,  the  Bank  established  a MSBP to  provide  both key
         employees  and outside  directors  with a  proprietary  interest in the
         Company in a manner  designed to encourage  such persons to remain with
         the Bank. The Bank, during the year ended December 31, 1997 contributed
         $1,688,171 to the MSBP to allow the MSBP to purchase  121,670 shares of
         common  stock of the Company in the open  market at an average  cost of
         $13.875 per share.

         Under the MSBP,  awards are granted in the form of common stock held by
         the MSBP  Trust.  The  awards  vest over a period of time not more than
         five  years,  commencing  one year from the date of award.  The  awards
         become  fully vested upon  termination  of  employment  due to death or
         disability.  At December 31, 1998 and 1997,  103,798  shares and 79,248
         shares,  respectively,  had been  granted  to  directors  and,  at both
         December 31, 1998 and 1997,  26,767 shares had been granted to officers
         and employees.  37,522 shares and 16,311 shares were vested at December
         31,  1998 and 1997,  respectively.  $501,237,  $271,101  and $87,903 of
         expense  related to the MSBP shares was recorded during the years ended
         December 31, 1998, 1997 and 1996, respectively.


                                       45
<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



12.      BENEFIT PLANS (Cont'd.)
----------------------

         Stock Option Plan
         -----------------

         The Company adopted the 1996 Stock Option Plan (the "Plan") authorizing
         the grant of stock options  equal to 304,175  shares of common stock to
         officers,  directors  and key  employees  of the  Bank or the  Company.
         Options  granted  under the Plan may be either  options that qualify as
         incentive  stock  options as defined  in  Section  422 of the  Internal
         Revenue Code of 1986, as amended,  or  non-statutory  options.  Options
         granted  will vest and will be  exercisable  on a  cumulative  basis in
         equal installments at the rate of 20% per year commencing one year from
         the date of grant. All options granted will be exercisable in the event
         the optionee terminates his employment due to death or disability.  The
         options expire ten years from the date of grant.

         In the event of change in control of the Bank or Company,  the optionee
         will be given:  (1)  substitute  options by the acquiring or succeeding
         corporation,  (2) shares of stock  issueable  upon the exercise of such
         substitute  options or (3) cash for each option  granted,  equal to the
         difference between the exercise price of the option and the fair market
         value or merger  price  equivalent  to cash  payment  for each share of
         common stock exchanged in the change of control transaction.

         Shares  of  common   stock  have  been   granted   under  the  plan  as
         non-incentive stock options to directors and incentive stock options to
         officers and employees, respectively, as follows:

<TABLE>
<CAPTION>
                                                          Shares                                  Weighted 
                                          --------------------------------------                   Average
                                             Non-                                   Exercise      Exercise
                                           Incentive    Incentive       Total         Price         Price
                                          -----------  ------------  -----------   ------------  -----------
<S>                                        <C>           <C>           <C>          <C>          <C>     
        Granted in 1996                      121,665       109,496       231,161      $ 10.625     $ 10.625
        Granted in 1997                           -         16,000        16,000        20.000       20.000
                                             -------       -------       -------

        Balance at December 31, 1997         121,665       125,496       247,161                     11.232
            Cancelled                              -          (304)         (304)       10.625       10.625
            Forfeited                              -        (6,083)       (6,083)       10.625       10.625
                                             -------       -------       -------

        Balance at December 31, 1998         121,665       119,109       240,774                     11.248
                                             =======       =======       =======
</TABLE>

         No  options  have  been  exercised.  Options  for  93,110  shares  were
         excercisable at December 31, 1998 at a weighted  average exercise price
         of $10.947.  Options for 46,232 shares were exercisable at December 31,
         1997 at a weighted average exercise price of $10.625.


                                       46
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



12.      BENEFIT PLANS (Cont'd.)
----------------------

         Stock Option Plan (Cont'd.)
         -----------------

         The Company, as permitted by Statement No. 123, recognizes compensation
         cost for stock  options  granted  based on the  intrinsic  value method
         instead of the fair value based method. The weighted-average grant-date
         fair value of options  granted  during 1997 and 1996, all of which have
         exercise prices equal to the market price of the Company's common stock
         at  the  grant   date,   were   estimated   using   the   Black-Scholes
         option-pricing  model.  Such fair values and the  assumptions  used for
         estimating fair values are as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                                                    -----------------------
                                                                       1997         1996
                                                                    ------------ ----------
<S>                                                                  <C>          <C>   
         Weighted average grant-date fair value per share              $ 5.87       $ 2.81
         Expected common stock dividend yield                            1.00%        0.94%
         Expected volatility                                            23.29%       13.90%
         Expected option life                                          5 years      5 years
         Risk-free interest rate                                         5.88%       6.875%

</TABLE>

         Had the Company  used the fair value based  method,  net income for the
         years ended December 31, 1998,  1997 and 1996 would have been decreased
         to  $1,616,000,  $1,736,000 and $574,000,  respectively,  and basic and
         diluted net income per common  share  would have been  reduced to $0.73
         and $0.70,  respectively,  for the year ended December 31, 1998,  $0.73
         and $0.70,  respectively,  for the years  ended  December  31, 1997 and
         $0.21 each during the year ended December 31, 1996.


13.      INCOME TAXES
---------------------

The Bank qualifies as a Savings Institution under the provisions of the Internal
Revenue Code and was  therefore,  prior to January 1, 1996,  permitted to deduct
from  taxable  income an  allowance  for bad debts  based on the greater of: (1)
actual  loan  losses  (the  "experience  method");  or (2) eight (8)  percent of
taxable  income before such bad debt  deduction  less certain  adjustments  (the
"percentage of taxable income method").

On  August  21,  1996,  legislation  was  signed  into law  which  repealed  the
percentage of taxable income method for tax bad debt  deductions.  The repeal is
effective for the Bank's  taxable year  beginning  January 1, 1996. In addition,
the  legislation  requires  the Bank to include  in taxable  income its bad debt
reserves in excess of its base year  reserves over a six,  seven,  or eight year
period depending upon the attainment of certain loan origination  levels.  Since
the percentage of taxable income method for Federal tax bad debt  deductions and
the corresponding  increase in the Federal tax bad debt reserve in excess of the
base  year  have  been  reflected  as  temporary  differences  pursuant  to FASB
Statement No. 109, with deferred income taxes recorded  thereon,  this change in
the tax law did not have a material adverse effect on the Company's consolidated
financial position or operations.

                                       47

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


13.      INCOME TAXES (Cont'd.)
---------------------

Retained  earnings at December 31, 1998 includes  approximately  $2.4 million of
tax bad debt  deductions  which,  in accordance with FASB Statement No. 109, are
considered a permanent difference between the book and income tax basis of loans
receivable, and for which income taxes have not been provided. If such amount is
used for  purposes  other  than  bad debt  losses,  including  distributions  in
liquidation, it will be subject to income tax at the then current rate.

The provision for income taxes is summarized as follows:

                                             Year Ended December 31,
                                ----------------------------------------------
                                      1998            1997            1996
                                --------------   --------------  -------------
    Current:
        Federal                   $ 887,989        $  990,405      $ 540,688
        State                       104,111           117,522         87,761
                                  ---------        ----------      ---------

                                    992,100         1,107,927        628,449
                                  ---------        ----------      ---------
    Deferred:
        Federal                    (135,889)          (32,405)      (222,744)
        State                       (12,361)           (3,122)       (20,261)
                                  ---------        ----------      ---------

                                   (148,250)          (35,527)      (243,005)
                                  ---------        ----------      ---------
                                  $ 843,850        $1,072,400      $ 385,444
                                  =========        ==========      =========


The  provision  for income  taxes  differs  from that  computed  at the  federal
statutory rate of 34% as follows:

<TABLE>
<CAPTION>

                                                                Year Ended December 31,
                                                  -----------------------------------------------
                                                      1998              1997            1996
                                                  --------------   ---------------  -------------
<S>                                                  <C>             <C>              <C>      
       Tax at the statutory rate                     $ 881,132       $   995,695      $ 338,753
       New Jersey Savings Institution Tax,
        net of federal income tax effect                60,555            75,504         44,550
       Dividends received deduction                    (96,381)             -             -
       Other                                            (1,456)            1,201          2,141
                                                     ---------       -----------      ---------
                                                     $ 843,850       $ 1,072,400      $ 385,444
                                                     =========       ===========      =========
</TABLE>

                                       48

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



13.      INCOME TAXES (Cont'd.)
---------------------

The tax effects of existing temporary differences which give rise to significant
portions of deferred tax assets and liabilities are as follows:

<TABLE>
<CAPTION>

                                                                         December 31,
                                                                -----------------------------
                                                                     1998            1997
                                                                -------------   -------------
<S>                                                           <C>                <C>      
   Deferred tax assets:
       Allowance for loan losses                                $  380,915         $ 316,151
       Deferred loan origination fees, net                          63,821            63,821
       Deferred compensation                                       176,979           115,025
       Minimum pension liability                                   156,561           120,111
       Goodwill                                                    133,544            90,101
       MSBP                                                          4,757            15,513
       Unrealized loss on securities available for sale            190,927            39,938
                                                                ----------         ---------

         Total deferred tax assets                               1,107,504           760,660
                                                                ----------         ---------

   Deferred tax liabilities:
       Depreciation of premises and equipment                       81,671            67,944
       Other                                                          -                2,572
                                                                ----------         ---------

         Total deferred tax liabilities                             81,671            70,516
                                                                ----------         ---------

         Net deferred tax asset included in other assets        $1,025,833         $ 690,144
                                                                ==========         =========
</TABLE>



At December 31, 1998 and 1997,  current income taxes  receivable of $309,549 and
$25,526,  respectively,  are included in other assets.  At December 31, 1998 and
1997, income taxes payable of $95,242 and $119,876,  respectively,  are included
in other liabilities.


                                       49

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


14.      NET INCOME PER COMMON SHARE
------------------------------------

                                             Year Ended December 31, 1998
                                       -----------------------------------------
                                                       Weighted
                                           Net          Average       Per Share
                                          Income         Shares         Amounts
                                       ------------  -------------    ----------

Basic net income per share             $ 1,747,716      2,207,591        $ 0.79
                                                                         ======
Effect of dilutive securities:
     Stock options                            -            96,875
     MSBP unearned shares                     -             6,774
                                       -----------          -----

Diluted net income per share           $ 1,747,716      2,311,240        $ 0.76
                                       ===========      ==========       ======


                                             Year Ended December 31, 1997
                                       -----------------------------------------
                                                        Weighted
                                          Net            Average       Per Share
                                         Income           Shares        Amounts
                                       ------------  --------------  ----------

Basic net income per share             $ 1,856,115      2,389,063        $ 0.78
                                                                         ======
Effect of dilutive securities:
     Stock options                             -           71,296
     MSBP unearned shares                      -            6,531
                                       -----------      ---------

Diluted net income per share           $ 1,856,115      2,466,890        $ 0.75
                                       ===========      =========        ======


                                             Year Ended December 31, 1996
                                       -----------------------------------------
                                                        Weighted
                                          Net            Average       Per Share
                                         Income          Shares         Amounts
                                       ------------   ------------    ----------

Basic net income pre share             $   610,889      2,727,627        $ 0.22
                                                                         ======
Effect of dilutive securities:
     Stock options                            -             7,336
     MSBP unearned shares                     -             1,681
                                       -----------      ---------

Diluted net income per share           $   610,889      2,736,644       $ 0.22
                                       ===========      =========       ======

                                       50
<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

15.  LEGISLATIVE MATTERS
------------------------

On September  30,  1996,  legislation  was enacted  which,  among other  things,
imposed a special  one-time  assessment on Savings  Association  Insurance  Fund
("SAIF") member  institutions,  including the Bank, to recapitalize the SAIF and
spread the obligation for payment of Financial Corporation ("FICO") bonds across
all SAIF and Bank Insurance Fund ("BIF") members.  The special assessment levied
amounted to 65.7 basis points on SAIF  assessable  deposits held as of March 31,
1995. The special  assessment was recognized in the third quarter of 1996 and is
tax deductible.  The Bank took a charge of $1,167,427 as a result of the special
assessment.  This legislation  eliminated the substantial  disparity between the
amount that BIF and SAIF members had been paying for deposit insurance premiums.
Currently,  the Federal  Deposit  Insurance  Corporation  ("FDIC") has estimated
that, in addition to normal deposit insurance  premiums,  BIF members will pay a
portion of the FICO payment  equal to 1.3 basis points on  BIF-insured  deposits
compared to 6.4 basis points by SAIF members on SAIF-insured deposits.

The FDIC has  lowered  SAIF  assessments  to a range  comparable  to that of BIF
members, although SAIF members must also make the FICO payments described above.
Management cannot predict the precise level of FDIC insurance  assessments on an
ongoing basis.

16.  COMMITMENTS
----------------

The Bank is a party to financial instruments with  off-balance-sheet risk in the
normal course of business to meet the financing  needs of its  customers.  These
financial  instruments  include  commitments  to extend  credit.  Commitments to
extend  credit  are  agreements  to lend to a  customer  as long as  there is no
violation of any condition established in the loan agreement.  These commitments
are comprised of the undisbursed  portion of construction  loans, unused amounts
of lines of credit and  residential  loan  originations.  The Bank's exposure to
credit loss from nonperformance by the other party to the financial  instruments
for  commitments to extend credit is represented  by the  contractual  amount of
those instruments.  The Bank uses the same credit policies in making commitments
and  conditional  obligations  as  it  does  for  on-balance-sheet  instruments.
Collateral,  usually  in the  form of  residential  real  estate,  is  generally
required to support financial instruments with credit risk.

At December 31, 1998, the Bank had commitments outstanding to originate mortgage
loans of $5,128,000,  of which  $1,251,000  were for adjustable  rate loans with
initial  rates over the first ten years of the loan terms  ranging from 6.25% to
6.75% and $3,877,000  were for fixed rate loans with rates ranging from 6.25% to
7.00%.  The  commitments are due to expire within sixty days. The rates at which
the Bank has  committed  to fund these loans are set based on the rate in effect
when the borrower accepts the commitment in writing.

At December  31,  1998,  outstanding  commitments  related to unused home equity
lines of credit  totaled  $4,618,000.  These  amounts,  when  used,  will  carry
interest rates that will float at rates ranging from the prime rate plus 1/4% to
the prime rate plus 1 3/4%.

                                       51

<PAGE>


                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

16.      COMMITMENTS (Cont'd.)
--------------------

Rental  expenses  related to the  occupancy  of premises  totaled  approximately
$68,000,  $30,000 and $38,000 for the years ended  December 31,  1998,  1997 and
1996, respectively.  Minimum non-cancellable  obligations under lease agreements
with original terms of more than one year are as follows:

                    December 31,                  Amount
                    ------------                ----------

                       1999                      $ 36,360
                       2000                        36,360
                       2001                        36,360
                       2002                        15,150
                                                 --------
                                                 $124,230 
                                                 ========


17.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS
--------------------------------------------------------------

The fair value of a financial  instrument  is defined as the amount at which the
instrument could be exchanged in a current  transaction between willing parties,
other than a forced or liquidation sale.  Significant  estimations were used for
the purposes of this disclosure. The following methods and assumptions were used
to estimate the fair value of each class of financial  instruments  for which it
is practicable to estimate such value:

         Cash and cash equivalents and interest receivable
         -------------------------------------------------

         For cash and cash  equivalents  and interest  receivable,  the carrying
         amounts approximate fair value.

         Investment and mortgage-backed securities
         -----------------------------------------

         For investment and mortgage-backed  securities, both available for sale
         and held to  maturity,  fair value is  estimated  using  quoted  market
         prices.

         Loans receivable
         ----------------

         The fair value of loans is  estimated  by  discounting  the future cash
         flows using the current  rates at which  similar loans would be made to
         borrowers  with  similar  credit  ratings  and for the  same  remaining
         maturities.

         Deposits
         --------

         The fair value of demand,  savings  and money  market  deposits  is the
         amount  payable  on demand at the  reporting  date.  The fair  value of
         certificates  of deposit is  estimated by  discounting  the future cash
         flows  using  the rates  currently  offered  for  deposits  of  similar
         remaining maturities.

                                                                          
                                       52

<PAGE>
                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------

17.  DISCLOSURES ABOUT THE FAIR VALUE OF FINANCIAL INSTRUMENTS (Cont'd.)
---------------------------------------------------------------

         Borrowed money
         --------------

         The fair value of advances  and  securities  sold under  agreements  to
         repurchase is estimated by discounting cash flows using rates currently
         available for borrowings of similar remaining securities.

         Commitments to extend 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
         levels of interest rates and the committed rates.

<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                   -----------------------------------------------------
                                                                              1998                       1997
                                                                   -------------------------- --------------------------
                                                                    Carrying        Fair       Carrying        Fair
                                                                     Amount         Value       Amount         Value
                                                                   ------------  ------------ ------------  ------------
<S>                                                                <C>           <C>           <C>           <C>    
             Financial assets:
                 Cash and cash equivalents                          $ 33,393      $ 33,393      $ 6,788       $ 6,788
                 Investment securities available for sale             39,423        39,423         -             -
                 Investment securities held to maturity               40,577        40,358       57,988        58,129
                 Mortgage-backed securities available for sale        13,971        13,971       13,929        13,929
                 Mortgage-backed securities held to maturity          61,373        61,307       90,957        91,246
                 Loans receivable                                    149,062       154,536      147,033       148,534
                 Interest receivable                                   1,961         1,961        2,079         2,079
             Financial liabilities:
                 Deposits                                            243,048       244,613      230,133       226,113
                 Borrowed money                                       68,500        68,488       58,720        58,708
             Commitments:
                 To fund loans                                         9,746         9,746        7,306         7,306

</TABLE>


         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 entire  holdings of
         a  particular  financial  instrument.  Because  no market  exists for a
         significant portion of the financial instruments,  fair value estimates
         are based on  judgments  regarding  future  expected  loss  experience,
         current economic conditions,  risk characteristics of various financial
         instruments,  and other  factors.  These  estimates  are  subjective in
         nature,  involve  uncertainties and matters of judgment and, therefore,
         cannot be  determined  with  precision.  Changes in  assumptions  could
         significantly affect the estimates.  In addition,  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 exclude the value of assets and liabilities that are not considered
         financial instruments. Other significant assets that are not considered
         financial assets include premises and equipment.  In addition,  the tax
         ramifications  related to the  realization of the unrealized  gains and
         losses can have a significant  effect on fair value  estimates and have
         not  been  considered  in  any of the  estimates.  Finally,  reasonable
         comparability  between financial  institutions may not be likely due to
         the wide range of permitted valuation techniques and numerous estimates
         which must be made given the  absence of active  secondary  markets for
         many  of the  financial  instruments.  The  lack of  uniform  valuation
         methodologies  introduces  a greater  degree of  subjectivity  to those
         estimated fair values.


                                       53

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


18.  PARENT ONLY FINANCIAL INFORMATION
--------------------------------------

The Company operates one wholly owned subsidiary,  the Bank. The earnings of the
Bank are  recognized  by the  Company  using the  equity  method of  accounting.
Accordingly, the earnings of the Bank are recorded as increases in the Company's
investment  in  the  subsidiary.  The  following  are  the  condensed  financial
statements for the Company  (parent  company only) as of December 31, 1998, 1997
and for the periods ended  December 31, 1998,  1997 and 1996. The Company had no
operations prior to the Bank's conversion to stock form on January 5, 1996.

<TABLE>
<CAPTION>

                                                                          December 31,
                                                                ---------------------------------
             Statements of Financial Condition                       1998                1997
             ---------------------------------                  ---------------    -------------- 
<S>                                                             <C>                <C>               
             Assets
             ------
             Cash and due from banks                              $ 1,167,896         $ 1,167,965      
             Securities available for sale                          6,331,875                -
             Loan receivable from subsidiary                             -              6,044,666
             ESOP loan receivable                                   2,049,555           2,213,081
             Investment in subsidiary                              31,273,275          29,200,841
             Other assets                                             127,965              18,000
                                                                  -----------         -----------
                                                                
                  Total assets                                    $40,950,566         $38,644,553
                                                                  ===========         ===========
                                                                
             Liabilities and stockholders' equity               
                                                                
             Liabilities                                        
                                                                
             Due to subsidiary                                    $ 3,405,982         $   257,783
             Other liabilities                                         99,128              92,109
                                                                  -----------         -----------
                                                                
                                                                    3,505,110             349,892
                                                                  -----------         -----------
             Stockholders' equity                               
                                                                
             Common stock                                             304,175             304,175
             Additional paid in capital                            29,204,431          29,067,633
             Retained earnings                                     19,517,521          18,275,517
             Common stock acquired by ESOP                         (1,936,741)         (2,106,432)
             Unearned restricted MSBP stock                          (855,791)         (1,329,167)
             Treasury stock                                        (8,191,308)         (5,632,286)
             Accumulated other comprehensive income                  (596,831)           (284,779)
                                                                  -----------         -----------
                                                                
                  Total stockholders' equity                      37,445,456           38,294,661
                                                                  -----------         -----------
                                                                
                  Total liabilities and stockholders equity       $40,950,566         $38,644,553 
                                                                  ===========         ===========
</TABLE>


                                       54
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENT
                    -----------------------------------------


18.  PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
--------------------------------------

                              STATEMENTS OF INCOME
                              --------------------

<TABLE>
<CAPTION>

                                                                                                         
                                                                                                        From
                                                                                                      Inception
                                                                                                      January 5,
                                                                 Year Ended December 31,               1996 to
                                                           ---------------------------------         December 31,
                                                                 1998                1997                1996
                                                           -------------        ------------       -------------
<S>                                                        <C>                 <C>                  <C>       
Interest income                                             $   543,398         $   666,225          $  880,582
Equity in undistributed earnings of subsidiary                1,591,741           1,598,621             248,247
                                                            -----------         -----------          ----------

                                                              2,135,139           2,264,846           1,128,829
Expenses                                                        336,173             235,731             274,940
                                                            -----------         -----------          ----------

Income before income taxes                                    1,798,966           2,029,115             853,889
Income taxes                                                     51,250             173,000             243,000
                                                            -----------         -----------          ----------

Net income                                                  $ 1,747,716         $ 1,856,115          $  610,889
                                                            ===========         ===========          ==========

</TABLE>


                                       55
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                    NOTES TO CONSOLIDATED FINANCIAL STATEMENT
                    -----------------------------------------



18.  PARENT ONLY FINANCIAL INFORMATION (Cont'd.)
--------------------------------------

                            STATEMENTS OF CASH FLOWS
                            ------------------------
<TABLE>
<CAPTION>

                                                                                                                                
                                                                                                                From               
                                                                                                              Inception            
                                                                                                              January 5,          
                                                                        Year Ended December 31,                1996 to
                                                                 -----------------------------------         December 31, 
                                                                       1998                 1997                1996
                                                                 -----------------     -------------       ---------------
<S>                                                               <C>                 <C>                 <C>         
Cash flows from operating activities:
     Net income                                                     $ 1,747,716         $ 1,856,115         $    610,889
     Adjustments to reconcile net income to net cash
       provided by operating activities:
          Amortization of premiums                                        1,044                -                    -
          Equity in undistributed earnings of subsidiary             (1,591,741)         (1,598,620)            (248,247)
          (Increase) in other assets                                   (100,764)             (5,833)             (12,167)
          Increase in other liabilities                                   7,019              30,327               61,782
                                                                    -----------         -----------          -----------

          Net cash provided by operating activities                      63,274             281,989              412,257
                                                                    -----------         -----------          -----------

Cash flows from investing activities:
     Purchase of all outstanding stock of the Bank                         -                   -             (14,638,780)
     Purchase of securities available for sale                       (6,355,000)               -                   -
     Loan to the Bank                                                      -                   -             (12,205,380)
     Repayments of loan by the Bank                                   6,044,666           2,809,598            3,351,116
     Loan to ESOP                                                          -                   -              (2,433,400)
     Repayments of loan by ESOP                                         163,526             129,841               90,478
                                                                    -----------         -----------          -----------

          Net cash (used in) provided by investing activities          (146,808)          2,939,439          (25,835,966)
                                                                    -----------         -----------          -----------

Cash flows from financing activities:
     Net proceeds from issuance of common stock                            -                   -              29,263,522
     Increase in due from subsidiary                                  3,148,199             128,891              128,892
     Acquisition of treasury stock                                   (2,559,022)         (2,355,282)          (3,277,004)
     Dividends paid                                                    (505,712)           (382,654)            (136,119)
                                                                    -----------         -----------          -----------

          Net cash provided by (used in) financing activities            83,465          (2,609,045)          25,979,291
                                                                    -----------         -----------          -----------

Net (decrease) increase in cash and cash equivalents                        (69)            612,383              555,582
Cash and cash equivalents - beginning                                 1,167,965             555,582                -
                                                                    -----------         -----------          -----------

Cash and cash equivalents - ending                                  $ 1,167,896         $ 1,167,965         $    555,582
                                                                    ===========         ===========          ===========

</TABLE>

                                       56
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


19.  QUARTERLY FINANCIAL DATA (UNAUDITED)
-----------------------------------------

<TABLE>
<CAPTION>

                                                    Year Ended December 31, 1998
                                       --------------------------------------------------------
                                          First        Second          Third          Fourth
                                         Quarter       Quarter        Quarter         Quarter
                                        ---------     ---------      ---------       ---------
                                                 (In thousands, except per share data)
<S>                                     <C>           <C>            <C>             <C>    
Interest income                          $ 5,608       $ 5,898        $ 5,651         $ 5,589
Interest expense                           3,518         3,768          3,745           3,664
                                         -------       -------        -------         -------

      Net interest income                  2,090         2,130          1,906           1,925

Provision for loan losses                     60            60             60             (19)
Non-interest income                           63           102            116             122
Non-interest expenses                      1,387         1,432          1,253           1,629
Income taxes                                 247           246            226             125
                                         -------       -------        -------         -------

Net income                               $   459       $   494        $   483         $   312
                                         =======       =======        =======         =======

Net income per common share:
      Basic                              $  0.20       $  0.23        $  0.22          $ 0.14
                                         =======       =======        =======         =======

      Diluted                            $  0.19       $  0.22        $  0.21          $ 0.14
                                         =======       =======        =======         =======
</TABLE>

<TABLE>
<CAPTION>

                                                    Year Ended December 31, 1998
                                       --------------------------------------------------------
                                          First        Second          Third          Fourth
                                         Quarter       Quarter        Quarter         Quarter
                                        ---------     ---------      ---------       ---------
                                                 (In thousands, except per share data)

<S>                                     <C>           <C>            <C>             <C>    
Interest income                          $ 4,981       $ 4,971        $ 5,348         $ 5,764
Interest expense                           2,995         3,034          3,322           3,569
                                         -------       -------        -------         -------

      Net interest income                  1,986         1,937          2,026           2,195

Provision for loan losses                     60            60             60              60
Non-interest income                           61           215             68              84
Non-interest expenses                      1,272         1,307          1,348           1,477
Income taxes                                 270           316            229             257
                                         -------       -------        -------         -------

Net income                               $   445       $   469        $   457         $   485
                                         =======       =======        =======         =======

Net income per common share:
      Basic                              $  0.18       $  0.20        $  0.19         $  0.21
                                         =======       =======        =======         =======

      Diluted                            $  0.17       $  0.19        $  0.19         $  0.20
                                         =======       =======        =======         =======

</TABLE>


                                       57

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------


20.      IMPACT OF RECENT ACCOUNTING STANDARDS
----------------------------------------------

In June 1998,  the FASB issued  Statement No. 133,  "Accounting  for  Derivative
Instruments and Hedging  Activities".  Statement No. 133 establishes  accounting
and reporting standards for derivative instruments, including certain derivative
instruments   embedded  in  other   contracts   (collectively   referred  to  as
derivatives),  and for hedging activities.  It requires that an entity recognize
all  derivatives  as either assets or liabilities in the statements of financial
position and measure those instruments at fair value. If certain  conditions are
met, a derivative may be specifically  designated as (a) a hedge of the exposure
to  changes  in  the  fair  value  of a  recognized  asset  or  liability  or an
unrecognized firm commitment, (b) a hedge of the exposure to variable cash flows
of a forecasted transaction,  or (c) a hedge of the foreign currency exposure of
a net investment in a foreign  operation,  an unrecognized  firm commitment,  an
available-for-sale  security,  or  a   foreign-currency-denominated   forecasted
transaction.  The accounting for changes in the fair value of a derivative (that
is,  gains and losses)  depends on the intended  use of the  derivative  and the
resulting designation.

At the date of initial  application of Statement No. 133, an entity may transfer
any  held-to-maturity  security  into  the  available-for-sale  category  or the
trading  category.  An entity  will then be able in the  future to  designate  a
security transferred into the available-for-sale category as the hedged item, or
its variable interest payments as the cash flow hedged transactions,  in a hedge
of the exposure to changes in market interest rates, changes in foreign currency
exchange  rates,  or changes  in the  overall  fair  value.  (Statement  No. 133
precludes a  held-to-maturity  security from being designated as the hedged item
in a fair value hedge of market interest rate risk or the risk of changes in its
overall fair value and precludes  the variable cash flows of a  held-to-maturity
security from being designated as the hedged transaction in a cash flow hedge of
market interest rate risk).  Statement No. 133 provides that such transfers from
the  held-to-maturity  category at the date of initial  adoption  shall not call
into  question an entity's  intent to hold other debt  securities to maturity in
the future.

Statement  No. 133 is  effective  for all fiscal  quarters  of all fiscal  years
beginning  after June 15, 1999, the quarter ended March 31, 2000 for the Company
and Bank. Initial application shall be as of the beginning of an entity's fiscal
quarter.  Earlier  application  of all of the provisions of Statement No. 133 is
permitted only as of the beginning of a fiscal quarter.  Earlier  application of
selected  provisions or  retroactive  application of provisions of Statement No.
133 are not permitted.

Management of the Company and Bank has not yet determined when Statement No. 133
will be  implemented,  but does  not  believe  the  ultimate  implementation  of
Statement No. 133 will have a material  impact on their  consolidated  financial
position or results of operations.


                                       58

<PAGE>


                Board of Directors of Little Falls Bancorp, Inc.
                                       and
                                Little Falls Bank



Albert J. Weite, Chairman of the Board      Edward J. Seugling, Vice Chairman of
Leonard G. Romaine (Bank only)              the Board
John P. Pullara                             Raoul G. Barton
                                            George Kuiken 
                                Norman A. Parker



                Executive Officers of Little Falls Bancorp, Inc.
                                     and/or
                                Little Falls Bank


Leonard G. Romaine             Richard A. Capone                 Anne Bracchitta
    President         Chief Financial Officer and Treasurer         Secretary

Michael J. Allen                                              Mary Denise Hopper
Vice President                                                   Vice President

                ------------------------------------------------

     Corporate Counsel:                          Independent Auditors:
     Vincent Marino                              Radics & Co., LLC
     86 Main Street                              55 US Highway #46
     Little Falls, New Jersey  07424             Pine Brook, New Jersey  07058

     Special Counsel:                            Transfer Agent and Registrar:
     Malizia, Spidi, Sloane & Fisch, P.C.        Chase Mellon Shareholder
     One Franklin Square                         Services, L.L.C.
     1301 K Street, N.W., Suite 700 East 4       50 West 33rd Street
     Washington, D.C.  20005                     New York, New York  10001-2697

                ------------------------------------------------


         The Company's  Annual Report for the Year Ended December 31, 1998 filed
         with the  Securities  and  Exchange  Commission  on Form  10-K  without
         exhibits is available  without charge upon written request.  For a copy
         of the Form 10-K or any other  investor  information,  please write the
         Secretary of the Company at 86 Main Street,  Little Falls,  New Jersey.
         Copies of any exhibits to the Form
         10-K are available at cost.

                                       59

<PAGE>



                                OFFICE LOCATIONS

                           LITTLE FALLS BANCORP, INC.
                                 86 Main Street
                         Little Falls, New Jersey 07424
                                 (973) 256-6100

                                LITTLE FALLS BANK

                                   Main Office
                                 86 Main Street
                         Little Falls, New Jersey 07424
                                 (973) 256-6100

                                 Branch Offices

                                  West Paterson
                            Route 46 & McBride Avenue
                         West Paterson, New Jersey 07424

                                   Spruce Run
                                 220 Main Street
                         Glen Gardner, New Jersey 08826

                                     Milford
                                34 Bridge Street
                            Milford, New Jersey 08848

                                   Alexandria
                           636 Milford-Frenchtown Road
                      Alexandria Township, New Jersey 08848

                                    Kingwood
                                Route 12 and 519
                          Baptistown, New Jersey 08825