SECURITIES AND EXCHANGE COMMISSION
                            Washington, D.C.  20549

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

                                   FORM 10-K

(Mark One)

 X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
---   EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the fiscal year ended       December 31, 1996
                          ------------------------------------

                                    - or -

|_|   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                         to
                                -------------------         -----------------

Commission Number:  0-27010

                         LITTLE FALLS BANCORP, INC.
          -----------------------------------------------------------
            (Exact name of Registrant as specified in its Charter)

                      New Jersey                               22-3402073
---------------------------------------------             --------------------
(State or other jurisdiction of incorporation              (I.R.S. Employer
  or organization)                                         Identification No.)

86 Main Street                                                   07424
------------------------------------------                 -------------------
(Address of principal executive offices)                         Zip Code

Registrant's telephone number, including area code:     (201) 256-6100
                                                        --------------

Securities registered pursuant to Section 12(b) of the Act:  None
                                                             -----

Securities registered pursuant to Section 12(g) of the Act:

                    Common Stock, $0.10 par value per share
                    ---------------------------------------
                               (Title of Class)

      Indicate by check mark  whether the  Registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
Registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days.         YES    X              NO
                                                      ------

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,  and
will not be  contained,  to the best of  registrant's  knowledge,  in definitive
proxy or information  statements  incorporated  by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]

      The aggregate market value of the voting stock held by  non-affiliates  of
the Registrant,  based on the closing price of the Registrant's  Common Stock as
quoted on the  Nasdaq  Stock  Market,  on March  25,  1997,  was  $30.8  million
(2,237,207 shares at $13.75 per share).

      As of March 25, 1997 there were issued 3,041,750 and outstanding 2,749,180
shares of the Registrant's Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE

1.    Portions of the Annual  Report to  Stockholders  for the Fiscal Year Ended
      December 31, 1996. (Parts I, II and IV)
2.    Portions  of  the  Proxy   Statement  for  the  1997  Annual   Meeting  of
      Stockholders. (Part III)


<PAGE>



                                     INDEX

PART I                                                                    Page

Item 1. Business...........................................................   1

Item 2. Properties.........................................................  29

Item 3. Legal Proceedings..................................................  29

Item 4. Submission of Matters to a Vote of Security-Holders................  29

PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder
         Matters  .........................................................  29

Item 6. Selected Financial Data............................................  29

Item 7. Management's Discussion and Analysis of Financial Condition
          and Results of Operations........................................  29

Item 8. Financial Statements and Supplementary Data........................  29

Item 9. Changes In and Disagreements with Accountants on Accounting
         and Financial Disclosure..........................................  29
 .
PART III

Item 10. Directors and Executive Officers of the Registrant................. 30

Item 11. Executive Compensation............................................. 30

Item 12. Security Ownership of Certain Beneficial Owners and Management..... 30

Item 13. Certain Relationships and Related Transactions..................... 30

PART IV

Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 30


<PAGE>



PART I

Item 1.  Business
-----------------

General

      Little Falls  Bancorp,  Inc. (the  "Company") is a New Jersey  corporation
organized in August 1995 at the  direction of Little Falls Bank (the "Bank") for
the purpose of becoming a savings and loan holding company and to acquire all of
the capital stock issued by the Bank in its conversion  from the mutual to stock
form of ownership (the  "Conversion").  On January 5, 1996, the Registrant  sold
3,041,750  shares of its common  stock,  par value $0.10 per share (the  "Common
Stock") in a subscription  offering as part of 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. References to the "Bank" herein, unless the context
required  otherwise,  refer to the  Company  on a  consolidated  basis.  The net
conversion  proceeds totaled  approximately $26.8 million of which $14.6 million
was invested in the Bank.

      The Bank is a federally  chartered  stock  savings bank  headquartered  in
Little  Falls,  New Jersey.  The Bank was  originally  chartered  in 1887 as the
Little  Falls  Building  and Loan  Association.  On December  2, 1993,  the Bank
converted its mutual charter from a federally chartered savings association to a
New Jersey  chartered  savings  bank,  changing its name to Little Falls Savings
Bank.  Effective  October 1995, the Bank converted its New Jersey mutual charter
to a federal  mutual  charter and changed its name to "Little  Falls  Bank." The
Bank's  deposits are  federally  insured and the Bank is a member of the Federal
Home Loan Bank ("FHLB") System.  At December 31, 1996, the Bank had total assets
of $303.5 million,  deposits of $228.3 million,  and retained  earnings of $40.4
million  or  13.3%  of total  assets  as  calculated  under  generally  accepted
accounting principles.

      The Company and the Bank are subject to regulation by the Office of Thrift
Supervision ("OTS"), the Federal Deposit Insurance  Corporation ("FDIC") and the
Securities and Exchange Commission ("SEC").

      The Bank is a community oriented savings institution offering a variety of
financial  services  to meet the needs of the  communities  it serves.  The Bank
conducts its business from its main office in Little  Falls,  New Jersey and ___
branch  offices  located in Passaic,  Hunterdon  and  Burlington  Counties,  New
Jersey.  The Bank attracts deposits from the general public and has historically
used such deposits  primarily to originate  loans secured by first  mortgages on
owner-occupied one- to four-family residences in its market area and to purchase
mortgage-backed  securities. Such loans totaled $108.4 million, or 91.45% of the
Bank's loan portfolio and 35.70% of total assets at December 31, 1996.

      To a  lesser  extent,  the  Bank  also  originates  a  limited  number  of
commercial  real estate,  residential  construction  and consumer  loans,  which
mainly  consist of home equity lines of credit.  Further,  at December 31, 1996,
the Bank had $112.5 million and $51.4 million or 37.1% and 16.9% of total assets
in its mortgage-backed securities portfolio and investment securities portfolio,
respectively.

                                      1


<PAGE>



      The  principal  sources of funds for the  Bank's  lending  activities  are
deposits,  the  amortization,  repayment and maturity of loans,  mortgage-backed
securities and investment  securities.  Principal sources of income are interest
and fees on loans,  mortgage-backed  securities and investment  securities.  The
Bank's principal expense is interest paid on deposits.

      Because the Bank did not convert to stock form (including the initial sale
of  Common  Stock  by  the  Company)  until  January  5,  1996,  a  part  of the
presentation herein is that of the Bank in mutual form.

Market Area and Competition

      The Bank  focuses  on  serving  its  customers  located  in the New Jersey
community of Little Falls and  surrounding  communities in Passaic and Hunterdon
Counties,  New  Jersey.  Economic  growth  in the  Bank's  market  area  remains
dependent  upon the local  economy.  The  economy of the  greater New York - New
Jersey  market  has  historically  benefitted  from  having  a large  number  of
corporate   headquarters  and   concentration   of  financial   services-related
industries.  It also has a  well-educated  employment base and a large number of
industrial, service and high technology businesses. Over the past few years, New
Jersey's  economy  has slowly  begun to recover  from the effects of a prolonged
decline in the national and regional economy,  layoffs in the financial services
industry and corporate relocations. Employment levels and real estate markets in
the Bank's market area have  stabilized and in some instances  begun to improve.
Whether such  improvement  will continue is dependent,  in large part,  upon the
general economic health of the United States and other factors beyond the Bank's
control and, therefore,  cannot be estimated.  In addition, the deposit and loan
activity of the Bank is  significantly  affected by economic  conditions  in its
market area. The Bank's  principal  competitors are financial  institutions  and
mortgage  banking  companies,  many of which are  significantly  larger and have
greater financial resources than the Bank. The Bank's competition for loans on a
retail and wholesale basis comes  principally  from commercial  banks,  mortgage
brokers,  banking and insurance  companies.  The Bank's competition for deposits
has  historically  come from commercial  banks,  thrift  institutions and credit
unions.  In addition,  the Bank faces  increasing  competition for deposits from
non-bank  institutions,  such as brokerage firms and insurance companies in such
areas as short-term  money market funds,  corporate  and  government  securities
funds, mutual funds and annuities.

Lending Activities

      General.  The Bank's loan portfolio  primarily  consists of first mortgage
loans secured by owner-  occupied one- to  four-family  residences.  To a lesser
extent,  the Bank's loan portfolio also consists of a number of commercial  real
estate, residential construction and consumer loans.

                                      2


<PAGE>



      Analysis of Loan  Portfolio.  The following  table sets forth  information
concerning the composition of the Bank's loan portfolio in dollar amounts and in
percentages of the loan portfolio as of the dates indicated.

<TABLE>
<CAPTION>


                                                                              At December 31,
                           ---------------------------------------------------------------------------------------------------------
                                   1996                      1995                   1994                1993               1992
                                    Percent of             Percent of            Percent of         Percent of            Percent of
                           Amount     Total      Amount      Total     Amount      Total    Amount     Total      Amount    Total
                           ------   ----------   ------    ----------  ------    ---------- ------  ----------   -------- ----------

                                                         (Dolllars in Thousands)

Type of Loans:

<S>                      <C>         <C>        <C>         <C>       <C>         <C>      <C>         <C>       <C>       <C>
One- to four-family .....$ 108,367    92.53     $ 88,828     92.31%   $  87,851    92.71%  $ 95,278     93.62%   $124,792   96.92%
Commercial real estate...    3,659     3.13        4,639      4.82        4,463     4.71      3,614      3.54         467     .36
Residential construction.      525     0.45        1,098      1.14          521     0.55         --        --          --      --
Consumer:

Savings account .........      889     0.76          824      0.86          866      .91      1,015      1.00         945     .73
Second mortgages ........    5,028     4.29        2,540      2.64        2,694     2.84      3,007      2.95       3,696    2.87
Other ...................       25     0.02           42      0.04           52      .05         87       .09         127     .10
                          --------   ------      ------    ------     ---------   ------  ---------    ------    --------  ------
Total loans  receivable

(gross) .................  118,493   101.18       97,971    101.81       96,447   101.77    103,001    101.20     130,027  100.98
Less:
  Loans in process ......      150    (0.13)         450     (0.47)         186     (.18)        --        --          --      --
  Deferred loan
    origination..........             (0.12)
   fees and costs .......      138                  333     (0.35)          338     (.36)       408      (.40)        548    (.43)
  Allowance for loan
     losses..............    1,090    (0.93)        958     (0.99)        1,169    (1.23)       818      (.80)        731    (.55)
                          --------   ------      ------    ------     ---------   ------  ---------    ------    --------  ------
Total loans, net ........ $117,115   100.00      96,230    100.00 %   $  94,754   100.00% $ 101,775    100.00 %  $128,748  100.00 %
                          ========   ======      ======    ======     =========   ======  =========    ======    ========  ======

</TABLE>



                                               3


<PAGE>



      Origination  and Repayment of Loans.  The  following  table sets forth the
Bank's loan originations and principal repayments for the periods indicated. The
Bank originates  loans primarily for retention in its portfolio and did not sell
or purchase loans during the periods indicated.

<TABLE>
<CAPTION>

                                            Year Ended December 31,
                                       ---------------------------------
                                         1996        1995         1994
                                       ---------   ----------  ---------

                                          (In Thousands)

Total gross loans receivable at
<S>                                    <C>         <C>         <C>
   beginning of period .............   $  97,971   $  96,447   $ 103,001
                                       ---------   ---------   ---------

Loans originated:

  One- to four-family ..............      29,525      10,812      10,632
  Commercial real estate ...........          --          --         821
  Residential construction .........         697         700          --
  Consumer .........................       3,864       1,868         559
                                       ---------   ---------   ---------
Total loans originated .............      34,086      13,380      12,012
Loan principal repayments ..........      13,107      10,842      17,690
Loans transferred to foreclosed real
    estate .........................         406         672         871
Loans charged off ..................          51         342           5
                                       ---------   ---------   ---------
Net loan activity ..................      20,522       1,524      (6,554)
                                       ---------   ---------   ---------
Total gross loans receivable at
    end of period ..................   $ 118,493   $  97,971   $  96,447
                                       =========   =========   =========
</TABLE>






                                            4


<PAGE>



Loan Maturity Tables

      The following table sets forth the contractual maturity of the Bank's loan
portfolio  at  December  31,  1996.  The table does not include  prepayments  or
scheduled principal  repayments.  Prepayments and scheduled principal repayments
on  loans  totaled  $13.1  million  for  the  year  ended   December  31,  1996.
Adjustable-rate  mortgage  loans  are  shown as  maturing  based on  contractual
maturities  rather than the period in which interest rates are next scheduled to
adjust.

<TABLE>
<CAPTION>
                       One- to Four-   Commercial       Residential
                          Family       Real Estate      Construction  Consumer      Total
                       ------------   ------------      ------------  --------      -----
                                                 (In Thousands)

Amounts Due:

<S>                     <C>            <C>              <C>          <C>          <C>
Within 3 months.......  $      55      $      --        $      --    $    505     $    560
3 months to 1 Year....         24             --              525         374          923
                         --------       --------          -------     -------     --------
Total Due Within 1
  Year................         79             --              525         879        1,483
                         --------       --------          -------     -------     --------

  1 to 3 years........        203             --               --          26          229
  3 to 5 years........      1,481            300               --          --        1,781
  5 to 10 years.......      4,623            571               --       1,635        6,829
  10 to 20 years......     18,319          1,008               --       3,351       22,677
  Over 20 years.......     82,673            920               --          --       83,593
                         --------       --------          -------     -------     --------
Total due after one
  year................    107,299          2,799               --       5,012      115,109
                         --------       --------          -------     -------     --------
Non-performing........        989            860               --          52        1,901
                         --------       --------          -------     -------     --------
Total amount due......    108,367          3,659              525       5,943      118,494

Less:
Allowance for loan and

lease loss............        863            184               16          27        1,090
Loans in process......         --             --              150          --          150
Deferred loan fees
  (costs).............        161             --               --         (23)         138
                         --------       --------          -------     -------     --------
  Loans receivable, net  $107,343       $  3,475          $   359     $ 5,939     $117,116
                         ========       ========          =======     =======     ========

</TABLE>


      The  following  table sets forth the dollar amount at December 31, 1996 of
all loans due after December 31, 1997, which have pre-determined  interest rates
and which have floating or adjustable interest rates.

                                            Floating or
                            Fixed Rates   Adjustable Rates   Total
                            -----------   ----------------   -----
                                         (In Thousands)

One- to four-family.....     $  71,934      $  36,354     $ 108,288
Commercial real estate..         1,779          1,880         3,659
Consumer................         2,401          2,662         5,063
                              --------       --------      --------
  Total.................     $  76,114      $  40,896     $ 117,010
                               =======        =======       =======



      One- to Four-Family Residential Loans. The Bank's primary lending activity
consists of the origination of single-family  residential mortgage loans secured
by owner-occupied property. The Bank

                                      5


<PAGE>



originates one- to four-family  residential  mortgage loans in amounts up to 80%
of the appraised value of the mortgaged property and in amounts up to 70% of the
appraised value on loans which exceed $200,000. No private mortgage insurance is
obtained since loan to value ratios do not exceed 80%. All loans are held in the
Bank's portfolio.

      The Bank has an agreement  with a mortgage  solicitation  firm pursuant to
which  the  Bank  receives  one-  to  four-family  mortgage  applications  on  a
state-wide  basis.  The Bank then submits bids on the mortgage  applications  on
which it is interested  prior to making the final loan.  The submission of a bid
to provide the mortgage loan is not a firm commitment on the Bank's part, as the
Bank applies its own underwriting  standards before  committing to the loan. All
loans must be documented,  including an original  appraisal.  This agreement has
provided  the  majority  of loan  applications  received by the Bank in the past
year.

      Loan referrals are also obtained from local realtors or builders, existing
or past customers and members of the local  community.  Mortgage loans generally
include due-on sale clauses which provide the Bank with the contractual right to
deem the  loan  immediately  due and  payable  in the  event  that the  borrower
transfers ownership of the property without the Bank's consent.

      The  Bank  primarily  originates  adjustable-rate  mortgage  loans  with a
guaranteed  renewal for a thirty-year term. These loans adjust after one, three,
five or ten years.  The Bank's ARM loans are originated for its portfolio and do
not conform to FNMA or FHLMC standards.  Although the Bank's ARM loans have a 6%
lifetime cap, at the adjustment period, interest rate changes are discretionary.
Generally,  ARM loans pose credit risks somewhat  greater than the risk inherent
in fixed-rate  loans primarily  because,  as interest rates rise, the underlying
payments of the borrower rise,  increasing  the potential for default.  The Bank
also  offers  fixed-rate  loans with terms of 15 and 30 years.  The Bank  offers
various  loan  programs  with  varying   interest   rates  and  fees  which  are
competitively priced based on market conditions and the Bank's cost of funds.

      The Bank has  purchased  and  participated  in a limited  number of loans,
primarily in its market area. At December 31, 1996, the Bank had $3.0 million of
purchased loans and $4.9 million in loan participations.  The Bank purchases and
participates in loans after applying its own  underwriting  standards.  The Bank
typically does not service the loans that it purchases or  participates  in with
other financial institutions.

      Commercial Real Estate. To a lesser extent,  the Bank's policy has been to
originate  commercial real estate loans. The loans are generally made in amounts
up to 65% of the appraised  value of the property.  The Bank's  commercial  real
estate  loans  primarily  have rates  equal to the prime rate plus a margin.  In
making  such  loans,  the Bank  primarily  considers  the net  operating  income
generated  by the real  estate  to  support  the  debt  service,  the  financial
resources  and  income  level and  managerial  resources  of the  borrower,  the
marketability  of the  property  and the  Bank's  lending  experience  with  the
borrower.

      The  Bank's   commercial  real  estate  loans  typically  are  secured  by
properties such as mixed-use  properties,  retail stores,  office  buildings and
strip shopping  centers.  The Bank's  commercial real estate portfolio  includes
multi-family  loans.  For a discussion  of the Bank's  largest  commercial  real
estate loan, see "- Loans to One Borrower."

                                      6


<PAGE>



      Loans secured by commercial real estate generally involve a greater degree
of risk than one- to  four-family  residential  mortgage  loans and carry larger
loan  balances.  This  increased  credit  risk is a result of  several  factors,
including  the  concentration  of  principal  in a  limited  number of loans and
borrowers,  the  effects  of general  economic  conditions  on income  producing
properties,  and the increased  difficulty of evaluating  and  monitoring  these
types of loans.  Furthermore,  the repayment of loans secured by commercial real
estate is typically dependent upon the successful  operation of the related real
estate. If the cash flow from the property is reduced, the borrower's ability to
repay the loan may be impaired.

      Residential  Construction  Loans.  The Bank's policy has been to originate
residential construction loans to a lesser extent than other types of mortgages.
Residential  construction loans are made up to a maximum of 80% of the appraised
value of the home, based upon the builder's plans. The rate charged is generally
the prime rate plus a margin.  The loan proceeds are  disbursed  based upon work
completed. For a discussion of the Bank's largest residential construction loan,
see "-- Loans to One Borrower."

      Consumer Loans. The Bank's consumer loans primarily consist of home equity
loans, and, to a much lesser extent,  student loans and loans secured by savings
deposits.  The home equity lines of credit are made with loan to value ratios of
up to 80% on either a fixed or adjustable rate basis.

      The underwriting standards employed by the Bank for consumer loans include
a  determination  of the  applicant's  payment  history  on other  debts  and an
assessment of the  borrower's  ability to make payments on the proposed loan and
other indebtedness.  In addition to the  creditworthiness of the applicant,  the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.  The Bank's consumer loans tend to
have higher  interest  rates and  shorter  maturities  than one- to  four-family
mortgage  loans,  but are  considered  to entail a greater  risk of default than
mortgage loans.

      Loan Approval Authority and Underwriting. The Board of Directors generally
approves all mortgage loans  although the Bank's  President has the authority to
approve loans up to $500,000.  Any loans  exceeding that amount must be approved
by the Board of Directors.

      The Bank uses board  approved  independent  fee  appraisers on real estate
loans.  It is the Bank's  policy to obtain  title  insurance  on all  properties
securing real estate loans and to obtain fire,  flood and casualty  insurance on
all loans that require security.

      Loan  Commitments.  The Bank issues  written  commitments  to  prospective
borrowers on all real estate approved loans. Generally,  the commitment requires
the loan to be closed within sixty days of issuance.  At December 31, 1996,  the
Bank had $3.3 million of commitments to fund new mortgage loans and  commitments
on unused lines of credit relating to home equity loans of $3.0 million.

      Loans to One Borrower. Savings associations are subject to the same limits
as those  applicable to national banks,  which under current  regulations  limit
loans-to-one  borrower  in an  amount  equal to 15% of  unimpaired  capital  and
retained income on an unsecured  basis and an additional  amount equal to 10% of
unimpaired  capital  and  retained  income  if the loan is  secured  by  readily
marketable collateral  (generally,  financial  instruments,  not real estate) or
$500,000, whichever is higher. The Bank's maximum loan-to-one borrower limit was
approximately $4.0 million as of December 31, 1996.

      At December 31, 1996, the Bank's largest lending relationship consisted of
an  aggregate  of $1.3  million in loans made to a builder in Little  Falls,  of
which $1.0 is secured by  residential  building  lots.  The remaining  loans are
mortgages on two one- to four-family homes. All of these loans are performing

                                      7


<PAGE>



in accordance with their original terms. The second largest lending relationship
at December 31, 1996,  consisted of an aggregate of $1.1 million in loans to two
local  businessmen.  Of these loans,  four are  nonperforming  loans  secured by
mortgages on two contiguous  parcels of commercial real estate located in Little
Falls,  New Jersey.  At December 31, 1996 the aggregate  outstanding  balance on
these nonperforming loans was $860,000. An appraisal of the properties as of May
1995  indicated an  aggregate  value of $995,000.  The  remaining  loans in this
relationship consist of two one- to four-family  residential  mortgages totaling
$184,000 and a home equity loan totaling $92,000, all of which are performing in
accordance with their original terms.

Non-Performing Loans and Classified Assets

      Loan Delinquencies.  The Bank's collection  procedures provide that when a
mortgage loan is 15 days past due, a notice of nonpayment is sent. If payment is
still delinquent after 30 days past due, the customer will receive a letter from
the Bank. If the delinquency  continues,  similar subsequent efforts are made to
eliminate the delinquency.  If the loan continues in a delinquent  status for 60
days or more and no repayment plan is in effect, the Bank's attorney will send a
letter to the customer. After 90 days past due, the Board of Directors typically
approves the  initiation of foreclosure  proceedings as soon as possible.  Loans
are  reviewed  on  a  monthly  basis  and  are  placed  on  a  non-accrual   and
non-performing status when the loan becomes more than 90 days delinquent.

      The following table sets forth information regarding  non-performing loans
and  real  estate  owned.  During  the  periods  indicated,   the  Bank  had  no
restructured loans within the meaning of SFAS No. 15.

<TABLE>
<CAPTION>

                                                        At December 31,
                                    -------------------------------------------------
                                     1996      1995      1994       1993       1992
                                     ----      ----      ----       ----       ----
                                               (Dollars in Thousands)

Non-performing loans:
   Nonaccrual loans:
<S>                                 <C>       <C>        <C>        <C>       <C>
   One- to four-family residential  $   989   $1,059     $4,182     $3,894    $3,888
   Commercial real estate......         860      860         --         --        --
   Consumer loans..............          52       23         20         --         9
                                    -------   ------     ------     ------    ------
Total nonaccrual loans.........       1,901    1,942      4,202      3,894     3,897
   Accruing one- to four-family
    residential................          --      505         --         --        --
                                    -------   ------     ------     ------    ------
Total non-performing loans.....       1,901    2,447      4,202      3,894     3,897
                                    -------   ------     ------     ------    ------
Real estate owned..............         857    1,501      1,765      1,859     1,677
                                    -------   ------     ------     ------    ------
Total non-performing assets....     $ 2,758   $3,948     $5,967     $5,753    $5,574
                                    =======   ======     ======     ======    ======
Total non-performing loans to
  net loans....................        1.62%    2.54%      4.43%      3.83%     3.03%
                                    =======   ======     ======     ======    ======
Total non-performing loans to
  total assets.................         .63%     .79%      2.17%      1.93%     1.95%
                                    =======   ======     ======     ======    ======
Total non-performing assets to
  total assets.................         .91%    1.27%      3.09%      2.85%     2.79%
                                    =======   ======     ======     ======    ======
</TABLE>



      Interest income that would have been recorded on nonaccrual loans had they
been current under the original terms of such loans was  approximately  $198,000
and  $189,000  for the years ended  December  31,  1996 and 1995,  respectively.
Amounts  included in the Bank's interest income  attributable to  non-performing
loans for the years ended December 31, 1996 and 1995 were approximately  $84,000
and $39,000, respectively.

      Classified  and  Criticized   Assets.   OTS  regulations   provide  for  a
classification  system for problem assets of insured  institutions  which covers
all problem assets. Under this classification  system, problem assets of insured
institutions are classified as "substandard," "doubtful," or "loss." An asset is
considered  substandard if it is inadequately protected by the current net worth
and paying capacity of the

                                      8


<PAGE>



obligor or of the collateral pledged,  if any.  Substandard assets include those
characterized  by the "distinct  possibility"  that the insured  institution may
sustain "some loss" if the deficiencies  are not corrected.  Loans classified as
substandard  may or may not be  considered  impaired  under  generally  accepted
accounting principals.  Assets classified as doubtful have all of the weaknesses
inherent in those classified substandard, with the added characteristic that the
weaknesses  present make  "collection  or  liquidation in full," on the basis of
currently  existing  facts,  conditions  and values,  "highly  questionable  and
improbable." Assets classified as loss are those considered  "uncollectible" and
as such, are charged off by the Bank.  Assets which do not currently  expose the
Bank to sufficient risk to warrant  classification in one of the  aforementioned
categories  but  possess   weaknesses  are  designated   "special   mention"  by
management.

      When the Bank classifies problem assets as either substandard or doubtful,
it may  establish  general  allowances  for loan and  lease  losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities.  When the Bank  classifies  problem assets as loss, it is considered
uncollectible and the Bank charges off such amount. The Bank's  determination as
to the  classification of its assets and the amount of its valuation  allowances
is subject to review by the OTS, which may order the establishment of additional
general or  specific  loss  allowances.  A portion of  general  loss  allowances
established to cover possible losses related to assets classified as substandard
or doubtful may be included in determining an institution's  regulatory capital,
while specific valuation  allowances for loan losses generally do not qualify as
regulatory capital.

      The  following  table  provides  further   information  about  the  Bank's
classified assets as of the dates indicated.

<TABLE>
<CAPTION>
                                             At December 31,
                   ------------------------------------------------------------------
                        1996             1995              1994             1993
                   ---------------  ---------------  ----------------  --------------
                                             (In Thousands)

Criticized:

<S>                     <C>                <C>               <C>              <C>
  Special Mention       $  2,931           $2,639            $2,094           $1,406
Classified:

  Substandard....          3,665            3,925             5,901            8,549
  Doubtful.......             --               --                --               --
  Loss...........       $     --               --               123              501
                        --------           ------            ------          -------
                        $  6,596           $6,564            $8,118          $10,456
                        ========           ======            ======          =======
</TABLE>



      Real  Estate  Owned.  Real  estate  acquired  by the Bank as a  result  of
foreclosure or by deed in lieu of foreclosure is classified as real estate owned
until it is sold.  When  property  is acquired it is carried at the lower of the
cost or fair value less selling costs. It is the policy of the Bank to obtain an
appraisal on all real estate acquired through foreclosure as soon as practicable
after it takes  possession of the property.  The Bank  generally  reassesses the
value of real estate owned at least every eighteen months.  These properties are
subsequently  evaluated and carried at the lower of the "new" cost or fair value
minus selling costs of the underlying  collateral.  The Bank's real estate owned
totaled $857,000 million at December 31, 1996.

      Allowance  for Loan  Losses.  A  provision  for loan  losses is charged to
operations based on management's  evaluation of the potential losses that may be
incurred in the Bank's loan portfolio. Such evaluation,  which includes a review
of certain loans of which full collectibility of interest and principal

                                      9


<PAGE>



may not be reasonably  assured,  considers the Bank's past loan loss experience,
known and inherent risks in the portfolio,  adverse  situations  that may affect
the borrower's  ability to repay,  estimated value of any underlying  collateral
and current economic conditions.

      Management  will  continue to review its loan  portfolio to determine  the
extent,  if any,  to which  further  additional  loss  provisions  may be deemed
necessary.  There can be no  assurance  that the  allowance  for losses  will be
adequate  to cover  losses  which may in fact be realized in the future and that
additional provisions for losses will not be required.

      As a result of the declines in regional  real estate market values and the
significant losses experienced by many financial institutions,  there has been a
greater level of scrutiny by regulatory  authorities  of the loan  portfolios of
financial institutions  undertaken as part of the examination of the institution
by the  FDIC,  OTS or other  federal  or state  regulators.  Results  of  recent
examinations  indicate that these  regulators may be applying more  conservative
criteria  in  evaluating  real estate  market  values,  requiring  significantly
increased  provisions for potential loan losses.  While the Bank believes it has
established  an adequate  allowance  for loan losses,  there can be no assurance
that  regulators,  in reviewing the Bank's loan portfolio,  will not request the
Bank to significantly increase its allowance for loan losses, thereby negatively
affecting the Bank's  financial  condition and earnings or that the Bank may not
have to increase its level of loan loss allowance in the future.

                                      10


<PAGE>



      Analysis of the Allowance for Loan Losses.  The following table sets forth
information  with respect to the Bank's  allowance  for loan losses at the dates
indicated.

<TABLE>
<CAPTION>

                                                      At December 31,
                                  ---------------------------------------------------------
                                    1996       1995        1994        1993          1992
                                    ----       ----        ----        ----          ----
                                                    (Dollars in Thousands)

<S>                               <C>         <C>         <C>         <C>         <C>
Total loans outstanding .......   $118,493    $ 97,971    $ 96,447    $103,001    $130,027
                                  ========    ========    ========    ========    ========

Allowance balances (at
  beginning of period) ........   $    958    $  1,169    $    818    $    731    $    835
Provision:
  One- to four-family .........        136          87         340         325         391
  Commercial real estate(1) ...         38          35          13          --          --
  Consumer ....................          9           9           3           3          --
                                  ========    --------    --------    --------    --------
Total provision for loan losses        183         131         356         328         391
                                  --------    --------    --------    --------    --------
Charge-offs net of recoveries:
  One- to four-family .........         51         342           5         241         495
  Commercial real estate ......         --          --          --          --          --
Consumer ......................         --          --          --          --          --
                                  --------    --------    --------    --------    --------
Total charge-offs .............         51         342           5         241         495
                                  --------    --------    --------    --------    --------
Allowance balance (at end of
  period) .....................   $  1,090    $    958    $  1,169    $    818    $    731
                                  ========    ========    ========    ========    ========
Allowance for loan losses as
  a percent of total loans

  outstanding .................       0.92%       0.98%       1.21%       0.79%       0.56%
                                  ========    ========    ========    ========    ========
</TABLE>


-----------------------------
(1)  Includes residential construction loans.

                                      11


<PAGE>



      Allocation  of Allowance for Loan Losses.  The following  table sets forth
the  allocation  of the  Bank's  allowance  for loan and  lease  losses  by loan
category and the percentage of loans in each category to net loans receivable at
the dates  indicated.  The portion of the loan loss allowance  allocated to each
loan category does not represent the total available for future losses which may
occur  within  the loan  category  since the  total  loan  loss  allowance  is a
valuation reserve applicable to the entire loan portfolio.

<TABLE>
<CAPTION>

                                                                         At December 31,
                    ----------------------------------------------------------------------------------------------------------------
                          1996                   1995                1994                    1993                   1992
                    ---------------------- --------------------- -------------------- ----------------------- ----------------------
                             Percent of             Percent of          Percent of              Percent of             Percent of
                              Loans to               Loans to            Loans to                Loans to               Loans to
                    Amount  Loan Portfolio Amount Loan Portfolio AmountLoan Portfolio  Amount  Loan Portfolio Amount Loan Portfolio
                    ------  -------------- ------ -------------- -------------------- -------  -------------- ------ --------------
                                                            (Dollars in Thousands)

At end of period
 allocated to:
<S>                 <C>         <C>         <C>       <C>        <C>       <C>          <C>        <C>         <C>       <C>
One-to four-family..$   863     91.66%      $778      92.31%     $1,033    92.71%       $814       93.62%      $730      96.92%
Commercial real
  estate(1).........    200       3.27       162       4.82         127     4.71          --        3.54         --       0.36
Consumer ...........     27       5.07        18       3.54           9     3.80           4        4.04          1       3.70
                     ------   --------      ----      -----      ------   ------         ---      ------        ---     ------
Total allowance.....$ 1,090    100.00%      $958     100.00%     $1,169   100.00%       $818      100.00%      $731     100.00%
                      =====    ======        ===     ======       =====   ======         ===      ======        ===      ======
</TABLE>


(1)  Includes residential construction loans.

                                      12


<PAGE>



Investment Activities

      The  investment  policy of the  Bank,  which is  approved  by the Board of
Directors and  implemented  by certain  officers as authorized by the Board,  is
designed  primarily to provide and maintain liquidity and to manage the interest
rate sensitivity of its overall assets and liabilities,  to generate a favorable
return without  incurring undue interest rate and credit risk, to provide a flow
of earnings and a  countercyclical  balance to earnings and to provide a balance
of  quality  and  diversification  of the Bank's  assets.  In  establishing  its
investment  strategies,  the Bank  considers its business and growth plans,  the
economic  environment,  its interest  rate  sensitivity  position,  the types of
securities  to  be  held,  and  other  factors.   Federally   chartered  savings
institutions have authority to invest in various types of assets, including U.S.
Treasury  obligations,  securities of various federal agencies,  mortgage-backed
and  mortgage-related  securities,  certain  certificates  of deposit of insured
banks  and  savings  institutions,   certain  bankers  acceptances,   repurchase
agreements,  loans of federal funds,  and, subject to certain limits,  corporate
securities, commercial paper and mutual funds.

      Current  regulatory  and  accounting   guidelines   regarding   investment
portfolio policy require insured  institutions to categorize  securities as held
for  "investment,"  "sale," or "trading." At December 31, 1996,  the Bank had no
securities held available for sale or trading. The Bank's securities  portfolio,
which the Bank has the ability and intent to hold to maturity, are accounted for
on an amortized cost basis. The Bank may purchase securities in the future to be
held available for sale or trading.

      At December 31, 1996, the Bank had an investment  securities  portfolio of
$51.4 million, consisting primarily of short and medium term U.S. Government and
agency securities.  The estimated fair value of the Bank's investment securities
portfolio at December 31, 1996 was $51.2 million,  resulting in a net unrealized
loss at that date of approximately  $166,000. In addition, at December 31, 1996,
the Bank had federal funds sold of $5.0 million and FHLB stock of $2.1 million.

      To supplement lending activities and to utilize excess liquidity, the Bank
invests in  residential  mortgage-backed  securities.  The Bank's  investment in
mortgage-backed  securities,  which had increased  significantly during the past
few years as a result of a decline in loan demand,  decreased  by  approximately
4.7% or $5.5 million  during the year ended  December 31, 1996. The decrease was
primarily due to the Bank using more of its funds for loan  originations.  While
the Bank did purchase $16.1 million of mortgage-backed securities in 1996, these
were more than offset by repayments and  prepayments  received.  Mortgage-backed
securities can serve as collateral for borrowings and, through repayments,  as a
source of liquidity.  The mortgage-backed  securities  portfolio at December 31,
1996 consisted of both fixed-rate and adjustable rate certificates issued by the
FHLMC, GNMA and FNMA. The fixed rate certificates provide the certificate holder
principal  payments  while the adjustable  rate  securities  provide  protection
against  rising  interest  rates.  At December  31,  1996,  the  mortgage-backed
securities  portfolio  had an  estimated  fair  value of  $112.4  million  and a
carrying  value of  $112.5  million.  The  portfolio  is  classified  as held to
maturity, and is recorded at amortized cost.

      Mortgage-backed securities represent a participation interest in a pool of
single-family or multi- family mortgages, the principal and interest payments on
which  are  passed  from  the  mortgage  originators,   through   intermediaries
(generally   quasi-governmental   agencies)   that   pool  and   repackage   the
participation  interests in the form of  securities,  to  investors  such as the
Bank. Such quasi-governmental agencies, which guarantee the payment of principal
and interest to investors, primarily include FHLMC, FNMA, and GNMA.

                                      13


<PAGE>



      Mortgage-backed  securities  typically  are issued with  stated  principal
amounts,  and the  securities  are backed by pools of mortgages  that have loans
with  interest  rates that are within a range and have varying  maturities.  The
underlying pool of mortgages can be composed of either  fixed-rate  mortgages or
adjustable-rate  mortgage  loans.   Mortgage-backed   securities  are  generally
referred to as mortgage participation certificates or pass-through certificates.
As a result,  the interest rate risk  characteristics  of the underlying pool of
mortgages, fixed rate or adjustable rate, as well as prepayment risk, are passed
on to  the  certificate  holder.  The  life  of a  mortgage-backed  pass-through
security is equal to the life of the underlying mortgages.

Investment and Mortgage-backed Securities Portfolio

      The following table sets forth the carrying value of the Bank's investment
and mortgage-backed securities portfolio.

                                       At December 31,
                                  --------------------------
                                  1996      1995      1994
                                  ----      ----      ----
                                      (In Thousands)
Investment Securities:
 U.S. Government securities ..   $ 6,006   $10,014   $14,016
 U.S. Agency securities ......    45,022    19,985    21,977
 Other securities ............       342        --       153
                                 -------   -------   -------
   Total investment securities    51,370    29,999    36,146
                                 -------   -------   -------
Federal funds sold ...........     5,000    39,800     1,100
FHLB Stock ...................     2,076     1,395     1,511
                                 -------   -------   -------
   Total investment
   securities, federal funds
   sold and FHLB stock .......   $58,446   $71,194   $38,757
                                 =======   =======   =======




                                     At December 31,
                               -----------------------------
                                1996       1995      1994
                                ----       ----      ----

                               Amount     Amount    Amount
                               ------     ------    ------
                                 (Dollars in Thousands)

Mortgage-backed securities:
  GNMA ....................   $ 33,675   $ 38,714   $ 26,206
  FNMA ....................     49,434     45,613      5,895
  FHLMC ...................     28,297     32,590     19,416
                              --------   --------   --------
      Total ...............    111,406    116,917     51,517
  Net premiums ............      1,067      1,103        147
                              --------   --------   --------
Net mortgage-backed
securities ................   $112,473   $118,020   $ 51,664
                              ========   ========   ========


                                               14


<PAGE>



     Investment  and  Mortgage-backed   Securities  Portfolios  Maturities.  The
following table sets forth certain  information  regarding the carrying  values,
weighted   average   yields  and   maturities  of  the  Bank's   investment  and
mortgage-backed securities portfolios at December 31, 1996.

<TABLE>
<CAPTION>

                                                                                                       Total Investment and
                                         One Year or Less    One to Five Years  More Than Five Years  Mortgage-backed Securities
                                       --------------------  ------------------ --------------------  --------------------------

                                                   Weighted            Weighted            Weighted            Weighted  Estimated
                                       Carrying     Average  Carrying   Average  Carrying   Average  Carrying   Average     Fair
                                        Value        Yield    Value     Yield      Value     Yield     Value     Yield      Value
                                        -----        -----    -----     -----      -----     -----    -------   -------    -------

                                                                 (Dollars in Thousands)

<S>                                   <C>            <C>     <C>         <C>      <C>         <C>    <C>         <C>     <C>
U.S. Government securities.........   $  6,006       5.63%   $    --       --%    $     --      --%  $  6,006    5.63%   $  6,000
U.S. Agency securities ............      3,002       5.35     15,014     5.39       27,006    7.23     45,022    6.49      44,862
Other securities ..................        342       6.00         --       --           --      --        342    6.00         342
                                      --------       ----    -------      ----    --------    ----   --------    ----    --------
  Total investment securities......      9,350       5.55%   $15,014     5.39%    $ 27,006    7.23%  $ 51,370    6.39%   $ 51,204
                                      ========       ====    =======      ====    ========    ====   ========    ====    ========

GNMA ..............................   $     --         --%   $    52     7.66%$     34,114    6.86%  $ 34,166    6.86    $ 34,369
FNMA ..............................        112       8.50      3,129     7.00       46,674    6.74     49,915    6.76      49,703
FHLMC .............................        752       8.02      9,872     6.66       17,768    6.87     28,392    6.83      28,354
                                      --------       ----    -------      ----    --------    ----   --------    ----    --------
   Total mortgage-backed
   securities .....................   $    864       8.08%   $13,053      6.75%   $ 98,556    6.80%  $112,473    6.81%   $112,426
                                      ========       ====    =======      ====    ========    ====   ========    ====    ========
</TABLE>





                                       15


<PAGE>



Sources of Funds

      General. Deposits are the major source of the Bank's funds for lending and
other  investment  purposes.  The  Bank  derives  funds  from  amortization  and
prepayment of loans and  maturities of  investment  securities,  mortgage-backed
securities and operations.  Scheduled loan principal repayments are a relatively
stable source of funds,  while deposit inflows and outflows and loan prepayments
are  significantly  influenced by general interest rates and market  conditions.
The Bank can obtain  advances from the FHLB as an  alternative to retail deposit
funds.  FHLB advances may also be used to acquire certain other assets as may be
deemed appropriate for investment purposes. These advances are collateralized by
the  capital  stock of the FHLB held by the Bank and by  certain  of the  Bank's
mortgage loans and  mortgage-backed  securities.  At December 31, 1996, the Bank
has a $9.0 million FHLB advance, with a rate of 5.82% and a term of three years,
with a one-time callable feature at the end of the second year. In addition, the
Bank  also has three  repurchase  agreements  with an  independent  third  party
totaling $24.6 million. The terms of the repurchase agreements are one year, six
months and overnight.  The annual rates on the one-year and six month repurchase
agreements  are  5.68%  and  5.50%,  respectively.  The  effective  rate  on the
overnight repurchase agreement adjusts daily.

      Deposits.  The Bank  currently  offers NOW  Accounts,  Super NOW accounts,
regular passbook  statement savings accounts and savings accounts,  money market
deposit  accounts and term certificate  accounts,  primarily to consumers within
its primary  market area.  Deposit  account terms vary  according to the minimum
balance  required,  the time  period  the funds must  remain on deposit  and the
interest rate, among other factors.

      Although the Bank partially relies on customer  service and  relationships
with customers to attract and retain  deposits,  market interest rates and rates
offered by  competing  financial  institutions  significantly  affect the Bank's
ability to attract and retain deposits.

      The interest  rates paid by the Bank on deposits are  monitored  regularly
and are set as needed at the direction of the Board of  Directors.  The interest
rates on deposit  account  products are  determined by  evaluating  the interest
rates offered by other local  institutions,  and the degree of  competition  the
Bank wishes to maintain;  the Bank's anticipated need for cash and the timing of
that desired cash flow; the cost of borrowing from other sources versus the cost
of acquiring funds through  customer  deposits;  and the Bank's  anticipation of
future economic conditions and related interest rates. The Bank's interest rates
typically  are  competitive  with  those  offered by  competitors  in the Bank's
primary market area.

      Regular savings accounts, money market accounts and NOW accounts including
non-interest bearing deposits constituted $49.7 million, $14.8 million and $20.9
million,  respectively, or 21.8%, 6.5%, and 9.1%, respectively.  Certificates of
deposit  constituted  $142.9  million or 62.6% of the deposit  portfolio.  As of
December 31, 1996, the Bank had no brokered deposits.

                                      16


<PAGE>



      Jumbo  Certificate  Accounts.  The following table indicates the amount of
the Bank's  certificates  of deposit of $100,000 or more by time remaining until
maturity as of December 31, 1996.

                                                  Certificates
                                                  of Deposits
                                                  ------------
Maturity Period                                  (In Thousands)
---------------
Within three months............................       $1,655
Three through six months.......................        1,634
Six through twelve months......................        3,211
Over twelve months.............................        3,552
                                                    -------
                                                     $10,052
                                                     =======

      Savings  Deposit  Activity.  The  following  table sets forth the  savings
activities of the Bank for the periods indicated.

                                           Year Ended December 31,
                                       --------------------------------
                                        1996        1995       1994
                                       --------   --------    --------
                                               (In Thousands)
Net increase (decrease)
  before interest credited, deposits

  purchased and deposits sold.......   $(21,401)   $  7,949   $(17,672)
Deposits purchased .................         --      54,415         --
Deposits sold ......................     (9,221)         --         --
Interest credited ..................     11,083       9,314      7,170
                                       --------    --------   --------
Net increase (decrease) in
  savings deposits .................   $(19,539)   $ 71,678   $(10,502)
                                       ========    ========   ========



Subsidiary Activities

      As of January 5, 1996,  the Bank was the sole  subsidiary  of the Company.
The Bank has no active subsidiaries.

Personnel

      As of  December  31,  1996,  the Bank  had 35  full-time  and 9  part-time
employees.  None  of  the  Bank's  employees  are  represented  by a  collective
bargaining  group. The Bank believes that its relationship with its employees is
good.

Regulation

      Set  forth  below  is a  brief  description  of  all  materials  laws  and
regulations  which relate to the  regulation  of the Bank and the  Company.  The
description  does not purport to be complete and is qualified in its entirety by
reference to applicable laws and regulations.

                                      17


<PAGE>



Company Regulation

      General. The Company is a unitary savings and loan holding company subject
to regulatory oversight by the OTS. As such, the Company is required to register
and file reports with the OTS and is subject to regulation  and  examination  by
the OTS. In addition, the OTS has enforcement authority over the Company and its
non-savings association subsidiaries,  should such subsidiaries be formed, which
also permits the OTS to restrict or prohibit  activities  that are determined to
be a serious risk to the subsidiary  savings  association.  This  regulation and
oversight is intended primarily for the protection of the depositors of the Bank
and not for the  benefit of  stockholders  of the  Company.  The Company is also
required to file certain reports with, and otherwise  comply with, the rules and
regulations of the OTS and the SEC.

      Qualified  Thrift  Lender  Test.  As a unitary  savings  and loan  holding
company, the Company generally is not subject to activity restrictions, provided
the Bank  satisfies  the Qualified  Thrift  Lender  ("QTL") test. If the Company
acquires  control of another savings  association as a separate  subsidiary,  it
would become a multiple savings and loan holding company,  and the activities of
the  Company  and any of its  subsidiaries  (other  than the  Bank or any  other
Savings Association Insurance Fund  ("SAIF")-insured  savings association) would
become subject to restrictions  applicable to bank holding companies unless such
other associations each also qualify as a QTL and were acquired in a supervisory
acquisition. See "Regulation of the Bank -- Qualified Thrift Lender Test."

      Restrictions  on  Acquisitions.  The Company must obtain approval from the
OTS  before  acquiring  control  of any  other  SAIF-insured  association.  Such
acquisitions  are generally  prohibited if they result in a multiple savings and
loan holding company  controlling  savings  associations in more than one state.
However,  such  interstate  acquisitions  are permitted  based on specific state
authorization or in a supervisory acquisition of a failing savings association.

      Federal  law  generally  provides  that no  "person,"  acting  directly or
indirectly or through or in concert with one or more other persons,  may acquire
"control," as that term is defined in OTS  regulations,  of a federally  insured
savings  institution  without giving at least 60 days' written notice to the OTS
and providing the OTS an opportunity to disapprove the proposed acquisition.  In
addition,  no company may acquire  control of such an institution  without prior
OTS approval.

      Federal  Securities  Law.  The Company is subject to filing and  reporting
requirements  by  virtue  of  having  its  common  stock  registered  under  the
Securities Exchange Act of 1934. Furthermore,  Company stock held by persons who
are affiliates (generally officers, directors and principal stockholders) of the
Company may not be resold without registration or unless sold in accordance with
certain  resale  restrictions.  If the Company meets  specified  current  public
information  requirements,  each affiliate of the Company is able to sell in the
public  market,  without  registration,  a  limited  number  of  shares  in  any
three-month period.

Regulation of the Bank

      General. As a federally chartered,  SAIF-insured savings association,  the
Bank is  subject  to  extensive  regulation  by the OTS  and the  FDIC.  Lending
activities and other  investments must comply with various federal statutory and
regulatory   requirements.   The  Bank  is  also  subject  to  certain   reserve
requirements promulgated by the Federal Reserve Board.

                                      18


<PAGE>



      The OTS, in  conjunction  with the FDIC,  regularly  examines the Bank and
prepares  reports for the  consideration of the Bank's Board of Directors on any
deficiencies that they find in the Bank's  operations.  The Bank's  relationship
with its depositors and borrowers is also regulated to a great extent by federal
law,  especially  in such matters as the  ownership of savings  accounts and the
form and content of the Bank's mortgage documents.

      The Bank  must  file  reports  with the OTS and the  FDIC  concerning  its
activities  and  financial  condition,   in  addition  to  obtaining  regulatory
approvals  prior to entering into certain  transactions  such as mergers with or
acquisitions  of other savings  institutions.  This  regulation and  supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the protection of the SAIF and depositors.
The  regulatory  structure  also  gives  the  regulatory  authorities  extensive
discretion in connection with their  supervisory and enforcement  activities and
examination  policies,  including policies with respect to the classification of
assets and the  establishment  of adequate  loan loss  reserves  for  regulatory
purposes.  Any change in such  regulations,  whether by the OTS, the FDIC or the
Congress could have a material adverse impact on the Company, the Bank and their
operations.

      Deposit Insurance.  The FDIC is an independent federal agency that insures
the deposits,  up to prescribed statutory limits, of federally insured banks and
savings  institutions and safeguards the safety and soundness of the banking and
savings  industries.  Two separate  insurance  funds,  the Bank  Insurance  Fund
("BIF") for  commercial  banks,  state  savings  banks and some federal  savings
banks, and the SAIF for savings associations, are maintained and administered by
the FDIC. The Bank is a member of the SAIF and its deposit  accounts are insured
by the FDIC, up to the prescribed  limits.  The FDIC has  examination  authority
over all insured  depository  institutions,  including  the Bank,  and has under
certain  circumstances,   authority  to  initiate  enforcement  actions  against
federally insured savings institutions to safeguard safety and soundness and the
deposit insurance fund.

      Assessments.   The  FDIC  is  authorized  to  establish   separate  annual
assessment rates for deposit  insurance for members of the BIF and the SAIF. The
FDIC may increase  assessment  rates for either fund if necessary to restore the
fund's  ratio of  reserves  to insured  deposits  to its target  level  within a
reasonable time and may decrease such assessment  rates if such target level has
been met. The FDIC has established a risk-based  assessment system for both SAIF
and BIF members. Under this system, assessments are set within a range, based on
the risk the institution poses to its deposit insurance fund. This risk level is
determined  based on the  institution's  capital  level and the FDIC's  level of
supervisory concern about the institution.

      Because a  significant  portion of the  assessments  paid into the SAIF by
savings  associations  were used to pay the cost of prior thrift  failures,  the
reserves of the SAIF were below the level required by law. The BIF had, however,
met its required  reserve level during the third calendar  quarter of 1995. As a
result,  deposit  insurance  premiums  for  deposits  insured  by the  BIF  were
substantially  less than  premiums for  SAIF-insured  deposits.  Legislation  to
capitalize the SAIF and to eliminate the significant  premium  disparity between
the BIF and the SAIF became  effective  December 31, 1996. The  recapitalization
plan provided for a special  assessment equal to $.657 per $100 of SAIF deposits
held at March 31, 1995, in order to increase SAIF reserves to the level required
by law. Certain BIF institutions holding SAIF-insured  deposits were required to
pay a lower  special  assessment.  Based on its deposits at March 31,  1995,  on
November 27, 1996, the Bank paid a pre-tax  special  assessment of $1.2 million.
Such  payment was  recorded as an expense  and  accounted  for by the Bank as of
December 31, 1996. Earnings and capital were, therefore, negatively affected for
the quarter ended  September 30, 1996, by an after-tax  amount of  approximately
$750,000.

                                      19


<PAGE>



      The  recapitalization  plan also  provides  that the cost of prior  thrift
failures will be shared by both the SAIF and the BIF (Fico Bond payments), which
will increase BIF assessments for healthy banks to approximately  $.013 per $100
of deposits in 1997. SAIF  assessments for healthy savings  institutions in 1997
will be approximately  $.064 per $100 in deposits and may never be reduced below
the level set for healthy BIF institutions.

      The FDIC has lowered the rates on assessments paid to the SAIF and widened
the spread of those  rates.  The FDIC's  action  established  a base  assessment
schedule  for the SAIF with  rates  ranging  from 4 to 31 basis  points,  and an
adjusted  assessment  schedule that reduces these rates by 4 basis points.  As a
result,  the effective  SAIF rates range from 0 to 27 basis points as of October
1, 1996.  In  addition,  the  FDIC's  final rule  prescribed  a special  interim
schedule of rates  ranging  from 18 to 27 basis points for  SAIF-member  savings
institutions  for the last quarter of calendar 1996, to reflect the  assessments
paid to the Financing Corp. (Fico Bonds). Finally, the FDIC's action established
a procedure  for making  limited  adjustments  to the base  assessment  rates by
rulemaking without notice and comment, for both the SAIF and the BIF.

      Examination  Fees.  In addition  to federal  deposit  insurance  premiums,
savings  institutions  like the  Bank are  required  by OTS  regulations  to pay
assessments to the OTS to fund the operations of the OTS. The general assessment
is paid on a  semi-annual  basis and is  computed  based on total  assets of the
institution, including subsidiaries.

      Regulatory Capital  Requirements.  OTS capital regulations require savings
institutions to meet three capital standards: (1) tangible capital equal to 1.5%
of total adjusted assets,  (2) a leverage ratio (core capital) equal to at least
3% of total adjusted assets, and (3) a risk-based  capital  requirement equal to
8.0% of total risk-weighted assets.

      Savings  associations  with a greater than "normal" level of interest rate
exposure  will,  in the future,  be subject to a deduction  for an interest rate
risk ("IRR")  component  which may be from  capital for purposes of  calculating
their risk-based capital requirement. See "-- Net Portfolio Value Analysis."

      Tangible  capital is defined as core  capital less all  intangible  assets
(including  supervisory  goodwill),  plus purchased  mortgage  servicing  rights
valued  at the lower of the  maximum  percentage  established  by the OTS or the
amount   includable  in  core  capital.   Core  capital  is  defined  as  common
stockholders'  equity (including  retained  earnings),  noncumulative  perpetual
preferred  stock and minority  interests in the equity  accounts of consolidated
subsidiaries, and qualifying supervisory goodwill, less nonqualifying intangible
assets.

      The OTS  requires a core  capital  ratio of at least 3% for those  savings
associations  in the strongest  financial and  managerial  condition.  All other
savings  associations  are required to maintain minimum core capital of at least
4% of total adjusted  assets,  with a maximum core capital ratio  requirement of
5%. In determining the required minimum core capital ratio, the OTS assesses the
quality of risk management and the level of risk in each savings  association on
a case-by-case basis.

      The  risk-based  capital  standard for savings  institutions  requires the
maintenance of total  risk-based  capital (which is defined as core capital plus
supplementary  capital)  of  8%  of  risk-weighted  assets.  The  components  of
supplementary capital include, among other items, cumulative perpetual preferred
stock,  perpetual  subordinated debt, mandatory  convertible  subordinated debt,
intermediate-term  preferred  stock and the  portion of the  allowance  for loan
losses not designated for specific loan losses. The portion of the allowance for
loan and lease  losses  includable  in  supplementary  capital  is  limited to a
maximum of

                                      20


<PAGE>



1.25% of risk-weighted assets. Overall, supplementary capital is limited to 100%
of core capital. A savings  association must calculate its risk-weighted  assets
by multiplying each asset and off-balance  sheet item by various risk factors as
determined  by the OTS,  which  range  from 0% for  cash to 100% for  delinquent
loans, property acquired through foreclosure, commercial loans and other assets.

      As shown  below,  the  Bank's  regulatory  capital  exceeded  all  minimum
regulatory capital requirements applicable to it as of December 31, 1996:

                                                                  Percent of
                                                                   Adjusted
                                                    Amount          Assets
                                                    ------         --------
                                                     (Dollars in Thousands)

Tangible Capital:
Actual capital..........................            $25,657          8.54%
Regulatory requirement..................              4,506          1.50
                                                    -------          ----
  Excess................................            $21,151          7.04%
                                                    =======         =====

Core Capital:
Actual capital..........................            $25,657          8.54%
Regulatory requirement..................              9,013          3.00
                                                    -------          ----
  Excess................................            $16,644          5.54%
                                                    =======         =====

Risk-Based Capital:
Actual capital..........................            $25,910         27.37%
Regulatory requirement..................              7,573          8.00
                                                    -------          ----
  Excess................................            $18,337         19.37%
                                                    =======         =====


      The Bank is not under any agreement with regulatory  authorities nor is it
aware of any current  recommendations  by the regulatory  authorities  which, if
they were to be implemented,  would have a material effect on liquidity, capital
resources or operations of the Bank or the Company.

      Net Portfolio Value Analysis. In order to encourage associations to reduce
their IRR,  the OTS  adopted a final rule in August  1993  incorporating  an IRR
component  into the  risk-based  capital  rules.  The IRR  component is a dollar
amount that will be deducted from total  capital for the purpose of  calculating
an institution's  risk-based capital requirement and is measured in terms of 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,  liabilities,  and off-balance sheet contracts.  An institution's IRR is
measured as the change to its NPV as a result of a hypothetical  200 basis point
("bp") change in market interest  rates. A resulting  change in NPV of more than
2% of the estimated  market value of its assets will require the  institution to
deduct from its capital 50% of that excess  change.  The rules  provide that the
OTS will calculate the IRR component  quarterly for each  institution.  The rule
will not become  effective  until the OTS evaluates the process by which savings
associations  may appeal an interest rate risk  reduction  determination.  It is
uncertain as to when this evaluation may be completed.

                                      21


<PAGE>



      The  following  table  presents the Bank's NPV at December  31,  1996,  as
calculated  by OTS and  based on OTS  assumptions  using  raw data  provided  to
FinPro, Inc. by the Bank.

<TABLE>
<CAPTION>
                                  Net Portfolio Value
                                   ($ In Thousands)

  Change in                                     Percent of                Change in NPV
Interest Rate                      Amount of    Estimated    NPV Ratio      Ratio (4)
(Basis Points)       NPV           Change (1)    NPV (2)        (3)
--------------     --------        ----------   ----------   ---------    -------------
<S>                 <C>              <C>          <C>        <C>             <C>
    +400             3,599          (24,295)      -87%        1.31%          -786 bp
    +300            10,104          (17,789)      -64%        3.58%          -560 bp
    +200            16,562          (11,331)      -41%        5.71%          -346 bp
    +100            22,609           (5,284)      -19%        7.60%          -157 bp
     Par            27,893               --                   9.17%
    -100            32,089            4,195       +15%       10.36%           119 bp
    -200            35,404            7,511       +27%       11.26%           209 bp
    -300            38,295           10,402       +37%       12.01%           284 bp
    -400            41,916           14,023       +50%       12.94%           377 bp
</TABLE>


----------------------------
(1)   Represents  the excess  (deficiency)  of the  estimated  NPV  assuming the
      indicated  change in interest  rates minus the  estimated  NPV assuming no
      change in interest rates.
(2)   Calculated  as the amount of change in the  estimated  NPV  divided by the
      estimated NPV assuming no change in interest rates.
(3)   Calculated as the estimated NPV divided by average total assets.
(4)   Calculated  as the  excess  (deficiency)  of the NPV  ratio  assuming  the
      indicated  change in interest  rates over the estimated NPV ratio assuming
      no change in interest rates.

      If the OTS rule regarding the IRR component had been in effect at December
31,  1996,  the Bank  would  have had to  deduct  from  its  risk-based  capital
approximately  $2.6 million.  The Bank would have met its capital  requirements,
had this rule been in effect at December 31, 1996.

                                                  December 31,      December 31,
                                                      1996             1995(1)
                                                  ------------      ------------

    *** RISK MEASURES: 200 BP RATE SHOCK ***

Pre-Shock NPV Ratio: NPV as % of PV of Assets...      9.17%            6.76%

Exposure Measure: Post-Shock NPV Ratio..........      5.71%            5.63%

Sensitivity Measure: Change in NPV Ratio........      (346) bp         (113) bp



*** CALCULATION OF CAPITAL COMPONENT ***

Change in NPV as % of PV of Assets..............      3.73%             1.3%

Interest Rate Risk Capital Component ($000).....     $2,630               --

-----------------------------
(1)   Percentages  for 1995 are  calculated  by  FinPro,  Inc.  and based on OTS
      assumptions using raw data provided to FinPro, Inc. by the Bank.

                                      22


<PAGE>



      Certain  shortcomings  are inherent in the  methodology  used in the above
table.  Modeling changes in NPV requires the making of certain  assumptions that
may tend to oversimplify  the manner in which actual yields and costs respond to
changes in market interest rates.  First, the models assume that the composition
of  the  Bank's  interest  sensitive  assets  and  liabilities  existing  at the
beginning of a period remains  constant over the period being measured.  Second,
the models  assume  that a  particular  change in  interest  rates is  reflected
uniformly  across the yield  curve  regardless  of the  duration  to maturity or
repricing  of specific  assets and  liabilities.  Accordingly,  although the NPV
measurements  do provide an indication of the Bank's interest rate risk exposure
at a particular  point in time, such  measurements are not intended to provide a
precise forecast of the effect of changes in market interest rates on the Bank's
net interest income.

      In times of decreasing  interest  rates,  the value of  fixed-rate  assets
could  increase in value and the lag in  repricing  of interest  rate  sensitive
assets could be expected to have a positive effect on the Bank.

      Prompt Corrective  Action.  The FDICIA also established a system of prompt
corrective  action to resolve  the  problems of  undercapitalized  institutions.
Under this  system,  which  became  effective  December  19,  1992,  the banking
regulators   are  required  to  take   certain   supervisory   actions   against
undercapitalized   institutions,   the  severity  of  which   depends  upon  the
institution's  degree of  capitalization.  Under the OTS final rule implementing
the prompt  corrective action  provisions,  an institution shall be deemed to be
(i) "well  capitalized" if it has total risk-based capital of 10.0% or more, has
a Tier I risk- based  capital ratio (core or leverage  capital to  risk-weighted
assets)  of 6.0% or  more,  has a  leverage  capital  of 5.0% or more and is not
subject to any order or final capital  directive to meet and maintain a specific
capital level for any capital measure, (ii) "adequately capitalized" if it has a
total risk-based  capital ratio of 8.0% or more, a Tier I risked-based  ratio of
4.0% or more and a leverage  capital  ratio of 4.0% or more (3.0% under  certain
circumstances)  and does not meet the  definition of "well  capitalized,"  (iii)
"undercapitalized"  if it has a total risk-based capital ratio that is less than
6.0%,  a Tier I  risk-based  capital  ratio that is less than 4.0% or a leverage
capital  ratio  that is less than 4.0%  (3.0% in  certain  circumstances),  (iv)
"significantly undercapitalized" if it has a total risk-based capital ratio that
is less than 6.0%, a Tier I risk-based capital ratio that is less than 3.0% or a
leverage   capital   ratio   that  is  less  than   3.0%  and  (v)   "critically
undercapitalized"  if it has a ratio of tangible  equity to total assets that is
equal to or less than 2.0%. In addition, under certain circumstances,  a federal
banking  agency may  reclassify a well  capitalized  institution  as  adequately
capitalized  and  may  require  an  adequately  capitalized  institution  or  an
undercapitalized institution to comply with supervisory actions as if it were in
the next lower category (except that the FDIC may not reclassify a significantly
undercapitalized institution as critically  undercapitalized).  Immediately upon
becoming  undercapitalized,  an  institution  shall  become  subject  to various
restrictions and could be subject to additional supervisory actions.

      As of December 31, 1996, the Bank was a "well capitalized  institution" as
defined in the prompt corrective  action  regulations and as such is not subject
to any prompt corrective action measures.

      Dividend  and Other  Capital  Distribution  Limitations.  OTS  regulations
require  the  Bank to give  the OTS 30  days'  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory  powers to prohibit  the payment of  dividends  to the  Company.  In
addition,  the Bank may not declare or pay a cash  dividend on its capital stock
if the  effect  thereof  would be to reduce the  regulatory  capital of the Bank
below the amount  required  for the  liquidation  account to be  established  in
connection with the Conversion.

                                      23


<PAGE>



      OTS  regulations  impose  limitations  upon all capital  distributions  by
savings  institutions,  such  as  cash  dividends,  payments  to  repurchase  or
otherwise acquire its shares, payments to shareholders of another institution in
a cash-out  merger and other  distributions  charged against  capital.  The rule
establishes  three tiers of  institutions,  based primarily on an  institution's
capital  level.  An  institution  that  exceeds  all  fully  phased-in   capital
requirements  before  and  after  a  proposed  capital   distribution  ("Tier  1
institution")  and has not  been  advised  by the OTS that it is in need of more
than the normal  supervision can, after prior notice but without the approval of
the OTS, make capital  distributions during a calendar year equal to the greater
of (i) 100% of its net income to date during the  calendar  year plus the amount
that would reduce by one-half its "surplus  capital  ratio" (the excess  capital
over its fully phased-in capital  requirements) at the beginning of the calendar
year,  or (ii) 75% of its net income over the most recent four  quarter  period.
Any additional capital distributions require prior regulatory approval. Based on
the  Bank's  capital  levels  at  December  31,  1996,  the  Bank  was a  Tier 1
institution.  In the event the Bank's  capital  fell  below its fully  phased-in
requirement  or the OTS  notified  it that  it was in need of more  than  normal
supervision,   the  Bank's  ability  to  make  capital  distributions  could  be
restricted.  In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS  determines  that such  distribution  would  constitute an unsafe or unsound
practice.

      Finally, under the FDICIA, a savings association is prohibited from making
a  capital   distribution  if,  after  making  the  distribution,   the  savings
association  would  be  "undercapitalized"  (not  meet  any  one of its  minimum
regulatory  capital  requirements).  OTS regulations also prohibit the Bank from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory (or total) capital of the Bank would be reduced below the
amount required to be maintained for the liquidation  account  established by it
for certain  depositors in connection  with its conversion  from mutual to stock
form. In addition,  such regulations  prohibit an institution from  repurchasing
any of its  stock  for a  period  of at  least  one  year  from  the date of its
conversion without a waiver of such prohibition by the OTS.

      Qualified  Thrift  Lender Test.  The Home Owners'  Loan Act  ("HOLA"),  as
amended, requires savings institutions to meet a QTL test. If the Bank maintains
an appropriate  level of Qualified  Thrift  Investments  (primarily  residential
mortgages and related investments, including certain mortgage-backed securities)
("QTIs")  and  otherwise  qualifies  as a QTL,  it will  continue  to enjoy full
borrowing  privileges from the FHLB of New York. The required percentage of QTIs
is 65% of  portfolio  assets  (defined as all assets  minus  intangible  assets,
property used by the  institution  in conducting  its business and liquid assets
equal to 10% of total  assets).  Certain  assets  are  subject  to a  percentage
limitation of 20% of portfolio  assets.  In addition,  savings  associations may
include  shares of stock of the FHLBs,  FNMA and FHLMC as qualifying  QTIs.  The
method for measuring  compliance with the QTL test is on a monthly basis in nine
out of every 12 months. As of December 31, 1996, the Bank was in compliance with
its QTL requirement.

      A savings association that does not meet a QTL test must either convert to
a bank charter or comply with the following restrictions on its operations:  (i)
the  savings  association  may not  engage in any new  activity  or make any new
investment,  directly or  indirectly,  unless such  activity  or  investment  is
permissible  for a  national  bank;  (ii) the  branching  powers of the  savings
association  shall be restricted to those of a national bank;  (iii) the savings
association shall not be eligible to obtain any advances from its FHLB; and (iv)
payment of  dividends by the savings  association  shall be subject to the rules
regarding  payment of dividends by a national bank. Upon the expiration of three
years from the date the  savings  association  ceases to be a QTL, it must cease
any activity and not retain any investment not  permissible  for a national bank
and  immediately  repay any  outstanding  FHLB  advances  (subject to safety and
soundness considerations).

                                      24


<PAGE>



      Loans-to-One Borrower. See "Business -- Lending Activities -- Loans-to-One
Borrower."

      Community  Reinvestment.  Under the Community Reinvestment Act ("CRA"), as
implemented  by OTS  regulations,  a savings  association  has a continuing  and
affirmative obligation consistent with its safe and sound operation to help meet
the credit needs of its entire  community,  including  low and  moderate  income
neighborhoods.  The CRA does not  establish  specific  lending  requirements  or
programs  for  financial   institutions  nor  does  it  limit  an  institution's
discretion  to develop the types of products and  services  that it believes are
best  suited  to its  particular  community,  consistent  with the CRA.  The CRA
requires the OTS, in connection with its  examination of a savings  institution,
to assess the institution's  record of meeting the credit needs of its community
and to take such record into account in its  evaluation of certain  applications
by such institution.  Current law requires public disclosure of an institution's
CRA  rating  and  requires  the  OTS  to  provide  a  written  evaluation  of an
institution's CRA performance utilizing a four-tiered  descriptive rating system
in lieu of the existing five-tiered numerical rating system. The Bank received a
satisfactory  rating (the second  highest  rating  available) as a result of its
last evaluation in November,  1993. In April 1995,  final CRA  regulations  were
adopted  by the  federal  banking  agencies,  including  the  OTS.  Under  these
regulations,  the Bank,  as a relatively  small  institution,  will have several
alternatives to choose from to satisfy its CRA obligations.  These  alternatives
were effective January 1, 1996.

      Transactions With Affiliates. Generally, restrictions on transactions with
affiliates  require  that  transactions  between  a savings  association  or its
subsidiaries  and  its  affiliates  be on  terms  as  favorable  to the  Bank as
comparable  transactions  with  non-affiliates.  In  addition,  certain of these
transactions  are restricted to an aggregate  percentage of the Bank's  capital;
collateral  in  specified  amounts  must  usually be provided by  affiliates  to
receive loans from the Bank.  Affiliates of the Bank include the Company and any
company  which would be under  common  control  with the Bank.  In  addition,  a
savings  association  may not lend to any affiliate  engaged in  activities  not
permissible  for a  bank  holding  company  or  acquire  the  securities  of any
affiliate  which  is not a  subsidiary.  The  OTS has the  discretion  to  treat
subsidiaries of savings associations as affiliates on a case-by-case basis.

      The Bank's  authority to extend credit to its officers,  directors and 10%
shareholders,  as well as to entities  that such  persons  control is  currently
governed by Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O
promulgated by the Federal Reserve Board. Among other things,  these regulations
require such loans to be made on terms substantially similar to those offered to
unaffiliated individuals,  place limits on the amount of loans the Bank may make
to such persons  based,  in part, on the Bank's  capital  position,  and require
certain approval  procedures to be followed.  Recent legislation permits savings
institutions  to make  loans  to  executive  officers,  trustees  and  principal
shareholders  ("insiders")  on  preferential  terms,  provided the  extension of
credit is made pursuant to a benefit or compensation program of the Bank that is
widely  available to employees of the Bank or its  affiliates  and does not give
preference to any insider over other employees of the Bank or affiliate.

      Branching  by Federal  Savings  Banks.  Effective  May 11,  1992,  the OTS
amended its Policy  Statement on Branching by Federal  Savings  Associations  to
permit  interstate  branching to the full extent  permitted by statute (which is
essentially  unlimited).  This  permits  savings  associations  with  interstate
networks to  diversify  their loan  portfolios  and lines of  business.  The OTS
authority  preempts any state law  purporting  to regulate  branching by federal
associations.  However, the OTS will evaluate a branching  applicant's record of
compliance  with the CRA.  A poor CRA  record  may be the basis for  denial of a
branching application.

                                      25


<PAGE>



      Liquidity Requirements.  All savings associations are required to maintain
an average daily  balance of liquid assets equal to a certain  percentage of the
sum of its  average  daily  balance of net  withdrawable  deposit  accounts  and
borrowings payable in one year or less. The liquidity  requirement may vary from
time to time (between 4% and 10%) depending upon economic conditions and savings
flows of all savings  associations.  At the present  time,  the required  liquid
asset ratio is 5%. At December 31, 1996, the Bank's liquidity ratio was 12.88%.

      Liquid  assets for  purposes of this ratio  include  specified  short-term
assets (e.g.,  cash,  certain time deposits,  certain  banker's  acceptances and
short-term  U.S.  Government  obligations),  and long-term  assets  (e.g.,  U.S.
Government  obligations  of more  than one and less  than  five  years and state
agency obligations with a minimum term of 18 months). The regulations  governing
liquidity  requirements  include as liquid  assets debt  securities  hedged with
forward  commitments  obtained  from, or debt  securities  subject to repurchase
agreements  with,  members  of the Bank of  Primary  Dealers  in  United  States
Government  Securities  or banks whose  accounts  are insured by the FDIC,  debt
securities  directly hedged with a short  financial  future  position,  and debt
securities  that  provide the holder with a right to redeem the  security at par
value,  regardless  of the stated  maturities  of the  securities.  FIRREA  also
authorized  the OTS to  designate  as  liquid  assets  certain  mortgage-related
securities  with less  than one year to  maturity.  Short-  term  liquid  assets
currently must constitute at least 1% of an association's  average daily balance
of net withdrawable deposit accounts and current borrowings.  Monetary penalties
may be imposed upon associations for violations of liquidity requirements.

      Federal  Home  Loan Bank  System.  The Bank is a member of the FHLB of New
York,  which is one of 12  regional  FHLBs that  administer  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB. As of December
31,  1996,  the Bank  had no  borrowed  funds  from the FHLB of New York to fund
operations; however, there can be no assurances that borrowings will not be made
in the future.

      As a member,  the Bank is required to purchase and  maintain  stock in the
FHLB of New York in an  amount  equal to at  least  1% of its  aggregate  unpaid
residential  mortgage loans, home purchase contracts,  or similar obligations at
the beginning of each year.  As of December 31, 1996,  the Bank had $2.1 million
in FHLB stock, which was in compliance with this requirement.

      The FHLBs are  required to provide  funds for the  resolution  of troubled
savings  associations  and to contribute to affordable  housing programs through
direct loans or interest subsidies on advances targeted for community investment
and  low-  and  moderate-income  housing  projects.   These  contributions  have
adversely  affected the level of FHLB dividends paid and could continue to do so
in the future.  For the fiscal year ended  December 31, 1996,  dividends paid by
the FHLB of New York to the Bank totaled $126,000.

      Federal Reserve System.  The Federal Reserve Board requires all depository
institutions  to maintain  non-interest  bearing  reserves at  specified  levels
against  their  transaction  accounts  (primarily  checking,  NOW and  Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements  imposed by the Federal Reserve Board may be used
to satisfy the liquidity requirements that are imposed by the OTS.

                                      26


<PAGE>



      Savings  associations  have  authority to borrow from the Federal  Reserve
Bank "discount  window," but Federal Reserve policy  generally  requires savings
associations  to exhaust  all OTS  sources  before  borrowing  from the  Federal
Reserve System. The Bank had no such borrowings at December 31, 1996.

Federal Taxation

      Savings institutions are subject to the provisions of the Internal Revenue
Code of 1986,  as amended  (the  "Code"),  in the same  general  manner as other
corporations. However, savings institutions such as the Bank, which meet certain
definitional tests and other conditions  prescribed by the Code may benefit from
certain favorable  provisions regarding their deductions from taxable income for
annual additions to their bad debt reserve. The amount of the bad debt deduction
that a qualifying savings institution may claim with respect to additions to its
reserve for bad debts is subject to certain limitations.

      Prior to certain changes to the Code in 1996, thrift institutions  enjoyed
a tax advantage over banks with respect to determining additions to its bad debt
reserves.  All thrift  institutions,  prior to 1996,  were  generally  allowed a
deduction  for  additions to a reserve for bad debts.  In contrast,  only "small
banks" (the average adjusted bases of all assets of such institution equals $500
million or less) were  allowed a similar  deduction  for  additions to their bad
debt  reserves.  In  addition,  while small  banks were only  allowed to use the
experience  method in determining  their annual  addition to a bad debt reserve,
all thrift institutions generally enjoyed a choice between (i) the percentage of
taxable  income method and, (ii) the  experience  method,  for  determining  the
annual  addition to their bad debt  reserve.  This choice of methods  provided a
distinct advantage to thrift institutions that continually experienced little or
no losses  from bad debts,  over  small  banks in a similar  situation,  because
thrift  institutions  in  comparison  to small  banks were  generally  allowed a
greater tax deduction by using the  percentage of taxable  income method (rather
than the experience method) to determine their deductible  addition to their bad
debt reserves.

      The Code was  revised in August 1996 to  equalize  the  taxation of thrift
institutions  and banks,  effective for taxable years  beginning after 1995. All
thrift institutions are now subject to the same provisions as banks with respect
to deductions  for bad debt.  Now only thrift  institutions  that are treated as
small banks may  continue  to account  for bad debts  under the reserve  method;
however such  institutions  may only use the experience  method for  determining
additions to their bad debt reserve. Thrift institutions that are not treated as
small banks may no longer use the reserve  method to account for their bad debts
but must alternatively use the specific charge-off method.

      The  revisions  to  the  Code  in  1996  also  provided  that  all  thrift
institutions  must generally  recapture any  "applicable  excess  reserves" into
their taxable income,  over a six year period beginning in 1996;  however,  such
recapture  may be  delayed  up to two  years  if a  thrift  institution  meets a
residential-lending  test. Generally,  a thrift institution's  applicable excess
reserves equals the excess of (i) the balance of its bad debt reserves as of the
close of its  taxable  year  beginning  before  January 1,  1996,  over (ii) the
balance of such  reserves  as of the close of its last  taxable  year  beginning
before January 1, 1988 ("pre- 1988 reserves").  The Bank will not be required to
recapture any amounts into income with regard to any applicable  excess reserves
because the balance of its bad debt reserves as of the close of its taxable year
beginning  before  January 1, 1996 did not exceed  the  balance of its  pre-1988
reserves.

      In addition,  all thrift institutions must continue to keep track of their
pre-1988 reserves because this amount remains subject to recapture in the future
under the  Code.  A thrift  institution  such as the Bank,  would  generally  be
required to recapture into its taxable income its pre-1988  reserves in the case
of certain excess  distributions  to, and  redemptions of,  shareholders  (e.g.,
stock  repurchases).  For taxable  years after 1995,  the Bank will  continue to
account for its bad debts under the reserve method. Any

                                      27


<PAGE>



additions  to the Bank's bad debt  reserves  after  1995 will  generally  not be
subject  to the  recapture  provisions  of the Code.  The  balance of the Bank's
pre-1988 reserves equaled $2.4 million.

      The Code  imposes a tax  ("AMT") on  alternative  minimum  taxable  income
("AMTI") at a rate of 20%. AMTI is increased by certain preference items defined
in the  Code.  Only a  portion  of AMTI  can be  offset  by net  operating  loss
carryovers;  however,  the Bank currently has no net operating loss  carryovers.
AMTI is also  adjusted by  determining  the tax  treatment of certain items in a
manner  that  negates  the  deferral  of income  resulting  from the regular tax
treatment of those items.  Thus,  the  Company's  AMTI is increased by an amount
equal to 75% of the  amount by which the  Company's  adjusted  current  earnings
exceeds its AMTI  (determined  without  regard to this  adjustment  and prior to
reduction for net operating losses).

                                      28


<PAGE>



Item  2.  Properties
---------------------

      The Bank operates from its main office  located at 86 Main Street,  Little
Falls, New Jersey and 7 branch offices.  This includes three branches  purchased
from an  unaffiliated  commercial  bank  in  December  1995.  The  Bank's  total
investment  in office  property  and  equipment  is $4.0 million with a net book
value of $2.7 million at December 31, 1996.

Item 3.  Legal Proceedings
--------------------------

      Neither the Company nor its subsidiaries are involved in any pending legal
proceedings,  other than routine legal matters  occurring in the ordinary course
of  business,  which in the  aggregate  involve  amounts  which are  believed by
management to be immaterial to the consolidated  financial  condition or results
of operations of the Company.

Item 4.  Submission of Matters to a Vote of Security-Holders
------------------------------------------------------------

      Not applicable.

                                    PART II

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

      Information  relating  to the market for  Registrant's  common  equity and
related  stockholder  matters  appears under "Stock Market  Information"  in the
Registrant's 1996 Annual Report to Stockholders ("Annual Report") on page _, and
is incorporated herein by reference.

Item 6.  Selected Financial Data
--------------------------------

      The  above-captioned  information  appears in the Annual Report on pages 3
and 4, and is incorporated herein by reference.

Item 7.  Management's Discussion and Analysis of Financial Conditions and
         Results of Operations
--------------------------------------------------------------------------

      The above-captioned  information appears under Management's Discussion and
Analysis of Financial  Condition  and Results of Operations in the Annual Report
on pages 5 through 15 and is incorporated herein by reference.

Item 8.  Financial Statements and Supplementary Data
-----------------------------------------------------

      The Financial  Statements of the Bank, together with the report thereon by
Radics & Co.,  LLC,  appear in the Annual  Report on pages 16 through 51 and are
incorporated herein by reference.

Item 9.  Changes In and Disagreements with Accountants on Accounting and
         Financial Disclosure
-------------------------------------------------------------------------

      Lewis  W.  Parker,  III  declined  to  stand  for  re-election  in 1995 as
indenpendent  auditor for the Bank.  The reports of Lewis W. Parker,  III on the
financial  statements  of the  Bank  for  the  past  three  years  prior  to his
resignation  contained no adverse opinion or disclaimer of opinion,  and was not
qualified or modified as to uncertainty,  audit scope or accounting  principles.
Further,  during the three most recent  fiscal years and the  subsequent  period
preceding the resignation of Lewis W. Parker, III, there were no

                                      29


<PAGE>



disagreements with Lewis W. Parker, III on any matters of accounting  principles
or practices,  financial statement  disclosure,  or auditing scope or procedure,
which  disagreements,  if not resolved to the  satisfaction  of Lewis W. Parker,
III,  would have caused  Lewis W. Parker,  III to make  reference to the subject
matter of the  disagreements  in connection  with his report.  The Bank accepted
Lewis  W.  Parker,  III's  resignation,  effective  as of  the  closing  of  the
Conversion,  and appointed Radics & Co., LLC, Pine Brook, New Jersey,  certified
public  accountants,  to conduct an audit of the  financial  statements  for the
fiscal years ended December 31, 1995 and 1996.

                                   PART III

Item 10.  Directors and Executive Officers of the Registrant
-------------------------------------------------------------

      The  information  contained  under the  section  captioned  "Proposal I --
Election of Directors" at pages 4 through 8 of the Registrant's definitive proxy
statement for the Registrant's 1997 Annual Meeting of Stockholders to be held on
April 17, 1997 (the "Proxy  Statement"),  which was filed with the Commission on
March 24, 1997 and incorporated herein by reference.  See also "Item 1. Business
of the Bank -- Personnel" included herein.

Item 11.  Executive Compensation
---------------------------------

      The information relating to executive  compensation is incorporated herein
by reference to the Registrant's Proxy Statement at pages 10 through 14.

Item 12.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

      The  information  relating to  security  ownership  of certain  beneficial
owners and management is  incorporated  herein by reference to the  Registrant's
Proxy Statement at pages 5-6.

                                    PART IV

Item 13.  Certain Relationships and Related Transactions
--------------------------------------------------------

      The information relating to certain relationships and related transactions
is incorporated  herein by reference to the Registrant's Proxy Statement at page
16.

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
--------------------------------------------------------------------------

(a)    The following documents are filed as a part of this report:

                                      30


<PAGE>



(1)   Financial  Statements of the Company are  incorporated by reference to the
following indicated pages of the Annual Report.

                                                                         PAGE
                                                                         ----

Independent Auditors' Report.........................................     17
Consolidated Statements of Financial Condition as of
  December 31, 1996 and 1995.........................................     18
Consolidated Statements of Income For the Years Ended
  December 31, 1996, 1995 and 1994...................................     19
Consolidated Statements of Changes in Stockholders' Equity
  for the Years Ended December 31, 1996, 1995 and 1994...............     20
Consolidated Statements of Cash Flows for the Years Ended
  December 31, 1996, 1995 and 1994...................................     21
Notes to Consolidated Financial Statements...........................     24


      The remaining  information appearing in the Annual Report is not deemed to
be filed as part of this report, except as expressly provided herein.

      (2)   All  schedules  are  omitted   because  they  are  not  required  or
applicable,  or the required information is shown in the consolidated  financial
statements or the notes thereto.

      (3)   Exhibits

            (a)   The following exhibits are filed as part of this report.

       2.0  Branch Sale Agreement**
       3.1  Articles of Incorporation of Little Falls Bancorp, Inc.*
       3.2  Bylaws of Little Falls Bancorp, Inc.*
       4.0  Form of Stock Certificate of Little Falls Bancorp, Inc.*
      10.1  Employment Agreement between the Bank and John P. Pullara**
      10.2  Employment Agreement between the Bank and Leonard G. Romaine**
      10.4  Form of Employment Agreement with Seven Employees of the Bank
      10.6  1996 Management Stock Bonus Plan
      10.7  1996 Stock Option Plan
      13.0  1996 Annual Report to Stockholders
      21.0  Subsidiary  of the  Registrant  (See  Item  1 -  Business-Subsidiary
            Activities)

            (b)   Reports on Form 8-K.


            None.

------------------------------------
*    Incorporated  herein by reference  into this  document from the Exhibits to
     Form S-1, Registration  Statement,  initially filed with the Securities and
     Exchange Commission on September 25, 1995, Registration No. 33-97316.
**   Incorporated   by  reference  into  this  document  from  the  Exhibits  to
     Registrant's  Annual  Report on Form 10-K for the Year Ended  December  31,
     1995 (File No. 0-27010).


                                      31


<PAGE>



                                  SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                    LITTLE FALLS BANCORP, INC.

Dated:  March 24, 1997              By:    /s/ Leonard G. Romaine
                                           --------------------------------
                                           Leonard G. Romaine
                                           President and Director
                                           (Duly Authorized Representative)

     Pursuant to the  requirement of the Securities  Exchange Act of 1934, this
Report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

By:  /s/ Leonard G. Romaine         By:     /s/ Richard A. Capone
     -----------------------------          ----------------------------------
     Leonard G. Romaine                     Richard A. Capone
     President and Director                 Chief Financial Officer
     (Principal Executive Officer)          Principal Financial and Accounting
                                              Officer)

Date:  March 24, 1997                       Date: March 24, 1997


By:                                 By:     /s/ John P. Pullara
     -------------------------              --------------------
     Albert J. Weite                        John P. Pullara
     Chairman of the Board and              Director
       Director

Date:  March __, 1997                       Date: March 25, 1997


By: /s/ Edward J. Seugling           By:     /s/ George Kuiken
    -----------------------                  -------------------
    Edward J. Seugling                       George Kuiken
    Vice Chairman of the Board               Director
      and Director

Date:  March 25, 1997                        Date: March 25, 1997


By:                                  By:    /s/ Norman A. Parker
      ------------------------               -------------------------
     Raoul G. Barton                         Norman A. Parker
     Director                                Director

Date:  March ____, 1997                      Date: March 25, 1997


By:    /s/ C. Evan Daniels
       --------------------
       C. Evans Daniels
       Director

Date:  March 25, 1997