Exhibit 13.0

                      1996 Annual Report to Stockholders




<PAGE>


                                 [** LOGO **]

                          Little Falls Bancorp, Inc.

                             ANNUAL REPORT - 1996
               ------------------------------------------------





<PAGE>




                          Little Falls Bancorp, Inc.
                             Annual Report - 1996

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

TABLE OF CONTENTS
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Letter to Stockholders ....................................................  1

Corporate Profile and Stock Market Information.............................  2

Selected Financial and Other Data..........................................  3

Management's Discussion and Analysis of
  Financial Condition and Results of Operations............................  5

Management Responsibility Statement.......................................  16

Independent Auditors' Report..............................................  17

Consolidated Statements of Financial Condition............................  18

Consolidated Statements of Income.........................................  19

Consolidated Statements of Retained Earnings..............................  20

Consolidated Statements of Cash Flows.....................................  21

Notes to Consolidated Financial Statements................................  24

Other Corporate Information...............................................  51






<PAGE>



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

To Our Stockholders:


On behalf of our directors, officers and employees, we are pleased to present to
you our second annual stockholders' report.

The year 1996 was an historic  year for Little  Falls Bank.  The year began with
Little Falls Bancorp,  Inc.,  selling  3,041,750  shares of stock in its initial
public  offering to the Bank's  customers,  directors,  employees and interested
investors in connection with the Bank's  conversion  from a federally  chartered
mutual  savings  bank  to a  federally  chartered  stock  savings  bank  and the
acquisition  of all of the issued and  outstanding  capital stock of the Bank by
the Company. The Conversion generated $26.8 million of net proceeds.

After much anticipation and speculation,  the FDIC imposed a special  assessment
on SAIF members to recapitalize  the deposit  insurance fund. For the Bank, this
resulted in a one-time expense of $1.2 million.  While this materially  impacted
earnings for 1996,  it is expected to  significantly  decrease  federal  deposit
insurance  premiums  going  forward.  In spite of the special  assessment,  1996
earnings increased over 1995's level.

During the past year, there were several other positive accomplishments achieved
by the Company.  For  example,  loans  increased by $20.9  million due to record
originations in excess of $31.0 million; non-performing assets decreased by $1.2
million  as the  area  economy  continued  to  improve  and the Bank was able to
resolve some problem assets,  and the net interest spread  increased by 25 basis
points as the Bank was able to reduce its cost of funds.

In addition,  the Bank closed its Mount Holly office,  and sold the $9.2 million
of deposits to an unaffiliated financial institution.  A small gain was recorded
on the sale. The Bank also closed its Frenchtown office, with the deposits being
retained.  We believe this  consolidation will better serve our customers and we
anticipate  a reduction in  operating  costs going  forward as a result of these
transactions.

In October 1996,  John P. Pullara retired as President of Little Falls Bank. Mr.
Pullara  started  with the Bank in 1955,  serving as President  since 1977.  His
guidance  helped  the Bank  through  some very  difficult  times for the  thrift
industry, culminating in the January 5, 1996 completion of Little Falls Bancorp,
Inc.'s initial public  offering.  The Board of Directors and the management team
want to take this moment to offer their thanks for the  leadership  John Pullara
provided.

Your Board of Directors and  management  team are  committed to  protecting  and
enhancing  the  value  of  your  investment  in the  Company.  To do so,  we are
challenged  to continue  delivering  high quality  services to our customers and
communities and build on our past accomplishments. We appreciate the confidence,
support and loyalty of our customers, employees, and stockholders.

Sincerely,


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

March 17, 1997

                                    - 1 -

<PAGE>



Little Falls Bancorp, Inc.

Corporate Profile

      Little Falls  Bancorp,  Inc. (the  "Company") is a New Jersey  corporation
organized  in August  1995 at the  direction  of the Board of  Directors  of the
Little Falls Bank (the  "Bank") to acquire all of the capital  stock of the Bank
issued upon its conversion from the mutual to stock form of ownership on January
5, 1996 (the "Conversion").  In connection with the Conversion, the Company sold
3,041,750 shares of Common Stock for net proceeds of $26.8 million.  The Company
is a unitary  savings and loan  holding  company  which,  under  existing  laws,
generally is not restricted in the types of business  activities in which it may
engage  provided  that the Bank  retains a  specified  amount  of its  assets in
housing-related  investments.  At the present time, because the Company does not
conduct any active  business,  the Company does not intend to employ any persons
other than  officers of the Bank but utilizes the support staff of the Bank from
time to time.

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

      The Bank attracts  deposits from the general  public and 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.  The Bank  also  originates  a  limited  number  of
commercial real estate,  residential  construction,  and consumer  loans,  which
consists mainly of second mortgages and home equity lines of credit.

Stock Market Information

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

                                            HIGH               LOW
                                            ----               ---

October 1, 1996 - December 31, 1996      $ 13 3/4             $ 11
July 1, 1996 - September 30, 1996          11 3/4               10
April 1, 1996 - June 30, 1996              11                    9 1/2
January 5, 1996 - March 31, 1996           11 7/8               10


      The number of stockholders of record of common stock as of the record date
of February 28, 1997  ("Record  Date"),  was  approximately  444.  This does not
reflect the number of persons or entities  who held stock in nominee or "street"
name  through  various  brokerage  firms.  As of the  Record  Date,  there  were
2,745,180 shares outstanding.

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

                                    - 2 -

<PAGE>



account  established  in connection  with the Bank's  conversion  from mutual to
stock form, or (2) the regulatory capital  requirements imposed by the Office of
Thrift Supervision ("OTS").


Selected Financial Condition Data

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
Year Ended December 31,              1996        1995        1994      1993        1992
------------------------------------------------------------------------------------------
                                                    (In Thousands)

<S>                                <C>          <C>        <C>       <C>         <C>
  Total Assets.............        $303,518     $310,355   $193,385  $202,280    $200,091
  Loans receivable (net)...         117,116       96,230     94,754   101,775     128,748
  Mortgage-backed securities        112,473      118,020     51,664    56,401      38,119
  Investment securities....          51,370       29,999     36,146    24,999      13,971
  Cash and cash equivalents          10,374       53,419      4,065    12,608      12,701
  Deposits.................         228,312      247,851    176,173   186,704     187,502
  Retained earnings........          40,448       16,223     15,715    14,149      11,259
</TABLE>


Selected Operating Data
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Year Ended December 31,               1996       1995       1994        1993      1992
-----------------------------------------------------------------------------------------
                                                      (In Thousands)
<S>                                <C>           <C>        <C>        <C>       <C>
Total interest income......        $ 18,776      $13,813    $13,075    $14,237   $16,549
                                   --------     --------    -------    -------   -------

Total interest expense.....          11,258        9,314      7,170      7,708     9,691
                                   --------     --------    -------    -------   -------
  Net interest income......           7,518        4,499      5,905      6,529     6,858
Provision for loan losses..             183          131        356        328       391
                                   --------     --------    -------    -------   -------
  Net interest income after
   provision for loan losses          7,335        4,368      5,549      6,201     6,467
                                   --------     --------    -------    -------   -------
  Total non-interest income             409          178        143        917       310
                                   --------     --------    -------    -------   -------
  Total non-interest expense          6,747(1)     3,840(2)   2,912      3,059     2,698
                                   --------     --------    -------    -------   -------

Income before provision for
 income taxes and cumulative
 effect of accounting change            996          705      2,781      4,058     4,079
Income tax expense.........             385          241      1,066      1,493     1,430
                                   --------     --------    -------    -------   -------
  Net income before cumulative
    effect of accounting
    change.................             611          464      1,715      2,565     2,649
                                   --------     --------    -------    -------   -------

Cumulative effect of accounting
  change...................              --           --         --        325(3)     --
                                   --------     --------    -------    -------   -------

  Net income...............        $    611     $    464    $ 1,715    $ 2,890   $ 2,649
                                   ========     ========    =======    =======   =======
</TABLE>

---------------
(1)   Includes one-time special assessment to recapitalize the SAIF.
(2)   Includes a non-recurring  expense of $195,000 due to the implementation of
      a directors' medical plan.
(3)   Reflects  the  adoption of  Statement  of  Financial  Accounting  Standard
      ("SFAS") No. 109 which relates to the accounting of deferred income taxes.

                                      - 3 -

<PAGE>



Other Selected Data
--------------------------------------------------------------------------------
Year Ended December 31,            1996     1995     1994     1993       1992
--------------------------------------------------------------------------------
Return on average assets.......    0.21%    0.22%   0.86%      1.43%     1.32%
Return on average equity.......    1.44%    2.89%  11.62%     21.67%    26.11%
Average equity to average
  assets.......................   14.78%    7.64%   7.62%      6.42%     5.07%
Net interest rate spread.......    2.22%    1.97%   2.86%      3.20%     3.41%
Per Share Information:
  Earnings per share (1).......   $ 0.22     N/A     N/A        N/A       N/A
  Dividends per share(1).......     0.05     N/A     N/A        N/A       N/A
  Tangible book value per
  share (1)....................   13.56      N/A     N/A        N/A       N/A
Dividend payout ratio(1).......   22.28%     N/A     N/A        N/A       N/A
Non-performing assets to total
  assets.......................    0.91%    1.27%   3.09%      2.85%     2.37%
Non-performing loans to total
  assets.......................    0.63%    0.79%   2.18%      1.93%     1.94%
Allowance for loan losses to
  total loans..................    0.92%    0.98%   1.21%      0.79%     0.56%


---------------------
(1) No shares of common stock were outstanding until January 5, 1996.

                                    - 4 -

<PAGE>



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

General

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

Branch Purchases/Consolidation

      In December  1995,  the Bank  purchased  three branch  offices  located in
Milford,  Glen  Gardner,  and  Baptistown,   New  Jersey  from  an  unaffiliated
commercial bank  ("Seller").  This increased the Bank's branch office network at
that time to a total of seven offices,  plus its main office. The amount paid by
the Seller to the Bank for the  transfer of such assets and  liabilities  of the
three  branches  equaled the  outstanding  balances and accrued  interest on the
deposit  liabilities   transferred,   reduced  by  (i)  $1.0  million,   net  of
adjustments,  (ii)  petty  cash and  vault  cash  transferred,  and (iii) a cash
premium equal to 7.55% of the deposit liabilities to be assumed. The acquisition
was paid for with cash  received  from the deposits  acquired.  The result was a
$4.1 million acquisition cost in excess of the fair market value of the tangible
net assets  acquired  and was recorded as an  intangible  asset net of $500,000,
which  is a  premium  over  the cost of fixed  assets.  In  connection  with the
acquisition,   the  Bank  assumed   approximately   $54.4   million  of  deposit
liabilities.  In consideration of the assumption of the deposit  liabilities and
certain other obligations, the Bank purchased branch office properties and fixed
assets at a purchase  price of $1.0 million,  which had an estimated fair market
value  of  approximately  $1.5  million.   Management   initially  reinvested  a
substantial  portion of the cash received as a result of the branch purchases in
investment  and   mortgage-backed   securities  with  short  and  medium  terms.
Management completed the branch acquisition based upon its analysis indicating a
reduction  in the Bank's cost of funds would result from the lower cost of funds
of the acquired  deposits.  These lower  costing  funds were in turn invested in
primarily  investment  and  adjustable  rate  mortgage-backed  securities  which
resulted in an increase in net  income,  as well as a  beneficial  impact on the
Bank's interest rate sensitivity.

      During the year ended December 31, 1996, the Bank closed two branches.  On
August 30,  1996,  the branch  office  located at  Frenchtown  was  closed.  The
deposits were retained,  and customers were able to use the Alexandria,  Milford
and Kingwood offices for their transactions.  Based upon Management's evaluation
of the above noted  branch  purchases,  the  proximity  of other  offices to the
Frenchtown  office and the ability of the Bank to decrease  expenses and improve
efficiencies through  consolidation,  the decision was made to close the branch.
On December 20, 1996,  the Bank closed its Mount Holly branch  office,  and sold
the deposits to an  unaffiliated  financial  institution.  Deposits sold totaled
$9.2 million, for which a premium of 1.5%, or $138,000 was received. The sale of
deposits  was funded  through a Federal  Home Loan Bank  ("FHLB")  advance.  The
branch  closing  and  related  sale of deposits is expected to result in reduced
operating  expenses  for the Bank,  and  eliminates  the Bank's  only  branch in
Burlington County.

                                    - 5 -

<PAGE>




Management Strategy

      The Bank  has been and  intends  to  continue  to be a  community-oriented
financial  institution  offering a variety of financial  services.  Management's
strategy has been to emphasize residential mortgage loans, monitor interest rate
risk through asset and liability management,  maintain asset quality and control
operating  expense.  The Bank's  purchase of three branches from an unaffiliated
commercial  bank reflects the Bank's  intention to provide a variety of services
to its  community  which  includes  the  origination  of  more  consumer  loans.
Historically,  the  Bank's  strategy  has  been  primarily  to  make  loans  and
secondarily  to  invest  remaining  funds  in  mortgage-backed   securities  and
investment securities.

      During 1996, the Bank  originated in excess of $31.0 million of loans,  an
increase  of 231% over 1995  originations.  However,  during  the past few years
prior to 1996, due to decreased  loan demand  coupled with  prepayments on loans
due to a generally lower interest rate environment,  the Bank had been investing
excess  liquidity in  investments  and  mortgage-backed  securities.  Management
believes that the Bank's purchases of mortgage-backed  securities and investment
securities have enhanced the Bank's asset quality and interest rate sensitivity.

Financial Condition

      The Bank's  total assets  decreased  by $6.9 million to $303.5  million at
December  31,  1996 from  $310.4  million at  December  31,  1995.  Total  loans
receivable  increased  by $20.9  million due to mortgage  originations  of $30.9
million  offset by loan  repayments.  Investment  securities  increased by $21.4
million due to purchases of $32.3 million  offset by securities  which  matured.
Mortgage-backed  securities  decreased by $5.5 million due to  repayments  being
greater than the $16.1  million of  purchases.  Total cash and cash  equivalents
decreased by $43.0 million due to the $30.9 million of mortgages originated, the
$32.3 million of investment securities purchased,  the purchase of $16.1 million
of  mortgage-backed  securities,  the $19.5 million decrease in deposits and the
refund of $19.7 million of over-subscribed stock subscriptions, partially offset
by  amortization  and repayments on loans and  mortgage-backed  securities,  the
maturities of investment securities and borrowed funds.

      Total  deposits  decreased  by $19.5  million due in part to $2.8  million
being used for the  purchase  of stock in the  Conversion,  and the sale of $9.2
million of deposits  in  connection  with the closing of the Mount Holly  branch
office.  Borrowed funds increased by $33.6 million,  due to $9.0 million of FHLB
advances used to fund the sale of the Mount Holly deposits, and $24.6 million of
repurchase agreements with terms of one year, six months and overnight. The $9.0
million  FHLB  advance  has a rate of 5.82%  and a term of three  years,  with a
one-time  callable  feature  at the  end  of the  second  year.  The  repurchase
agreements were the result of a financial  transaction entered into by the Bank,
whereby it  purchased  a $25.0  million  fixed-rate  Federal  National  Mortgage
Association  ("FNMA")  note and  simultaneously  borrowed  $25.0 million from an
independent  third  party,  using the FNMA note as  collateral.  The note has an
initial  term of ten years at an annual rate of 7.20% and is callable  after two
years and continuously thereafter. The borrowings are comprised of a combination
of repurchase  agreements with terms of one year, six months and overnight.  The
annual rates  payable 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.


                                    - 6 -

<PAGE>



      Accounts  payable  and  other  liabilities   decreased  by  $44.5  million
primarily due to the decrease of stock  subscriptions  payable of $44.8 million.
The decrease  was due to the refund of $19.7  million of  over-subscribed  stock
subscriptions  and the  remaining  funds  being used to purchase  the  Company's
common stock in the Conversion.

      Total  stockholders  equity  increased by $24.2 million  mainly due to the
completion of the mutual to stock conversion, partially offset by the repurchase
of 296,570  shares at an aggregate  cost of $3.3 million.  Earnings for the year
ended December 31, 1996,  also  contributed to the increase,  although to a much
smaller extent.


                                    - 7 -

<PAGE>



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

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

<TABLE>
<CAPTION>
                                          1996                              1995                            1994
                              --------------------------------  ------------------------------  ------------------------------
                              Average                Average    Average              Average    Average              Average
                              Balance   Interest    Yield/Cost  Balance   Interest  Yield/Cost  Balance   Interest  Yield/Cost
                              -------   --------    ----------  -------   --------  ----------  -------   --------  ----------
                                                                  (Dollars in Thousands)
Interest-earning assets:
<S>                           <C>        <C>          <C>     <C>          <C>         <C>     <C>          <C>        <C>
 Loans receivable(1)........  $105,794   $ 8,255      7.80%   $ 93,638     $7,580      8.09%   $ 97,481     $7,776     7.98%
 Mortgage-backed securities.   119,684     7,972       6.64     63,605      3,839      6.04      53,984      3,187     5.90
 Investment securities(2)...    40,316     2,164       5.37     36,163      1,998      5.52      35,827      2,000     5.58
 Other interest-earning
  assets....................     7,431       385       5.18      6,900        395      5.72       4,993        112     2.24
                              --------   -------               ------      ------                 -----     ------
  Total interest-earning
    assets..................   273,225    18,776       6.87    200,306     13,812      6.90     192,285     13,075     6.80
                                         -------                           ------                           ------
Non-interest-earning assets.    14,223                           9,940                            6,406
                              --------                         -------                          -------
  Total assets..............  $287,448                        $210,246                         $198,691
                               =======                        =======                           =======


Interest-bearing
  liabilities:
 Savings accounts...........  $ 51,633     1,860       3.60   $ 31,425        929      2.95    $ 31,602        860     2.72
 Now and money market           39,270     1,155       2.94     27,099      1,086      4.01      28,326        945     3.34
 Certificates of deposit....   147,707     8,068       5.46    130,513      7,299      5.59     122,080      5,365     4.39
 Borrowed funds.............     3,173       175       5.52         --         --        --          --         --       --
  Total interest-bearing
   liabilities..............   241,783    11,258       4.66    189,037      9,314      4.93     182,008      7,170     3.94
                                         -------                           ------                           ------
Non-interest bearing
  liabilities...............    3,171                            5,149                            1,551
                              --------                        --------                         --------
 Total liabilities..........   244,954                         194,186                          183,559
Retained earnings...........    42,494                          16,060                           15,132
                              --------                        --------                         --------
 Total liabilities and
   retained earnings........  $287,448                        $210,246                         $198,691
                              ========                        ========                         ========
Net interest income.........             $ 7,518                           $4,498                           $5,905
                                         =======                           ======                           ======
Interest rate spread(3).....                          2.21%                            1.97%                           2.86%
                                                    ======                           ======                          ======
Net yield on interest-earning
  assets(4).................                          2.75%                            2.25%                           3.07%
                                                    ======                           ======                          ======
Ratio of average interest-
  earning assets to average
  interest-bearing liabilities                      111.00%                          105.96%                         105.65%
                                                    ======                           ======                          ======
</TABLE>

---------------------------------
(1)   Average balances include non-performing loans.
(2)   Includes  interest-bearing  deposits in other financial  institutions  and
      FHLB stock.
(3)   Interest-rate  spread represents the difference  between the average yield
      on  interest-earning  assets  and the  average  cost  of  interest-bearing
      liabilities.
(4)   Net yield on  interest-earning  assets represents net interest income as a
      percentage of average interest-earning assets.

                                    - 8 -

<PAGE>



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

<TABLE>
<CAPTION>
                                                                Year Ended December 31,
                                  ---------------------------------------------------------------------------------------
                                               1996 vs. 1995 (1)                          1995 vs. 1994
                                              Increase (Decrease)                       Increase (Decrease)
                                                   Due to                                      Due to
                                  -----------------------------------------    ------------------------------------------
                                                         Rate/                                        Rate/
                                   Volume      Rate      Volume       Net       Volume     Rate      Volume       Net
                                  --------    -------    -------    -------    --------   -------   --------    -------
                                                       (In Thousands)
Interest income:
<S>                                 <C>       <C>        <C>        <C>        <C>        <C>        <C>        <C>
 Loans receivable ..............    $  985    $  (274)   $   (36)   $   675    $  (306)   $   115    $    (5)   $  (196)
 Mortgage-backed securities.....     3,385        398        351      4,134        568         71         13        652
 Investment securities .........       142         22          2        166         19        (21)        --         (2)
 Other interest-earning assets..        45        (49)        (6)       (10)        43        174         66        283
                                   -------    -------    -------    -------    -------    -------    -------    -------
  Total interest-earning assets.     4,557         97        311      4,965        324        339         74        737
                                   -------    -------    -------    -------    -------    -------    -------    -------

Interest expense:
 Savings accounts ..............       597        203        131        931         (5)        74         --         69
 Now and money market ..........       488       (289)      (130)        69        (41)       190         (8)       141
 Certificates of deposit .......       962       (170)       (22)       770        371      1,462        101      1,934
 Borrowed funds ................       175         --         --        175         --         --         --         --
                                   -------    -------    -------    -------    -------    -------    -------    -------
   Total interest-bearing
    liabilities ................     2,222       (256)       (21)     1,945        325      1,726         93      2,144
                                   -------    -------    -------    -------    -------    -------    -------    -------

Net change in net interest
  income .......................   $ 2,335    $   353    $   332    $ 3,020    $    (1)   $(1,387)   $   (19)   $(1,407)
                                   -------    -------    -------    -------    -------    -------    -------    -------

</TABLE>


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

      General.  Net income increased  $147,000 or 31.7% to $611,000 for the year
ended December 31, 1996 from $464,000 for the year ended December 31, 1995. This
was primarily the result of a $3.0 million increase in net interest income and a
$230,000  increase  in  non-interest  income,  offset  by  a  $2.9  increase  in
non-interest expenses and an $144,000 increase in the provision for income taxes
in fiscal 1996 compared to fiscal 1995.

      Interest Income.  Interest income increased $5.0 million or 35.9% to $18.8
million for the year ended  December  31,  1996 from $13.8  million for the year
ended  December 31, 1995.  This increase was primarily due to increases of $56.1
million and $12.2 million in the average balances of mortgage-backed  securities
and loans  receivable,  respectively.  These increases were primarily due to the
funds  received from the purchase of three  branches in December,  1995 and from
the Conversion.

      Interest  Expense.  Interest expense  increased $1.9 million,  or 20.9% to
$11.3  million for the year ended  December  31, 1996 from $9.3  million for the
year ended December 31, 1996. The increase was mainly due to the increase in the
average balance of interest-bearing deposits to $238.6 million for

                                    - 9 -

<PAGE>



the year ended December 31, 1996 from $189.0 million for the year ended December
31, 1995. In addition,  the average  balance of borrowed funds increased to $3.2
million during 1996. In 1995, the Company had no borrowed funds. The increase in
the average balance of  interest-bearing  liabilities was offset somewhat by the
decrease in the average rate paid on  interest-bearing  liabilities  of 29 basis
points (100 basis  points  equals 1%) to 4.66% for the year ended  December  31,
1996.

      Net Interest  Income.  Net interest income  increased by $3.0 million,  or
67.1%  for the year  ended  December  31,  1996 as  compared  to the year  ended
December 31, 1995.  This  increase was due to the  investment  of $26.8  million
received from the  Conversion in loans and  mortgage-backed  securities  and the
decrease in the average rate paid on interest-bearing  liabilities, as described
earlier.  This  resulted  in an  increase  in the net  interest  spread  and net
interest  margin to 2.21% and 2.75%,  respectively,  for the year ended December
31, 1996  compared with a net interest  spread and net interest  margin of 1.97%
and 2.25%, respectively, for the year ended December 31, 1995.

      Provision  for Losses on Loans.  The Bank  maintains an allowance for loan
losses based upon management's  periodic  evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience,  adverse situations that
may  affect  the  borrowers'  ability  to repay  loans,  estimated  value of the
underlying collateral and current and expected market conditions.  The provision
for loan  losses  increased  $52,000  or 39.2% to  $183,000  for the year  ended
December 31, 1996 from $131,000 for the year ended December 31, 1995,  primarily
due to the  write-off of a loan in the third  quarter.  The  allowance  for loan
losses was $936,000 at December 31, 1996. While the Bank maintains its allowance
for  losses  at a level  which it  considers  to be  adequate,  there  can be no
assurance  that further  additions  will not be made to the loss  allowances and
that such losses will not exceed the estimated amounts.

      Non-Interest Income.  Non-interest income increased by $230,000, or 129.3%
to $409,000  for the year ended  December  31, 1996 from  $178,000  for the year
ended  December 31, 1995.  The increase was due in most part to a $138,000  gain
recorded on the sale of the Mount Holly  deposits in December,  1996.  Income on
checking  accounts  increased by $70,000 to $121,000 for the year ended December
31, 1996, from $51,000 for the year ended December 31, 1995 primarily due to the
increase in checking  accounts that resulted from the purchase of three branches
from an unaffiliated commercial bank.

      Non-Interest  Expense.  Non-interest  expense  increased $2.9 million,  or
75.7% to $6.7 million for the year ended December 31, 1996 from $3.8 million for
the year ended  December 31,  1995.  This was  primarily  due to the increase in
deposit insurance premiums of $1.2 million,  or 286.9%. This increase was due to
a special  assessment  charged by the FDIC on its SAIF members to capitalize the
SAIF at the  designated  reserve level of 1.25% as of October 1, 1996.  The Bank
paid $1.2  million in November  1996 for this special  assessment.  The FDIC has
subsequently  lowered its premium rate for deposits.  Other factors  causing the
increase in non-interest  expense was the increase in compensation  and employee
benefits  of  $920,000  and the  increase in other  expenses  of  $714,000.  The
increase  in  compensation  and  employee  benefits  was  due to the  additional
employees  resulting from the purchase of three branch offices in December 1995,
the adoption of an employee  stock  ownership  plan ("ESOP") and the  management
stock bonus plan  ("MSBP").  For the year ended  December 31, 1996, the ESOP and
MSBP expenses were $178,000 and $49,000,  respectively.  The  acquisition of the
branch  offices  also  caused  increases  in  occupancy,  equipment  and deposit
insurance premiums. In addition,  the acquisition resulted in an increase in the
amortization  of goodwill to $361,000 for the year ended December 31, 1996, from
$30,000 for the year ended December 31, 1995.


                                    - 10 -

<PAGE>



      The 1996 increases were partially offset by a nonrecurring 1995 expense of
$195,000 for the implementation of a directors' medical plan, which was recorded
during the three months ended June 30, 1995. On August 30, 1996, the Bank closed
its  Frenchtown   office.  The  decision  to  close  the  branch  was  based  on
management's  evaluation  of the  purchase of three  branch  offices in the same
county from an unaffiliated  commercial bank in December 1995 and the ability of
the Bank to decrease expenses and improve efficiencies through consolidation. On
December 20, 1996, the Bank closed its Mount Holly office,  and sold the related
deposits to an unaffiliated local financial  institution.  This should result in
decreased operating expenses going forward.

      Income Tax Expense.  Income tax expense increased $144,000 to $385,000 for
the year ended  December 31, 1996 from $241,000 for the year ended  December 31,
1995 due to an increase in pre-tax income of $291,000.

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

      General.  Net income  decreased  $1.3 million or 73.0% to $464,000 for the
year ended  December 31, 1995 from $1.7 million for the year ended  December 31,
1994.  This was primarily the result of a $1.4 million  decrease in net interest
income and a $929,000  increase in  non-interest  expense,  offset somewhat by a
$225,000  decrease in the provision  for loan losses and a $825,000  decrease in
the provision for income taxes in fiscal 1995 compared to fiscal 1994.

      Interest  Income.  Interest  income  increased  $737,000  or 5.6% to $13.8
million for the year ended  December  31,  1995 from $13.1  million for the year
ended  December 31, 1994.  This  increase was primarily due to increases of $9.6
million and $1.9 million in the average balances of  mortgage-backed  securities
and  other  interest-earning  assets,  respectively.  These  increases  were due
primarily to the funds received from the purchase of three branches,  as well as
the Bank investing excess  liquidity in such securities and stock  subscriptions
received in connection with the Conversion. In addition, there was a decrease of
$196,000 in income  earned on loans due to a decrease in the average  balance of
loans  receivable,  reflecting  both lower demand and increased  competition for
loans in the Bank's market area.

      Interest Expense. Interest expense increased $2.1 million or 29.9% to $9.3
million  for the year ended  December  31,  1995 from $7.2  million for the year
ended  December  31,  1994.  The average  balance of  interest-bearing  deposits
increased  by  $7.0  million  and the  average  rate  paid  on  interest-bearing
liabilities  increased 99 basis points (100 basis points equals 1%) to 4.93% for
the year  ended  December  31,  1995 from 3.94% in 1994 due to the  increase  in
general  market  rates  and a  shift  in  the  deposit  mix to  higher  yielding
certificate  accounts.  The  Bank's  average  cost of  certificates  of  deposit
increased  from 4.39% for the year ended December 31, 1994 to 5.59% for the year
ended  December  31, 1995 and the  average  balance of  certificates  of deposit
increased by $8.4 million.

      Net  Interest  Income.  Net interest  income  decreased  primarily  due to
interest  income  increasing  at a slower pace than  interest  expense,  as loan
originations  decreased dramatically due to increased competition and low demand
for  residential  lending in the Bank's  primarily  market  area and  depositors
sought higher returns in certificate  accounts  compared to traditional  savings
accounts.  This  resulted  in a decline in the net  interest  spread and the net
interest  margin to 1.97% and 2.25%,  respectively,  for the year ended December
31, 1995  compared with a net interest  spread and net interest  margin of 2.86%
and 3.07%, respectively, for the year ended December 31, 1994.


                                    - 11 -

<PAGE>



      Provision  for Losses on Loans.  The Bank  maintains an allowance for loan
losses based upon management's  periodic  evaluation of known and inherent risks
in the loan portfolio, the Bank's past loss experience,  adverse situations that
may  affect  the  borrowers'  ability  to repay  loans,  estimated  value of the
underlying collateral and current and expected market conditions.  The provision
for loan  losses  decreased  $225,000  or 63.1% to  $131,000  for the year ended
December 31, 1995 from $356,000 for the year ended December 31, 1994,  primarily
due to a decrease in  non-performing  loans.  The  allowance for loan losses was
$958,000 at December 31, 1995. While the Bank maintains its allowance for losses
at a level which it  considers to be  adequate,  there can be no assurance  that
further  additions will not be made to the loss  allowances and that such losses
will not exceed the estimated amounts.

      Non-Interest  Income.  Non-interest  income,  primarily consisting of loan
fees and checking account fees,  increased  $35,000 or 24.3% to $178,000 for the
year ended December 31, 1995 from $143,000 for the year ended December 31, 1994.

      Non-Interest Expense.  Non-interest expense increased $929,000 or 31.9% to
$3.8 million for the year ended December 31, 1995 from $2.9 million for the year
ended December 31, 1994.  This was primarily due to the loss on foreclosed  real
estate,  which  increased  by $355,000  to  $372,000  at December  31, 1995 from
$17,000 at December 31, 1994.  This increase was due in most part to the payment
of  back  taxes  of  approximately  $141,000  on  seven  properties,  as well as
additional write downs of approximately $150,000 on foreclosed properties due to
the  Bank  receiving   updated   appraisals.   Also  contributing  to  increased
non-interest   expense  was  a   nonrecurring   expense  of  $195,000   for  the
implementation  of a directors'  medical  plan.  Pursuant to SFAS No. 106,  this
nonrecurring expense represents a transition obligation which is permitted to be
recognized  in the period when the plan was  adopted.  To a lesser  extent,  the
increase  in  non-interest  expense was due to  increases  in  compensation  and
related  expenses of $150,000 to $1.7  million for the year ended  December  31,
1995 from $1.5 million in the same period in 1994,  $30,000 of amortization of a
deposit  premium  resulting from the December,  1995 purchase of three branches,
and increases of $27,000 and $35,000 to $54,000 and $68,000,  respectively,  for
legal  and  consulting  service  expenses,  respectively.  Non-interest  expense
includes  insurance  premiums  paid to the FDIC which were $413,000 and $425,000
for the years ended December 31, 1995 and 1994, respectively.

      Management  anticipates that its  non-interest  expense will increase as a
result of  additional  expenses  relating to the Company  operating  as a public
stock company, as well as expenses relating to its stock benefit plans.

      Income Tax Expense.  Income tax expense decreased $825,000 to $241,000 for
the year ended  December 31, 1995 from $1.1 million for the year ended  December
31, 1995 due to a reduction in pre-tax income of $2.1 million.

Asset and Liability Management

      In an effort to reduce interest rate risk and protect it from the negative
effect  of  rapid  increases  and  decreases  in  interest  rates,  the Bank has
instituted certain asset and liability management measures including emphasizing
the origination of three, five and ten year  adjustable-rate  mortgage loans and
investing excess funds in short- and medium-term  mortgage-backed and investment
securities.  The Bank retains an asset/liability  consultant,  FinPro,  Inc., to
assist it in  analyzing  its asset  liability  position.  With the  consultant's
assistance,  the Bank undertakes a quarterly  extensive study of various trends,
conducts   separate   deposit   and  asset   analyses   and   prepares   various
asset/liability tables including contractual interest

                                    - 12 -

<PAGE>



rate gap,  interest  rate gap with  prepayment  assumptions,  margin/spread  and
duration  tables.  Interest rate gap analysis  measures the  difference  between
amounts of interest-earning assets and interest-bearing liabilities which either
reprice  or mature  within a given  period of times  and  their  sensitivity  to
changing interest rates.

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

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

Liquidity and Capital Resources

      The Bank is required  under  applicable  federal  regulations  to maintain
specified levels of "liquid" investments in qualifying types of U.S. Government,
federal agency and other  investments  having  maturities of five years or less.
OTS regulations require that a savings association maintain liquid assets of not
less than 5% of its average daily balance of net  withdrawable  deposit accounts
and borrowings  payable in one year or less, of which  short-term  liquid assets
must consist of not less than 1%. At December 31, 1996, the Bank's liquidity was
in excess of the minimum requirement.  The Bank adjusts liquidity as appropriate
to meet its asset/liability objectives.

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

      The Bank's most liquid asset is cash, which includes investments in highly
liquid  short-term  investments.  The level of these assets are dependent on the
Bank's operating, financing and investing activities during any given period. At
December 31, 1996, cash and cash  equivalents  totaled $10.4 million,  with cash
received from stock subscriptions accounting for $44.8 million in 1995. The Bank
has other sources of liquidity if a need for  additional  funds arises.  Another
source of liquidity is the  repayment  and  prepayment  of  mortgage-backed  and
investment  securities.  Additional  sources  of funds  include  the  ability to
utilize  FHLB  of  New  York   advances  and  the  ability  to  borrow   against
mortgage-backed and investment securities.  At December 31, 1996, the Bank had a
$9.0 million advance with a rate of 5.82%. The advance matures in December 1999,
and has a one time call feature at December  20, 1998.  This advance was used to
fund the sale of the Mount  Holly  branch  deposits.  In an  effort to  increase
earnings,  reduce the Company's  interest rate sensitivity,  and to better match
its interest rate

                                    - 13 -

<PAGE>



position, on November 13, 1996, the Company entered into a financial transaction
whereby it purchased a $25.0  million  fixed-rate  FNMA note and  simultaneously
borrowed  $25.0 million from an  independent  third party using the FNMA note as
collateral. The note has an initial term of ten years at an annual rate of 7.20%
and is callable after two years and continuously thereafter.  The borrowings are
comprised of a combination of repurchase  agreements with terms of one year, six
months and  overnight.  The annual  rates  payable 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.

      The Bank's cash flows are comprised of three primary classifications: cash
flows from operating activities,  investing activities and financing activities.
Cash  flows  from  operating  activities,  consisting  primarily  of net  income
adjusted for depreciation,  amortization and provisions for loan and real estate
owned losses, were $1.6 million,  $368,000, and $1.6 million for the years ended
December 31, 1996, 1995, and 1994, respectively.  Net cash provided by (used in)
investing  activities  consisted primarily of disbursement of loan originations,
mortgage-backed security purchases and investment purchases, offset by principal
collections  on loans  and  mortgage-backed  securities  and  proceeds  from the
maturities  of  investment  securities  or sales  of  securities,  were  $(37.2)
million,   $(12.8)  million  and  $453,000  for  fiscal  1996,  1995  and  1994,
respectively.  Net cash  provided by (used in) financing  activities  consisting
primarily  of proceeds  from stock  subscriptions,  net  activity in deposit and
escrow  accounts,  and  activity in borrowed  funds were $(7.5)  million,  $61.8
million and $(10.6)  million for the years ended  December  31,  1996,  1995 and
1994, respectively.

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

      Operating  activities in 1995  provided  $368,000 in cash due primarily to
net  income of  $464,000  adjusted  for  $103,000  in  depreciation,  a $382,000
provision  for loan and real estate  owned  losses and  $355,000,  $127,000  and
$528,000  increases  in interest  receivable,  net,  interest  payable and other
assets,  respectively.  Investing  activities  in 1995 used $12.8 million due to
$75.2 million and $6.0 million in purchases of  mortgage-backed  and  investment
securities,  respectively,  and  $2.2  million  due  to  an  increase  in  loans
receivable  offset somewhat by $49.3 million of cash received in connection with
the  branch  acquisitions,  $12.2  million  provided  due  to  the  maturity  of
investment   securities  held  to  maturity  and  $8.8  million  from  principle
collections on mortgage-backed securities held to maturity. Financing activities
provided  $61.6  million  primarily  due to $44.8 million in proceeds from stock
subscriptions and a $17.1 million increase in deposits.

      Operating  activities  in 1994 provided $1.6 million in cash due primarily
to net income of $1.7 million adjusted for $93,000 in  depreciation,  a $356,000
provision  for loan and real estate  owned  losses and  increases of $262,000 in
interest receivable,  net and $160,000 in other assets.  Investing activities in
1994  provided  $453,000 due to $8.0  million  from the  maturity of  investment
securities  held  to  maturity,  $7.7  million  from  principle  collections  on
mortgage-backed securities held to maturity and $6.2

                                    - 14 -

<PAGE>



million from the decrease in loans receivable,  offset by $3.1 million and $19.1
million in purchases of  mortgage-backed  and investment  securities.  Financing
activities  used $10.6  million  primarily  due to a $10.5  million  decrease in
deposits.

      The Bank  anticipates that it will have sufficient funds available to meet
its  current  commitments.  As of  December  31,  1996,  the Bank  had  mortgage
commitments  to fund loans of $3.3 million.  Also,  at December 31, 1996,  there
were commitments on unused lines of credit relating to home equity loans of $3.0
million.  Certificates  of  deposit  scheduled  to mature in one year or less at
December  31,  1996  totaled  $103.4  million.   Based  on  historical   deposit
withdrawals and outflows,  and on internal monthly deposit reports  monitored by
management,  management  believes  that a majority of such  deposits will remain
with the Bank. As a result, no adverse liquidity effects are expected.

      At December  31,  1996,  the Bank  exceeded  each of the three  regulatory
capital requirements on a fully phased-in basis.

Impact of Information and Changing Prices

      The  financial  statements  of  the  Bank  and  notes  thereto,  presented
elsewhere  herein,  have been prepared in  accordance  with  generally  accepted
accounting  principles,  which require the measurement of financial position and
operating results in terms of historical dollars without  considering the change
in the relative  purchasing  power of money over time and due to inflation.  The
impact of inflation is reflected in the increased cost of the Bank's operations.

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


                                    - 15 -

<PAGE>
LITTLE FALLS BANCORP, INC. LOGO

Little Falls Bancorp, Inc.
86 Main Street
Little Falls, NJ  07424-1493
(201) 256-6100


January 31, 1997


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


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

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

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

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


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

<PAGE>


[LOGO]

R                             RADICS & CO., LLC

--------------------------------------------------------------------------------
Established            Certified Public Accountants & Consultants
1933

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

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

We have audited the  consolidated  statements  of financial  condition of Little
Falls Bancorp,  Inc. (the  "Company") and subsidiary as of December 31, 1996 and
1995 and the related consolidated statements of income, changes in stockholders'
equity and cash flows for the years then  ended.  These  consolidated  financial
statements   are  the   responsibility   of  the   company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits. The consolidated  statements of income,  changes
in  stockholders'  equity,  and cash flows for the year ended  December 31, 1994
were audited by other auditors,  whose report, dated January 31, 1995, expressed
an unqualified opinion on these statements.

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

In our opinion, the consolidated  financial statements referred to in the second
preceding  paragraph present fairly, in all material respects,  the consolidated
financial  position of Little Falls Bancorp,  Inc. and subsidiary as of December
31,  1996 and 1995 and the  results of their  operations  and cash flows for the
years then ended, in conformity with generally accepted accounting principles.

                                           Radics & Co., LLC

January 31, 1997

                                      -17-

     55 US Highway 46 East,  Post  Office Box 676,  Pine  Brook,  NJ  07058-0676
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

<TABLE>
<CAPTION>

                                                                                                        December 31,

                                                                                           ---------------------------------------
Assets                                                                        Notes               1996                    1995
------                                                                  ------------------ -----------------    ------------------

<S>                                                                       <C>                 <C>                  <C>
Cash and due from banks                                                                       $   1,746,743        $    2,518,055
Interest-bearing deposits in other banks                                                          3,627,221            11,101,033
Federal funds sold                                                                                5,000,000            39,800,000
                                                                                              -----------------    -----------------
      Total cash and cash equivalents                                       1 and 16             10,373,964            53,419,088

Investment securities held to maturity                                      1,3 and 16           51,370,297            29,999,470
Mortgage-backed securities held to maturity                                 1,4 and 16          112,473,144           118,020,300
Loans receivable                                                            1,5 and 16          117,115,784            96,229,678
Premises and equipment                                                      1 and 6               2,659,239             2,789,468
Investment in real estate                                                   1 and 7                 683,054               546,786
Foreclosed real estate                                                         1                    857,157             1,500,825
Interest receivable                                                         1 and 16              1,735,291             1,717,349
Federal Home Loan Bank of New York stock                                    9 and 16              2,075,700             1,395,200
Excess of cost over assets acquired                                            1                  3,217,017             3,577,800
Other assets                                                                   13                   957,091             1,158,999
                                                                                           -----------------    ------------------
      Total assets                                                                             $303,517,738          $310,354,963
                                                                                           =================    ==================


Liabilities and stockholders equity
-----------------------------------

Liabilities
-----------
Deposits                                                                    8 and 16           $228,311,543          $247,851,373
      Advance payments from borrowers for taxes                                                           -               701,773
         Stock subscriptions payable                                            2                         -            44,831,296
      Securities sold under agreements to repurchase                           10                33,623,500                     -
         Accounts payable and other liabilities                                12                 1,134,397               747,298
                                                                                           -----------------    ------------------
        Total Liabilities                                                                       263,069,440           294,131,740
                                                                                           -----------------    ------------------
              Commitments                                                   15 and 16                     -                     -

Stockholders' equity                                                        2,11,12, and 13
--------------------
Preferred stock $0.10 par value, 5,000,000 shares                                                         -                     -
  authorized; none issued and outstanding
Common stock $0.10 par value, 10,000,000 shares
  authorized; 3,041,750 shares issued
  at December 31, 1996                                                                               304,175                     -
Additional paid in capital                                                                        28,974,799                     -
Retained earnings - substantially restricted                                                      16,802,056            16,327,286
Common stock aquired by employee stock                                                            (2,271,173)                    -
  ownership plan ("ESOP")
Treasury stock, at cost; 296,569 shares at                                                        (3,277,004)                    -
  December 31,1996
Minimum pension liability,
  net of deferred income taxes                                                                     (84,555)              (104,063)
                                                                                           -----------------    ------------------
           Total stockholders' equity                                                            40,448,298            16,223,223
                                                                                           -----------------    ------------------
                            Total liabilities and stockholders' equity                         $303,517,738          $310,354,963
                                                                                           =================    ==================
</TABLE>
                                     - 18 -

                 See notes to consolidated financial statements.


<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                        CONSOLIDATED STATEMENTS OF INCOME
                        ---------------------------------
<TABLE>
<CAPTION>

                                                                                        December 31,
                                                                 ----------------------------------------------------------
                                                 Notes                   1996               1995                 1994
                                         ----------------------- ------------------ -----------------    ------------------
<S>                                              <C>               <C>                <C>                  <C>

Interest income:
   Loans receivable                               5                $    8,255,040     $   7,579,947        $    7,776,258
   Mortgage-backed securities                                           7,972,069         3,839,383             3,186,726
        Investment securities
          and other interest-earning assets                             2,549,230         2,393,297             2,112,506
                                                                ------------------ -----------------    ------------------
        Total interest income                                          18,776,339        13,812,627            13,075,490
                                                                ------------------ -----------------    ------------------

Interest expense:
  Deposits                                        8                    11,082,926         9,313,730             7,170,191
       Borrowings                                                         175,324                 -                     -
                                                                ------------------ -----------------    ------------------
       Total interest expense                                          11,258,250         9,313,730             7,170,191
                                                                ------------------ -----------------    ------------------

Net interest income                                                     7,518,089         4,498,897             5,905,299
Provision for loan losses                         5                       182,900           131,359               356,083
                                                                  ------------------ -----------------    ------------------
Net interest income
  after provision for loan losses                                       7,335,189         4,367,538             5,549,216
                                                                  ------------------ -----------------    ------------------
Non-interest income:
  Service fees                                                            199,033           152,662               126,649
  Other                                                                   209,538            25,501                16,721
                                                                  ------------------ -----------------    ------------------
        Total non-interest income                                         408,571           178,163               143,370
                                                                  ------------------ -----------------    ------------------
Non-interest expenses:
  Compensation and employee benefits             12                     2,608,587         1,688,213             1,538,337
  Occupancy, net                                  6                       334,406           166,347               154,817
  Equipment                                       6                       401,510           268,841               226,489
  Deposit insurance premiums                     14                     1,596,307           412,639               424,870
  Loss on foreclosed real estate                                           88,981           372,304                17,141
  Amortization of deposit premium                                         360,783            30,069                     -
  Other                                          12                     1,356,853           902,059               550,131
                                                                  ------------------ -----------------    ------------------

       Total non-interest expenses                                      6,747,427         3,840,472             2,911,785
                                                                  ------------------ -----------------    ------------------
Income before provision for income taxes                                  996,333           705,229             2,780,801
Provision for income taxes                       13                       385,444           241,490             1,066,207
                                                                  ------------------ -----------------    ------------------
Net income                                                        $       610,889    $      463,739        $    1,714,594
                                                                  ================== =================    ==================

Net income per common share and common
  stock equivalents                                               $          0.22            N/A (1)               N/A (1)
                                                                  ================== =================    ==================
Weighted average number of common
  shares and common stock equivalents outstanding                       2,733,000            N/A (1)               N/A (1)
                                                                  ================== =================    ==================
</TABLE>


   (1) Little Falls Bancorp, Inc. converted to stock form on January 5, 1996.
                 See notes to consolidated financial statements.

                                      -19-

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
           ----------------------------------------------------------
<TABLE>
<CAPTION>
                                                                                                          Minimum
                                                                                                          Pension
                                                               Retained                                  Liability,
                                                               Earnings -    Common Stock                 Net of
                                    Common    Additional     Substantially    Aquired by    Treasury      Deferred
                                    Stock  Paid in Capital    Restricted         ESOP        Stock       Income Taxes       Total
                                  -------- ---------------  ---------------- ------------  --------------------------- -----------
<S>                               <C>       <C>            <C>             <C>             <C>            <C>         <C>
Balance -
December 31, 1993                 $     --  $          --  $ 14,148,953    $           --  $        --    $       --  $ 14,148,953
Net income for the year
  ended December 31, 1994               --             --     1,714,594                --           --            --     1,714,594
  Additional pension liability,
   net of deferred income taxes         --             --            --                --           --      (148,825)     (148,825)
                                  ---------- ------------   -----------      ------------   ----------     ---------  ------------
Balance -
  December 31, 1994                     --             --    15,863,547                --           --      (148,825)   15,714,722
Net income for the year
  ended December 31, 1995               --             --       463,739                --           --            --       463,739
Decrease in minimum
  pension liability, net
  of deferred income taxes              --             --            --                --           --        44,762        44,762

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

Balance - December 31, 1995             --             --    16,327,286               --            --      (104,063)   16,223,223

Net income for the year ended
December 31, 1996                       --             --       610,889               --            --            --       610,889

Net proceeds from issuance of
  common stock                     304,175     28,959,347            --               --            --            --    29,263,522
Acquisition of common stock
  by ESOP                               --             --            --       (2,433,400)           --            --    (2,433,400)
ESOP shares committed to be
  released                              --         15,452            --          162,227            --            --       177,679
Purchase of 296,570 shares
  of treasury stock                     --             --            --               --    (3,277,004)           --    (3,277,004)
Decrease in minimum pension
  liability, net of                     --             --            --               --            --        19,508        19,508
  of deferred income taxes
Dividends paid                          --             --      (136,119)              --            --            --      (136,119)
                                  ---------- ------------  ------------      -----------   -----------  ------------  ------------
Balance - December 31, 1996       $304,175   $ 28,974,799  $ 16,802,056     $ (2,271,173)  $(3,277,004) $    (84,555) $ 40,448,298
                                  ========== ============  ============    =============   ===========  ============  ============

</TABLE>


See notes to consolidated financial statements.  -20-

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
<TABLE>
<CAPTION>

                                                                             Year Ended December 31,
                                                                 ----------------------------------------------
                                                                     1996             1995           1994
                                                                 -------------   ------------    --------------
<S>                                                              <C>             <C>             <C>
Cash flows form operating activities:
  Net income                                                     $    610,889    $    463,739    $  1,714,594
    Adjustments to reconcile net income to
      net cash provided by operating activities:
   Depreciation                                                       153,207         102,863          92,817
   Provision for loan and real estate owned losses                    182,900         381,809         356,083
   Amortization of intangibles                                        360,783          30,069            --
   Amortization (accretion) of
     deferred fees, premiums and discounts, net                        40,903           7,186         (77,004)
   Gain on sale of branch                                            (138,320)           --              --
   Loss (Gain) on sale of foreclosed real estate                       28,418         (27,705)           --
   Deferred income taxes                                             (243,005)          1,808          71,772
   Increase in interest receivable                                    (17,942)       (354,543)       (261,626)
   Increase in other assets                                            (2,446)       (528,405)       (160,072)
   Increase (decrease) in interest payable                            180,501         127,445         (28,276)
   Increase (decrease) in
     accounts payable and other liabilities                           256,012         163,438        (131,108)
   ESOP shares committed to be released                               177,679            --              --
                                                                 ------------    ------------    ------------
           Net cash provided by operating activities                1,589,579         367,704       1,577,180
                                                                 ------------    ------------    ------------

Cash flows from investing activities:
  Purchases of investment securities held to maturity             (32,347,937)     (6,022,500)    (19,147,279)
  Maturities of investment securities held to maturity             11,000,000      12,167,500       8,000,000
  Purchases of mortgage-backed securities held to maturity        (16,073,205)    (75,243,631)     (3,059,236)
  Principal collections on
    mortgage-backed securities held to maturity                    21,500,221       8,849,495       7,756,975
  Net (increase) decrease in loans receivable                     (21,265,657)     (2,239,571)      6,177,391
  Purchases of premises and equipment                                (159,246)       (482,366)        (40,619)
  Proceeds from sales of foreclosed real estate                       849,629         713,646         698,604
  (Purchase) Redemption of Federal Home Loan Bank
     of New York stock                                               (680,500)        116,100          67,600
  Cash and cash equivalents
    received in connection with acquisition                              --        49,303,415            --
                                                                 ------------    ------------    ------------
          Net cash (used in ) provided by investing activities    (37,176,695)    (12,837,912)        453,436
                                                                 ------------    ------------    ------------

</TABLE>


See notes to consolidated financial statements.

                                    -21-

<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                               -----------------------------------------------
                                                                   1996             1995           1994
                                                               --------------  -------------   ---------------
<S>                                                            <C>             <C>             <C>

Cash flows from financing activities:
  Net (decrease) increase in deposits                          $ (7,464,225)   $ 17,135,595    $(10,501,656)
  Decrease in advances from borrowers for taxes                    (701,773)       (142,723)        (72,156)
  (Refunds of) proceeds from stock subscriptions                (19,706,653)     44,831,296            --
  Proceeds of securities sold under
    agreement to repurchase                                      33,623,500            --              --
  Costs of insurance of common stock                               (731,348)           --              --
  Dividends paid                                                   (136,119)           --              --
  Cash paid in connection with branch sales                      (9,064,385)           --              --
  Treasury stock acquired                                        (3,277,004)           --              --
                                                               ------------    ------------    ------------

         Net cash (used in) provided by financing activities     (7,458,007)     61,824,168     (10,573,812)
                                                               ------------    ------------    ------------

(Decrease) increase  in cash and cash equivalents               (43,045,124)     49,353,960      (8,543,196)
Cash and cash equivalents:
  Beginning                                                      53,419,088       4,065,128      12,608,324
                                                               ------------    ------------    ------------

Ending                                                         $ 10,373,964    $ 53,419,088    $  4,065,128
                                                               ============    ============    ============
</TABLE>


See notes to consolidated financial statements.

                                      -22-
<PAGE>

                           LITTLE FALLS BANCORP, INC.
                                 AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                      -------------------------------------
<TABLE>
<CAPTION>
                                                                      Year Ended December 31,
                                                          --------------------------------------------
                                                              1996             1995           1994
                                                          ------------    ------------    ------------
<S>                                                       <C>             <C>             <C>
Supplemental disclosures:
  Cash paid during the period for:
       Interest                                           $ 11,077,749    $  9,186,285    $  7,199,015
                                                          ============    ============    ============
       Income taxes                                       $    410,701    $    403,925    $  1,072,511
                                                          ============    ============    ============
Loans receivable transferred to foreclosed real estate    $    406,379    $    672,584    $    871,350
                                                          ============    ============    ============
Loans to facilitate sale of foreclosed real estate        $    172,000            --              --
                                                          ============    ============    ============
(Decrease) increase in minimum
   pension liability, net of deferred income taxes             (19,508)        (44,762)   $    148,825
                                                          ============    ============    ============

Property transferred to investment in real estate         $    145,478    $    243,667    $       --
                                                          ============    ============    ============
Issuance of common stock:
  Deposits used for stock purchases                       $  2,859,458    $       --      $       --
  Stock subscriptions used for stock purchases              25,124,642            --              --
  Deferred costs                                              (422,630)           --              --
                                                          ------------    ------------    ------------
                                                          $ 27,561,470    $       --      $       --
                                                          ============    ============    ============
Assets acquired in connection with acquisition:
  Cash and cash equivalents                               $       --      $ 49,303,415    $       --
  Loans receivable                                                --             8,564            --
  Premises and equipment                                          --         1,500,000            --
                                                          ------------    ------------    ------------

                                                                  --        50,811,979            --
                                                          ------------    ------------    ------------
Liabilities assumed in connection with acquisition:
  Deposits                                                        --        54,414,848            --
  Other                                                           --             5,000            --
                                                          ------------    ------------    ------------

                                                                  --        54,419,848            --
                                                          ------------    ------------    ------------


Excess of cost over assets acquired                       $       --      $ (3,607,869)   $       --
                                                          ============    ============    ============

Liabilities assigned in connection with sale of branch:
  Deposits                                                $  9,221,324    $       --      $       --
                                                          ============    ============    ============

Assets sold in connection with sale of branch:
  Loans                                                   $     18,619    $       --      $       --
                                                          ============    ============    ============
</TABLE>



See notes to consolidated financial statements.

                                      -23-
<PAGE>

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

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

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

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

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

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

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

                                      -24-
<PAGE>

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

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

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

     Investments in debt  securities  that the Bank has the positive  intent and
     ability to hold to maturity are classified as  held-to-maturity  securities
     and reported at amortized cost. Debt and equity  securities that are bought
     and held  principally  for the purpose of selling them in the near term are
     classified  as  trading   securities  and  reported  at  fair  value,  with
     unrealized  holding gains and losses included in earnings.  Debt and equity
     securities  not classified as trading  securities  nor as held-to  maturity
     securities are classified as available for sale  securities and reported at
     fair value, with unrealized holding gains or losses, net of deferred income
     taxes, reported in a separated component of retained earnings. The Bank has
     both the intent and ability to hold all securities to maturity.

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

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

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

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

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

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

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

                                      -25-
<PAGE>

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

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

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

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

     Effective January 1, 1995, the Bank adopted Financial  Accounting Standards
     Board ("FASB") Statement of Financial  Accounting  Standards  (`Statement")
     No. 114, "Accounting by Creditors for Impairment of a Loan" , and Statement
     No.  118,  "Accounting  by  Creditors  for  Impairment  of a Loan -  Income
     Recognition  and  Disclosures".  The  provisions  of these  statements  are
     applicable to all loans, uncollateralized as well as collateralized, except
     for large groups of smaller-balance homogeneous loans that are collectively
     evaluated  for  impairment  and loans that are measured at fair value or at
     the lower of cost or fair value. Additionally, such provisions apply to all
     loans that are  renegotiated  in troubled debt  restructurings  involving a
     modification of terms.

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

     The adoption of Statements No. 114 and 118 did not have a material  adverse
     impact on consolidated financial condition or operations.


                                      -26-




<PAGE>

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

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

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

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

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

     Investment in real estate is carried at cost less accumulated depreciation.

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

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

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

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

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

     The Company  and its  subsidiary  file a  consolidated  federal  income tax
     return and separate state income tax returns. Income taxes are allocated to
     the  Company  and its  subsidiary  based  upon  the  contribution  of their
     respective  income or loss to the  consolidated  return.  Federal and State
     income  taxes  have been  provided  on the basis of  reported  income.  The
     amounts  reflected  on the tax  returns  differ from these  provisions  due
     principally to temporary  differences in the reporting of certain items for
     financial  reporting and tax reporting  purposes.  In accordance  with FASB
     Statement  No. 109,  "Accounting  for Income  Taxes",  deferred  income tax
     expense or benefit is  determined  by  recognizing  deferred tax assets and
     liabilities  for the  estimated  future tax  consequences  attributable  to
     differences  between the financial  statement  carrying amounts of existing
     assets and liabilities and their respective tax bases.

                                    - 27 -

<PAGE>


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


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

     Income taxes (Cont'd)
     ------------

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

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

     In  October  1995,  the FASB  issued  Statement  No. 123 "  Accounting  for
     Stock-Based   Compensation."   Statement  No.  123  establishes   financial
     accounting and reporting standards for stock-based  employees  compensation
     plans.  Statement No. 123  encourages all entities to adopt the "fair value
     based method" of accounting for employee stock compensation plans. However,
     Statement No. 123 also allows an entity to continue to measure compensation
     cost under such plans using the "intrinsic  value based  method."  Underthe
     fair value based  method,  compensation  cost is measured at the grant date
     based on the value of the award and is recognized  over the service period,
     usually  the  vesting  period.  Fair  value is  determined  using an option
     pricing  model that takes into  account  the stock price at the grant date,
     the exercise price, the expected life of the option,  the volatility of the
     underlying  stock  and the  expected  dividends  on it,  and the risk  free
     interest  rate over the expected  life of the option.  Under the  intrinsic
     value based method,  compensation cost is the excess, if any, of the quoted
     market price of the stock at the grant date or other  measurement date over
     the amount an employee must pay to acquire the stock.

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

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

     Net income per common  share is  calculated  by dividing  net income by the
     weighted  average  number  of  shares of  common  stock  and  common  stock
     equivalents  outstanding,  adjusted for the  unallocated  portion of shares
     held by the ESOP in  accordance  with the  American  Institute of Certified
     Public  Accountants'  ("AICPA")  Statement of Position  ("SOP") 93-6. Stock
     options  granted are  considered  common stock  equivalents  and  therefore
     considered in net income per common share calculations,  if dilutive, using
     the treasury stock method.

     Net  income  per  common  share for the year  ended  December  31,  1996 is
     calculated  based on the net income for the entire year. The calculation of
     the weighted average number of common shares outstanding,  adjusted for the
     unallocated portion of shares held by the ESOP, from the date of conversion
     to stock form  (January 5, 1996)  through  December 31, 1996,  assumes such
     shares were outstanding for the entire year (as if the conversion had taken
     place on January 1, 1996).


                                     - 28 -
<PAGE>


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


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

     Interest rate risk
     ------------------

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

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

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

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

     Certain  amounts for the years ended  December  31, 1995 and 1994 have been
     reclassified to conform to the current year's presentation.


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


     On July 13,  1995,  the Board of  Directors  of the Bank  adopted a Plan of
     Conversion,  which was  subsequently  amended,  pursuant  to which the Bank
     would convert from a federally chartered mutual savings bank to a federally
     chartered  stock savings bank,  with the concurrent  formation of a holding
     company. The holding company,  Little Falls Bancorp, Inc., ( the "company")
     is a New Jersey corporation  organized in August 1995 to acquire all of the
     capital stock of the Bank upon the completion of the conversion. In October
     1995, the Bank converted from a New Jersey chartered mutual savings bank to
     a federally chartered mutual savings bank.  Concurrently,  the Bank changed
     its name from "Little  Falls  Savings  Bank" to " Little  Falls  Bank".  On
     January 5, 1996,  the  conversion  and initial  public stock  offering were
     completed with the issuance of 3,041,750  shares of Company's common stock,
     par value $0.10 per share, for net proceeds, after conversion costs and the
     effect of the shares  acquired by the ESOP,  of  $26,830,022.  Concurrently
     with the  issuance of the  Company's  common  stock,  the Company  utilized
     $14,671,962 of the net proceeds to purchase all of the outstanding  capital
     stock of the Bank.

     At the time of the  conversion,  the Bank,  in order to grant  priority  to
     eligible  depositors  in the event of  future  liquidation,  established  a
     liquidation account of $15,488,000,  an amount equal to its total net worth
     as of  September  30, 1995,  the date of the latest  statement of financial
     condition  appearing in the final prospectus.  The liquidation account will
     be maintained for the benefit of eligible  account  holders who continue to
     maintain their accounts at the Bank after the  conversion.  The liquidation
     account  will be reduced  annually  to the  extent  that  eligible  account
     holders have reduced their qualifying deposits. Subsequent increases in the
     deposit account will not restore an eligible account  holder's  interest in
     the liquidation  account. In the unlikely event of a complete  liquidation,
     each  eligible  account  holder will be entitled to receive a  distribution
     from the liquidation  account in an amount  proportionate  to their current
     adjusted  qualifying  balances.  The balance of the liquidation  account on
     December 31, 1996 has not been determined.

                                     - 29 -

<PAGE>

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


2. REORGANIZATION AND STOCKHOLDERS' EQUITY  (Cont'd)
------------------------------------------


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

     During the year ended  December 31,  1996,  the Company  approved  plans to
     repurchase  296,570  shares of its  common  stock  outstanding,  up to five
     percent  (5%)  of  the  shares  outstanding  at  any  single  instance.  In
     accordance  therewith,  296,570 shares, at an aggregate cost of $3,277,004,
     were purchased in the open market.


3.   INVESTMENT SECURITIES HELD TO MATURITY
-------------------------------------------

<TABLE>
<CAPTION>
                                                                December 31, 1996
                                              ----------------------------------------------------
                                              Amortized          Gross Unrealized       Estimated
                                                                 ------------------
                                                 Cost            Gains       Losses    Fair Value
                                              ----------         -----       ------    -----------
U.S. Government
   (including agencies):
<S>                                           <C>           <C>           <C>           <C>
      Due in one year or less                 $ 9,008,182   $      --     $    23,182   $ 8,985,000
      Due after one year through five years    15,014,352          --         147,477    14,866,875
      Due after five years                     27,005,763         4,237          --      27,010,000

Municipal bonds
       Due within one year                        342,000          --            --         342,000
                                              -----------   -----------   -----------   -----------

                                              $51,370,297   $     4,237   $   170,659   $51,203,875
                                              ===========   ===========   ===========   ===========
</TABLE>

<TABLE>
<CAPTION>

                                                                December 31, 1995
                                              ------------------------------------------------------
                                              Amortized         Gross Unrealized         Estimated
                                                               ---------------------
                                                 Cost          Gains         Losses      Fair Value
                                              -----------   -----------   -----------   -----------
U.S. Government
   (including agencies):
<S>                                           <C>           <C>           <C>           <C>
      Due in one year or less                 $ 8,000,083   $         -   $    58,833   $ 7,941,250
      Due after one year through five years    21,999,387        73,792       158,179    21,915,000
                                              -----------   -----------   -----------   -----------

                                              $29,999,470   $    73,792   $   217,012   $29,856,250
                                              ===========   ===========   ===========   ===========
</TABLE>


There were no sales of investment  securities  held to maturity during the years
ended December 31, 1996, 1995 and 1994.

Investment  securities  held to maturity with a carrying value of  approximately
$2,000,000 at December 31 1996, were pledged to secure public funds. See note 10
for securities pledged as collateral for repurchase agreements.

                                     - 30 -

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

4.   MORTGAGE-BACKED SECURITIES HELD TO MATURITY
-------------------------------------------------
<TABLE>
<CAPTION>
                                                                                  December 31, 1996
                                                             ------------------------------------------------------------
                                                                Carrying           Gross Unrealized           Estimated
                                                                            ------------------------------
                                                                 Value          Gains          Losses         Fair Value
                                                             -------------     --------      ---------      -------------

<S>                                                           <C>              <C>           <C>            <C>
        Government National Mortgage Association              $ 34,166,041     $211,082      $   8,570      $ 34,368,553
        Federal Home Loan Mortgage Corporation                  28,391,893      223,170        260,908        28,354,155
        Federal National Mortgage Association                   49,915,210      148,410        360,828        49,702,792
                                                              ------------     --------      ---------      ------------

                                                              $112,473,144     $582,662      $ 630,306      $112,425,500
                                                              ============     ========      =========      ============
</TABLE>
<TABLE>
<CAPTION>
                                                                                  December 31, 1995
                                                             ---------------------------------------------------------------
                                                              Carrying             Gross Unrealized           Estimated
                                                                                ---------------------
                                                               Value            Gains          Losses         Fair Value
                                                             --------------     --------     -----------     -------------
<S>                                                           <C>               <C>          <C>             <C>
        Government National Mortgage Association              $ 39,246,722      $386,465     $    7,365      $ 39,625,822
        Federal Home Loan Mortgage Corporation                  32,652,388       368,631        116,363        32,904,656
        Federal National Mortgage Association                   46,121,190       203,454         12,777        46,311,867
                                                              ------------      --------     ----------      ------------

                                                              $118,020,300      $958,550     $  136,505      $118,842,345
                                                              ============      ========     ==========      ============
</TABLE>
<TABLE>
<CAPTION>
                                                                                   December 31, 1996
                                                          ------------------------------------------------ ------------------
                                                                Principal       Unamortized      Unearned         Carrying
                                                                 Balance          Premium        Discounts         Value
                                                          ----------------    --------------   ------------   ---------------
<S>                                                           <C>              <C>               <C>           <C>
        Government National Mortgage Association              $ 33,675,013     $   510,696       $ 19,668      $ 34,166,041
        Federal Home Loan Mortgage Corporation                  28,296,802         219,734        124,643        28,391,893
        Federal National Mortgage Association                   49,434,097         517,150         36,037        49,915,210
                                                              ------------     -----------       --------      ------------

                                                              $111,405,912     $ 1,247,580       $180,348      $112,473,144
                                                              ============     ===========       ========      ============
</TABLE>
<TABLE>
<CAPTION>
                                                                                December 31, 1995
                                                          ------------------------------------------------------------------
                                                                Principal      Unamortized       Unearned         Carrying
                                                                 Balance        Premium          Discounts         Value
                                                          -----------------  ----------------   ------------  ---------------
<S>                                                           <C>             <C>              <C>             <C>
        Government National Mortgage Association              $ 38,714,537    $    562,120     $   29,935      $ 39,246,722
        Federal Home Loan Mortgage Corporation                  32,589,950         264,915        202,477        32,652,388
        Federal National Mortgage Association                   45,612,561         508,629              -         6,121,190
                                                              ------------    ------------     ----------      ------------

                                                              $116,917,048    $  1,335,664     $  232,412      $118,020,300
                                                              ============    ============     ==========      ============
</TABLE>
There were no sales of  mortgage-backed  securities  held to maturity during the
years ended December 31, 1996, 1995 and 1994.
                                     - 31 -

<PAGE>

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


5.   LOANS RECEIVABLE
---------------------

<TABLE>
<CAPTION>
                                                                 December 31,
                                                  --------------------------------------
                                                         1996                    1995
                                                  -----------------       --------------
      Real estate mortgage:
<S>                                                 <C>                   <C>
            One-to-four family                      $  108,367,393        $   88,828,104
            Commercial and multi-family                  3,658,543             4,638,556

                                                       112,025,936            93,466,660
                                                    --------------        --------------

      Construction                                         525,000             1,098,087
                                                    --------------        --------------

      Consumer:
            Second mortgage                              5,028,193             2,539,240
            Passbook or certificate                        888,885               824,151
            Student education guaranteed
               by the State of New Jersey                   25,368                42,418
                                                    --------------        --------------

                                                         5,942,446             3,405,809
                                                    --------------        --------------

                    Total loans                        118,493,382            97,970,556
                                                    --------------        --------------

      Less: Loans in process                               150,000               450,000
                Allowance for loan losses                1,089,828               958,149
                Deferred loan fees and discounts           137,770               332,729
                                                    --------------        --------------

                                                         1,377,598             1,740,878
                                                    --------------        --------------

                                                    $  117,115,784        $   96,229,678
                                                    ==============        ==============
</TABLE>


An analysis of the allowance for loan losses follows:

<TABLE>
<CAPTION>
                                                             Year Ended December 31,
                                                   --------------------------------------------
                                                       1996           1995              1994
                                                   ------------   ------------      -----------

<S>                                                 <C>           <C>               <C>
      Balance - beginning                           $  958,149    $  1,169,058      $   817,636
      Provisions charged to operations                 182,900         131,359          356,083
      Loans charged off, net of recoveries             (51,221)       (342,268)
                                                    ----------    ------------      -----------

      Balance - ending                              $1,089,828    $    958,149      $ 1,169,058
                                                    ==========    ============      ===========
</TABLE>


                                     - 32 -

<PAGE>


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


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

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

<TABLE>
<CAPTION>
                                                                           December, 31
                                                                   -----------------------
                                                                       1996       1995
                                                                   ----------  -----------
      Recorded investment in impaired loans:
<S>                                                                <C>         <C>
            With recorded allowances                               $   1,777   $   1,743
            Without recorded allowances                                    -         267
                                                                   ---------   ---------

                 Total impaired loans                                  1,777       2,010

            Related allowance for loan losses                            404          30
                                                                   ---------   ---------

                Net impaired loans                                 $   1,373   $   1,980
                                                                   =========   =========

      Average recorded investment in impaired loans                $   1,717   $   1,783
                                                                   =========   =========

      Interest income  recognized on impaired  loans during
         the period each loan was impaired:
               Total                                               $      57   $      42
                                                                   =========   =========
               Cash basis                                          $      57   $      33
                                                                   =========   =========
</TABLE>


At December 31, 1996, 1995 and 1994,  nonaccrual  loans for which the accrual of
interest had been discontinued totalled approximately $1,901,000, $1,942,000 and
$4,202,000,  respectively.  Interest  income that would have been recorded under
the original terms of such loans and the interest income actually  recognized is
summarized as follows (in thousands):


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

           Interest income
             that would have been recorded          $  198    $  189     $ 419
           Interest income recognized               $   84    $   39     $  33


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

                                                Year ended December 31,
                                            -------------------------------
                                                 1996            1995
                                            ---------------- --------------

           Balance - beginning                  $   855,760    $   882,640
           Loans originated                         569,187         40,439
           Collection of principal                 (256,670)       (67,319)
                                                 ----------    -----------

           Balance - ending                      $1,168,277    $   855,760
                                                 ==========    ===========


                                     - 33 -

<PAGE>

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

6.   PREMISES AND EQUIPMENT
---------------------------
<TABLE>
<CAPTION>
                                                                  December 31,
                                                            ---------------------------
                                                               1996            1995
                                                            ----------     ------------

<S>                                                         <C>            <C>
      Land                                                  $  614,714     $    662,324
      Buildings and improvements                             2,296,452        2,549,603
      Furniture, fixtures and equipment                      1,038,673          886,222
      Leasehold improvements                                    54,122          54,122
                                                            ----------     ------------
                                                             4,003,961        4,152,271
      Less accumulated depreciation and amortization         1,344,722        1,362,803
                                                            ----------     ------------

                                                            $2,659,239     $  2,789,468
                                                            ==========     ============
</TABLE>


Depreciation and amortization expense totalled $143,997, $92,735 and $83,704 for
the years ended December 31, 1996,1995 and 1994, respectively.


7.   INVESTMENT IN REAL ESTATE
------------------------------

The Bank owns real estate  adjoining  its main office and other land  originally
acquired  for a future  office site no longer to be used for that  purpose.  The
real estate  adjoining the main office is comprised of various rental units both
residential and commercial. During the year ended December 31, 1996, as a result
of the  relocation of a branch office and the sale of deposits in another branch
office,  properties  with a carrying  value of $145,478  were  transferred  from
premises and  equipment  to  investment  in real estate.  The Bank does not have
immediate  plans to utilize  these  facilities  . The income  received  from the
properties,  net of expenses,  is included in other income.  The  properties are
summarized as follows:

                                                              December 31,
                                                       ------------------------
                                                          1996           1995
                                                       -----------   ----------
      Land                                             $  291,277    $  243,667
      Buildings and improvements                          622,480       362,534
                                                       ----------    ----------

                                                          913,757       606,201
      Less accumulated depreciation and amortization      230,703        59,415
                                                       ----------    ----------

                                                       $  683,054    $  546,786
                                                       ==========    ==========



                                     - 34 -

<PAGE>


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


8.   DEPOSITS
-------------

<TABLE>
<CAPTION>
                                                                         December 31,  1996
                                                             ------------------------------------------
                                                             Weighted
                                                             Average
                                                               Rate              Amount        Percent
                                                             ---------      ---------------    --------

<S>                                                            <C>          <C>                   <C>
      Now accounts and non-interest-bearing deposits           1.46%        $  20,871,936         9.14
      Money market accounts                                    3.33            14,822,840         6.49
      Passbook and club accounts                               3.26            49,700,347        21.77
      Certificates of deposit                                  5.48           142,916,420        62.60
                                                                            -------------       ------
                                                               4.48         $ 228,311,543       100.00
                                                                            =============       ======
</TABLE>

<TABLE>
<CAPTION>
                                                                     December 31,  1995
                                                          --------------------------------------------
                                                           Weighted
                                                            Average
                                                             Rate             Amount          Percent
                                                          ----------     ----------------     --------
<S>                                                          <C>         <C>                    <C>
      Now accounts and non-interest-bearing deposits         1.94%       $   23,113,126         9.32
      Money market accounts                                  5.15            19,575,052         7.90
      Passbook and club accounts                             3.21            51,850,350        20.92
      Certificates of deposit                                5.44           153,312,845        61.86
                                                                         --------------       ------
                                                             4.26        $  247,851,373       100.00
                                                                         ==============       ======
</TABLE>


The  aggregate   amount  of  jumbo   certificates  of  deposit  with  a  minimum
denomination  of  greater  than  $100,000  was  approximately   $18,177,000  and
$13,221,000 at December 31, 1996 and 1995,  respectively.  These certificates of
deposit do not  receive a  preferential  interest  rate.  Deposits  in excess of
$100,000 are not federally insured.

The scheduled maturities of certificates of deposit are as follows:

                                                          December 31,
                                                     ---------------------
                                                        1996         1995
                                                     -----------  --------
                                                           (In thousands)
      Three months or less                           $   27,834   $  38,811
      Over three months to one year                      75,561      67,233
      Over one year to three years                       37,488      43,292
      Over three years                                    2,033       3,977
                                                     ----------   ---------

                                                     $  142,916   $ 153,313
                                                     ==========   =========


                                     - 35 -

<PAGE>



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



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


A summary of interest on deposits follows:

<TABLE>
<CAPTION>
                                                          Year Ended December 31,
                                            ------------------------------------------------
                                                  1996             1995            1994
                                            ---------------- --------------- ---------------

<S>                                            <C>              <C>             <C>
      Now  accounts                            $    366,984     $   195,025     $   228,544
      Money market                                  788,001         890,973         716,033
      Passbook and club                           1,859,939         970,934         860,198
      Certificates of deposit                     8,068,002       7,256,798       5,365,416
                                               ------------     -----------     -----------

                                               $ 11,082,926     $ 9,313,730     $ 7,170,191
                                               ============     ===========     ===========
</TABLE>


9.   ADVANCES FROM FEDERAL HOME LOAN BANK OF NEW YORK
-----------------------------------------------------

The Bank has an available  line of credit with the Federal Home Loan Bank of New
York,  subject to the terms and  conditions of the lenders'  overnight  advances
program,  in the amount of $28,068,200 at December 31, 1996. Advances under this
line of  credit,  which  expires  on  November  21,  1997,  are made for one day
periods.  During the year ended December 31, 1996, the bank did not borrow funds
under this program.



10.   SECURITIES SOLD UNDER AGREEMENTS TO REPUCHASE
---------------------------------------------------


                                              December 31, 1996
                                    -----------------------------------------
                                                   Interest
        Lender                        Maturity       Rate          Amount
                                    ------------- ----------- ---------------
        Security broker dealer         5-19-97       7.20%     $   8,175,000
        Security broker dealer        11-20-97       5.68          8,148,000
        Security broker dealer       overnight       7.10          8,300,000
        Federal Home Loan Bank        12-20-99       5.82          9,000,000
                                                               -------------
                                                     6.44      $  33,623,500
                                                               =============


                                     - 36 -

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


10.   SECURITIES SOLD UNDER AGREEMENTS TO REPUCHASE   (Cont'd.)
---------------------------------------------------

Certain information concerning securities sold under agreements to repurchase is
summarized as follows:

                                                             Year Ended
                                                          December 31, 1996
                                                      --------------------------


      Average balance during the year                    $    3,173,000
      Average interest rate during the year                        5.53%
      Maximum month-end balance during the year          $   33,624,000
      Investment  securities  held to maturity
        underlying the agreement at year end:
             Carrying value                              $   35,331,000
             Estimated fair value                        $   35,168,000


There were no similar borrowings during the year ended December 31, 1995.

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

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

The OTS  has  prescribed  capital  requirements  which  include  three  separate
measurements of capital adequacy: a leverage-ratio  capital standard ("Core"), a
tangible capital standard and a risk based capital standard  (collectively known
as the "Capital  Rule").  The Capital Rule requires each savings  institution to
maintain tangible capital equal to at least 1.5% of its tangible assets and core
capital equal to at least 3.0% of its adjusted  total  assets.  The Capital Rule
further requires each savings  institution to maintain total capital equal to at
least 8.0% of its risk-weighted assets.

The following table sets forth the capital position of the Bank as calculated as
of December 31, 1996:

<TABLE>
<CAPTION>
                                                       Tangible                      Core                       Risk-Based
                                               ------------------------    ------------------------    ------------------------
                                               Amount          Percent        Amount       Percent        Amount       Percent

<S>                                            <C>               <C>       <C>               <C>       <C>              <C>
       Capital as calculated under GAAP        $ 28,874          9.61      $ 28,874          9.61      $ 28,874         30.50
       Deduct goodwill                          ( 3,217)        (1.07)       (3,217)         1.07        (3,217)        (3.40)
       Deduct investment in real estate               -             -             -             -          (683)        (0.72)
       Add qualifying
         general loan loss allowance                  -             -             -             -           936          0.99
                                               --------         -----      --------         -----     ---------         -----

       Capital, as calculated                    25,657          8.54        25,657          8.54        25,910         27.37
       Capital, as required                       4,506          1.50         9,013          3.00         7,573          8.00
                                               --------         -----      --------         -----     ---------         -----

       Excess                                  $ 21,151          7.04      $ 16,644          5.54     $  18,337         19.37
                                               ========          ====      ========          ====     =========         =====
</TABLE>
                                     - 37 -

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



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

The Federal  Deposit  Insurance  Corporation  Improvement Act of 1991 ("FDICIA")
imposes increased  requirements on the operations of financial  institutions and
mandated the development of regulations  designed to empower  regulators to take
prompt  corrective  action with respect to institutions  that fall below certain
capital standards.  FDICIA stipulates that an institution with less than 4% core
capital is deemed to be undercapitalized.  Quantitative  measures established by
FDICIA to ensure capital  adequacy  require the Bank to maintain minimum amounts
and  ratios of total and Tier I  capital  (as  defined  in the  regulations)  to
risk-weighted  assets (as defined),  and of Tier I capital to average assets (as
defined).  Management believes, as of December 31, 1996, that the Bank meets all
capital adequacy requirements to which it is subject.

As of March 31, 1996,  the most recent  notification  from the OTS, the Bank was
categorized  as well  capitalized  under the  regulatory  framework  for  prompt
corrective action. To be categorized as well capitalized, the Bank must maintain
minimum  total,  risk-based,  and Tier I  leverage  ratios of 10%,  6%,  and 5%,
respectively.  There are no  conditions  existing or events which have  occurred
since  notification  that  management  believes  have changed the  institution's
category.


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

Employee Pension Plan
---------------------

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

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

<TABLE>
<CAPTION>

                                                                        December 31,
                                                              ---------------------------------
                                                                   1996             1995
                                                              ---------------- ----------------
      Actuarial present value of benefit obligations:
<S>                                                             <C>               <C>
            Vested                                              $   1,493,630     $  1,327,888
            Non-vested
                                                                        4,382            7,116
                                                                 ------------     ------------

                    Total benefit obligation                     $  1,498,012     $  1,335,004
                                                                 ============     ============

</TABLE>

                                     - 38 -

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



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

Employee Pension Plan (Cont'd)
---------------------

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                      ------------------------------
                                                                           1996             1995
                                                                      --------------   -------------

<S>                                                                   <C>              <C>
      Projected benefit obligation                                    $  1,919,617     $   1,743,089
      Plan assets at fair value                                          1,222,245         1,010,000

      Projected benefit
        obligation in excess of plan assets                                697,372           733,089
      Unrecognized net transition
         obligation being amortized over fifteen years                     (96,350)         (110,115)
      Unrecognized net loss                                               (553,681)         (570,632)
      Additional minimum liability                                         228,426           272,663
                                                                      ------------     -------------

      Accrued pension cost including in accounts payable and
        other liabilities                                             $    275,767     $     325,005
                                                                      ============     =============
</TABLE>


<TABLE>
<CAPTION>
                                                                          Year Ended December 31,
                                                             -----------------------------------------------
                                                                 1996              1995             1994
                                                             ------------     --------------   -------------
      Net periodic pension cost included the following
         components:
<S>                                                          <C>              <C>              <C>
            Service cost                                      $   87,161      $    113,020     $    93,368
            Interest cost                                        127,080           122,026          91,045
            Actual return on plan assets                         (74,297)          (89,941)        (52,500)
            Net amortization and deferral                         60,784            63,398          55,064
                                                              ----------      ------------     -----------

      Net periodic pension cost included in
        compensation and employee benefits                    $  200,728      $    208,493     $   186,977
                                                              ==========      ============     ===========
</TABLE>


Significant actuarial assumptions used in determining plan benefits are:


                                             Year Ended December 31,
                                        ----------------------------------
                                          1996       1995          1994
      Annual salary increase             5.00%       6.00%         5.00%
      Long-term return on assets         8.00%       8.00%         7.00%
      Discount rate                      7.00%       8.25%         7.00%


                                     - 39 -

<PAGE>

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


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

Directors retirement plan
-------------------------

The board of Directors adopted a plan, effective January 1, 1995, which provides
that any  director  with twenty or more years of service may retire and continue
to be paid at the rate of 50% of regular  directors  fees.  These  payments will
continue  for the  directors'  lifetime.  This plan is unfunded.  The  following
tables  present the status of the plan and the  components  of net periodic plan
cost:

<TABLE>
<CAPTION>
                                                                                 December 31,
                                                                        -------------------------------
                                                                            1996            1995
                                                                        -------------- ----------------
      Actuarial present value of benefit obligation:
<S>                                                                       <C>            <C>
           Vested                                                         $   189,536    $      98,892
           Non-vested                                                         143,912          162,232
                                                                          -----------    -------------

                                                                          $   333,448    $     261,124
                                                                          ===========    =============


      Projected benefit obligation                                        $   357,661    $     279,624
      Unrecognized past service cost                                         (235,914)        (253,231)
      Unrecognized net (loss) gain                                            (46,819)           3,866
                                                                          -----------    -------------

      Accrued plan cost included in accounts payable and other
       liabilities                                                        $    74,928    $      30,259
                                                                          ===========    =============

</TABLE>


<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                         -------------------------------
                                                                             1996            1995
                                                                         -------------- ----------------
      Net periodic plan cost included the following components:
<S>                                                                       <C>            <C>
           Service cost                                                   $      6,380   $    4,151
           Interest cost                                                        20,972       14,563
           amortization of past service cost                                    17,317       11,545
                                                                          ------------   ----------

      Net periodic plan cost included in other expense                    $     44,669   $   30,259
                                                                          ============   ==========

</TABLE>

A discount rate of 7.50% and 8.25% and a rate of increase in future compensation
levels of 7% and 8% were  assumed  in the plan  valuation  for the  years  ended
December 31, 1996 and 1995, respectively.

                                     - 40 -

<PAGE>


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


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

Directors health benefits plan
------------------------------

The Board of Directors also adopted a plan, effective January 1, 1995, providing
for the  continuation  of the directors'  medical  insurance  coverage for their
lifetime after  retirement.  Benefits under this plan are available to directors
retiring after December 31, 2000 upon their attainment of the later of age 75 or
twenty years of service. This plan is unfunded. The following tables present the
status of the plan and the net components of periodic plan cost:

<TABLE>
<CAPTION>
                                                                               December 31,
                                                                       -----------------------------
                                                                           1996           1995
                                                                       ------------- ---------------
<S>                                                                      <C>            <C>
                 Accumulated postretirement benefit obligation           $  160,094     $   198,828
                 Unrecognized net gain (loss)                                44,907          (3,646)
                                                                         ----------     -----------

                 Accrued plan cost included in accounts payable
                    and other liabilities                                $  205,001     $   195,182
                                                                         ==========     ===========
</TABLE>


<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                                                -------------------------------
                                                                                    1996            1995
                                                                                -------------- ----------------
                 Net periodic plan cost included the following components:
<S>                                                                              <C>             <C>
                      Service cost                                               $      2,866    $      4,082
                      Interest cost                                                    10,969          13,270
                      Immediate recognition of prior service cost                           -         177,830
                      Net amortization                                                 (4,016)              -
                                                                                 ------------     -----------

                 Net periodic plan cost included in other expense                $      9,819     $   195,182
                                                                                 ============     ===========
</TABLE>




A discount rate of 7.50% and 8.25% was assumed for the years ended  December 31,
1996 and 1995, respectively. For both the year ended December 31, 1996 and 1995,
a medical cost trend rate of 10.5%, decreasing 0.5% per year thereafter until an
ultimate rate of 5.5% is reached,  was used in the plan's valuation.  Increasing
the assumed  medical  cost trend by one percent in each year would  increase the
accumulated  postretirement  benefit  obligation  as of December  31,  1996,  by
$20,000 and the aggregate of the service and interest components of net periodic
postretirement benefit cost for the year ended December 31, 1996, by $2,000.


                                     - 41 -
<PAGE>

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



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

Employee Stock Ownership Plan (ESOP)
-----------------------------

Effective upon conversion,  an ESOP was established for all eligible  employees.
The ESOP used  $2,433,400  of  proceeds  from a term loan  from the  Company  to
purchase  243,340  shares of Company common stock in the initial  offering.  The
term loan from the Company to the ESOP, including interest,  is payable over one
hundred and eighty (180) equal monthly  installments.  The initial interest rate
is 8.25% and is subject to semi-annual  adjustment  based on the prime rate. The
Bank  intends  to make  contributions  to the  ESOP  which  will be equal to the
principal and interest payment  required from the ESOP on the term loan.  Shares
purchased with the loan proceeds are pledged as collateral for the term loan and
are  held in a  suspense  account  for  future  allocation  among  participants.
Contributions  to the ESOP and shares released from the suspense account will be
allocated among the participants on the basis of  compensation,  as described by
the plan in the year of allocation. During the year ended December 31, 1996, the
Bank made a $286,659 cash contribution to the ESOP of which $196,181 and $90,478
were applied to interest and principal,  respectively. At December 31, 1996, the
loan had an  outstanding  balance of $ 2,342,922.  The ESOP is accounted  for in
accordance  with SOP 93-6,  which was  issued  by the  AICPA in  November  1993.
Accordingly, the ESOP shares pledged as collateral are reported as unearned ESOP
shares in the  consolidated  statements  of financial  condition.  As shares are
committed  to be released  from  collateral,  the Company  reports  compensation
expense equal to the current  market price of the shares,  and the shares become
outstanding for net income per common share computations. Dividends on allocated
ESOP  shares are  recorded as a reduction  of retained  earnings.  Contributions
equivalent to dividends on  unallocated  ESOP shares are recorded as a reduction
of debt.  ESOP  compensation  expenses were $177,679 for the year ended December
31, 1996.

The ESOP shares at December 31, 1996 were as follows:

                         Allocated shares                           9,048
                         Shares committed to be released            7,175
                         Unreleased Shares                        227,117
                                                            -------------

                         Total ESOP Shares                        243,340
                                                            =============

                         Fair value of unreleased shares    $   2,895,742
                                                            =============



Management Stock Bonus Plan  (the "MSBP")
-----------------------------------------

On July 3, 1996,  the Bank  established a MSBP to provide both key employees and
outside  directors  with a  proprietary  interest  in the  company  in a  manner
designed  to  encourage  such  persons  to remain  with the Bank.  The Bank will
contribute  sufficient  funds to the MSBP to purchase  121,670  shares of common
stock of the Company in the open market.

Underthe  MSBP,  awards are granted in the form of common stock held by the MSBP
Trust.  The  awards  vest  over a  period  of time  not more  than  five  years,
commencing one year from the date of award.  The awards become fully vested upon
termination of employment  due to death,  disability or change in control of the
Bank or Company.  At December 31, 1996,  54,748 shares were granted to directors
and 27,986  shares were granted to officers and  employees.  None of the granted
shares were vested at December 31, 1996.  $87,903 of expense related to the MSBP
shares was recorded during the year ended December 31, 1996.

                                     - 42 -
<PAGE>



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

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

Management Stock Bonus Plan (the "MSRP") (Cont'd)
----------------------------------------

During the year ended December 31, 1996,  the Bank did not  contribute  funds to
the MSBP trust to enable the trust to  purchase  the  121,670  shares of Company
common  stock.  Based on the market  price on December  31,  1996,  had the Bank
contributed  sufficient  funds  to  purchase  the  shares  in the  open  market,
stockholders' equity would have been decreased by $1,463,390.

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

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

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

During the year ended  December 31, 1996,  121,655 and 109,496  shares of common
stock were  granted  under the plan at an option  price of $10.625  (the  market
price on the date of stockholders  approval ) as non-incentive  stock options to
directors and incentive  stock options to officers and employees,  respectively.
The  weighted  average  excercise  price  of the  options  granted  in 1996  and
outstanding  at December  31,  1996 is $10.625.  No options  were  exercised  or
exerciseable as of December 31, 1996.

The Company, as permitted by Statement No. 123, recognizes compensation cost for
stock options  granted based on the intrinsic  value method  instead of the fair
value  based  method.  The  weighted-average  grant-date  fair  value of options
granted  during  1996,  all of which have  excercise  prices equal to the market
price of the Company's common stock as the grant date, is estimated at $2.81 per
share using the  Black-Scholes  option-pricing  model.  The assumptions used for
estimating fair value are expected common stock divided yield of 0.94%, expected
volatility  of  13.9%,  expected  option  life  of  5  years  and  a  risk  free
interest-rate of 6.875%.  Had the Company used the fair value based method,  net
income would be decreased to $571,000 and net income per common share and common
stock equivalents would be $0.21.

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

The Bank qualifies as a Saving and Loan Association  under the provisions of the
Internal Revenue Code and was therefore,  prior to January 1, 1996, permitted to
deduct from taxable  income an allowance  for bad debts based on the greater of:
(1) actual loan losses (the  "experience  method");  or (2) eight (8) percent of
taxable  income before such bad debt  deduction  less certain  adjustments  (the
"percentage  of taxable  income  method").  For the tax years 1995 and 1994, the
Bank used the percentage of taxable income method.


                                     - 43 -
<PAGE>



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


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

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

Retained  earnings at December 31, 1996 includes  approximately  $2.4 million of
tax bad debt  deductions  which,  in accordance with FASB Statement No. 109, are
considered a permanent difference between the book and income tax basis of loans
receivable, and for which income taxes have not been provided. If such amount is
used for  purposes  other  than  bad debt  losses,  including  distributions  in
liquidation, it will be subject to income tax at the then current rate.

The provision for income taxes is summarized as follows:

                                          Year Ended December 31,
                              ----------------------------------------------
                                 1996             1995              1994
                              -----------     ------------     -------------
      Current:
            Federal           $  540,688      $  222,142       $    913,197
            State                 87,761          17,540             81,238
                              ----------      ----------       ------------

                                 628,449         239,682            994,435
                              ----------      ----------       ------------
      Deferred:
           Federal              (222,744)          1,658            65,953
           State                 (20,261)            150             5,819
                              ----------      ----------       ------------

                                (243,005)          1,808            71,772
                              ----------      ----------       ------------

                              $  385,444      $  241,490       $  1,066,207
                              ==========      ==========       ============


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

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
                                                 ---------------------------------------------------------
                                                       1996               1995                1994
                                                 ------------------ ------------------ -------------------

<S>                                                 <C>             <C>                 <C>
         Tax at the statutory rate                  $  338,753      $     239,777       $     945,472
         New Jersey Savings Institution Tax             44,550             11,675              53,616
         Other                                           2,141             (9,962)             67,119
                                                    ----------      -------------         -----------

                                                    $  385,444      $     241,490         $ 1,066,207
                                                    ==========      =============         ===========

</TABLE>

                                     - 44 -

<PAGE>


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


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

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

<TABLE>
<CAPTION>
                                                                                           December 31,
                                                                                -------------------------------
                                                                                     1996              1995
                                                                                --------------   --------------
                 Deferred tax assets:
<S>                                                                             <C>              <C>
                       Allowance for loan losses                                $    346,353     $    148,769
                       Deferred loan origination fees, net                            46,702          104,609
                       Deferred compensation                                          97,185           75,670
                       Minimum pension liability                                      47,521           58,485
                       Goodwill                                                       46,829                -
                       MSBP                                                           31,627                -
                       Other                                                           1,920                -
                                                                                ------------      -----------

                           Total deferred tax assets                                 618,137          387,533
                                                                                ------------      -----------

                 Deferred tax liabilities:
                     Depreciation of premises and equipment                           64,196           63,450
                     Other                                                            11,852           14,035
                                                                                ------------      -----------

                          Total deferred tax liabilities                              76,048           77,485
                                                                                ------------      -----------

                          Net deferred tax asset included in other assets       $    542,089      $   310,048
                                                                                ============      ===========
</TABLE>


At December 31, 1996 and 1995,  current  income taxes  receivable of $55,769 and
$273,517, respectively, are included in other assets.

14.   LEGISLATIVE MATTERS
-------------------------

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

Beginning on January 1, 1997, the FDIC has estimated that, in addition to normal
deposit insurance  premiums,  BIF members will pay a portion of the FICO payment
equal to 1.3 basis points on BIF-insured  deposits  compared to 6.4 basis points
by SAIF members on SAIF-insured  deposits.  All institutions will pay a pro-rate
share of the FICO  payment  on the  earlier  of January 1, 2000 or the date upon
which  the last  savings  association  ceases  to exist.  The  legislation  also
requires BIF and SAIF to be merged by January 1, 1999 provided that  legislation
is  adopted  to  eliminate  the  saving  association   charter  and  no  savings
associations remain as of the time.

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

                                     - 45 -

<PAGE>


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


15.    COMMITMENTS
------------------

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

At December 31, 1996, the Bank had commitments outstanding to originate mortgage
loans of $ 3,313,000,  of which $2,898,000,  were for adjustable rate loans with
initial  rates  ranging from 6.50% to 8.25%,  $265,000 were for fixed rate loans
with rates  ranging from 7.25% to 8.25% and  $150,000 was for a commercial  loan
with a fixed rate of 10.25%.  The  commitments  are due to expire  within  sixty
days.  The rates at which the Bank has  committed  to fund  these  loans are set
based on the rate in effect when the borrower accepts the commitment in writing.

At December  31,  1996,  outstanding  commitments  related to unused home equity
lines of credit  totalled  $2,974,000.  These  amounts,  when  used,  will carry
interest rates that will float at the prime rate plus 13/4%.

Rental  expenses  related to the  occupancy of premises  totalled  approximately
$38,000 for each of the years ended  December 31, 1996,  1995 and 1994.  Minimum
non-cancelable  obligations  under lease  agreements with original terms of more
than one year are as follows:

                                   December 31,               Amount
                                   ------------           -------------
                                       1997               $     22,800
                                       1998                     22,800
                                       1999                     22,800
                                       2000                     22,800
                                       2001                     22,800
                                    Thereafter                  22,800
                                                          ------------

                                                          $    136,800
                                                          ============


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

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

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

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

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

     For  investment  and  mortgage-backed  securities,  fair value is estimated
     using quoted market prices.


                                     - 46 -

<PAGE>

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


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

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

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

         Deposits
         --------

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

         Securities sold under agreements to repurchase
         ----------------------------------------------

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

         Commitments to extend credit
         ----------------------------

         The fair value of commitments  to extend credit is estimated  using the
         fees currently  charged to enter into similar  agreements,  taking into
         account  the  remaining   terms  of  the  agreements  and  the  present
         credit-worthiness   of  the   counterparties.   For   fixed-rate   loan
         commitments,  fair value also considers the difference  between current
         levels of interest rates and the committed rates.

<TABLE>
<CAPTION>
                                                                                December 31,
                                                       -------------------------------------------------------------
                                                                      1996                             1995
                                                       ------------------------------   ----------------------------
                                                           Carrying          Fair          Carrying           Fair
                                                            Amount          Value           Amount           Value
                                                            ------          -----           ------           -----
                                                                               (In Thousands)
        Financial assets:
<S>                                                    <C>             <C>             <C>               <C>
             Cash and cash equivalents                 $    10,374     $    10,374     $    53,419       $    53,419
             Investment
              securities held to maturity                   51,370          51,204          29,999            29,855
             Mortgage-backed
              securities held to maturity                  112,473         112,426         118,020           118,842
             Loans receivable                              117,116         114,850          96,230            98,506
             Interest receivable                             1,735           1,735           1,717             1,717
        Financial liabilities:
             Deposits                                      228,312         227,954         247,851           248,661
             Securities sold under agreements to
               repurchase                                   33,624          33,475               -                 -
        Commitments:
             To fund loans                                   6,287           6,287           6,835             6,835

</TABLE>

                                     - 47 -

<PAGE>


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

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

Fair  value  estimates  are made at a specific  point in time based on  relevant
market  information  and  information  about  the  financial  instrument.  These
estimates do not reflect any premium or discount that could result from offering
for sale at one time the entire holdings of a particular  financial  instrument.
Because no market  value  exists  for a  significant  portion  of the  financial
instruments,  fair  value  estimates  are based on  judgments  regarding  future
expected loss experience,  current economic conditions,  risk characteristics of
various financial instruments, and other factors. These estimates are subjective
in nature, involve uncertainties and matters of judgment and, therefore,  cannot
be determined with precision.  Changes in assumptions could significantly affect
the  estimates.  In  addition,  fair  value  estimates  are  based  on  existing
on-and-off  balance sheet financial  instruments  without attempting to estimate
the value of anticipated  future  business,  and exclude the value of assets and
liabilities that are not considered  financial  instruments.  Other  significant
assets that are not considered  financial assets include premises and equipment.
In addition,  the tax ramifications related to the realization of the unrealized
gains and losses can have a significant  effect on fair value estimates and have
not been considered in any of the estimates.  Finally,  reasonable comparability
between  financial  institutions  may not be  likely  due to the  wide  range of
permitted  valuation  techniques and numerous estimates which must be made given
the absence of active secondary  markets for many of the financial  instruments.
The lack of  uniform  valuation  methodologies  introduces  a greater  degree of
subjectivity to those estimated fair values.

17.  PARENT ONLY FINANCIAL INFORMATION
--------------------------------------

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

                                                                    December 31,
Statement of Financial Condition                                       1996
--------------------------------                                       -----

Assets
------
Cash and due from banks                                            $    555,582
Loan receivable from Little Falls Bank                                8,854,264
ESOP loan receivable                                                  2,342,922
Investment in subsidiary                                             28,874,037
Other assets                                                             12,167
                                                                   ------------
            Total assets                                           $ 40,638,972
                                                                   ============
Liabilities and stockholders' equity
------------------------------------
Liabilities
-----------
Other liabilities                                                  $    190,674

Stockholders' equity
--------------------
Common stock                                                            304,175
Additional paid in capital                                           28,974,799
Retained earnings                                                    16,802,056
Common Stock acquired by ESOP                                        (2,271,173)
Treasury stock                                                       (3,277,004)
Minimum pension liability, net                                          (84,555)
                                                                   ------------
            Total stockholders' equity                               40,448,298
                                                                   ------------

            Total liabilities and stockholders' equity             $ 40,638,972
                                                                   ============


                                     - 48 -

<PAGE>


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

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

Statement of Income
-------------------                                        From Inception,
                                                           January 5, 1996,
                                                         to December 31, 1996
                                                         ---------------------

Interest income                                               $    880,582
Equity in undistributed earnings of subsidiary                     248,247
                                                              ------------
                                                                 1,128,829
Expenses                                                           270,940
                                                              ------------

Income before income taxes                                         853,889
Income taxes                                                       243,000
                                                              ------------

Net income                                                    $    610,889
                                                              ============

                                                              From Inception,
Statement of Cash Flows                                      January 5, 1996
-----------------------                                    to December 31, 1996
                                                           ---------------------
Cash flow from operations activities:
   Net income                                                 $    610,889
   Adjustments to reconcile net income
     provided by operations activities:
       Equity in undistributed earnings of the subsidiary         (248,247)
       (Increase) in other assets                                  (12,167)
       Increase in other liabilities                               190,674
                                                              ------------

            Net cash provided by operations activities             541,149
                                                              ------------

Cash flow from investing activities:
   Purchase of all outstanding stock of the Bank               (14,638,780)
   Loan to Little Falls Bank                                   (12,205,380)
   Repayments of loan by Little Falls Savings Bank               3,351,116
   Loan to ESOP                                                 (2,433,400)
   Repayments of loan by ESOP                                       90,478
                                                              ------------
            Net cash used in investing activities              (25,835,966)
                                                              ------------

Cash flows from financing activities:
   Net proceeds from issuance of common stock                   29,263,522
   Acquisition of treasury stock                                (3,277,004)
   Dividends paid                                                 (136,119)
                                                              ------------
   Net cash provided by financing activities                    25,850,399
                                                              ------------
Net increase in cash and cash equivalents                          555,582

Cash and cash equivalents-beginnings                                  --
                                                              ------------
Cash and cash equivalents- ending                             $    555,582
                                                              ============

                                     - 49 -

<PAGE>

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


18.  QUARTERLY FINANCIAL DATA (UNAUDITED)


                                            Year Ended December 31, 1996
                                     ----------------------------------------
                                       First    Second     Third     Fourth
                                      Quarter   Quarter    Quarter   Quarter
                                     --------   -------    -------   --------
                                       (In thousands except per share data)
Interest income                      $ 3,237    $ 4,670   $  4,614  $ 4,782
Interest expense                       2,912      2,751      2,721    2,874
                                     -------    -------   --------  -------
  Net interest income                  1,798      1,919      1,893    1,908
Provision for loan losses                 30         --        153       --
Non-interest income                       53         82         67      207
Non-interest expenses                  1,427      1,296      2,564    1,460
Income taxes                             133        282       (275)     246
                                     -------    -------   --------  -------

  Net income (loss)                  $   261    $   423   $   (482) $   409
                                     =======    =======   ========  =======

Net income (loss) per common share
  and common stock equivalents       $  0.09    $  0.15   $  (0.18) $  0.16
                                     =======    =======   ========  =======



                                            Year Ended December 31, 1995
                                     ----------------------------------------
                                       First    Second     Third     Fourth
                                      Quarter   Quarter    Quarter   Quarter
                                     --------   -------    -------   --------
                                       (In thousands except per share data)

Interest income                      $ 3,237    $ 3,161   $  3,537  $ 3,878
Interest expense                       1,998      2,266      2,383    2,667
                                     -------    -------   --------  -------
  Net interest income                  1,239        895      1,154    1,211
Provision for loan losses                 --        285        107     (261)
Non-interest income (loss)                34         37        113       (6)
Non-interest expenses                    724        995        898    1,224
Income taxes                             181       (121)       138       43
                                     -------    -------   --------  -------

Net income (loss)                    $   368    $  (227) $     124  $   199
                                     =======    =======  =========  =======

Net income (loss) per common share
  and common stock equivalents (1)       N/A        N/A        N/A      N/A
                                     =======    =======  =========  =======

(1) Little Falls Bancorp., Inc. converted to stock form on January 5, 1996
                                     - 50 -
<PAGE>

<TABLE>
<CAPTION>

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

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

</TABLE>


<TABLE>
<CAPTION>

<S>                    <C>                                                    <C>
                       Executive Officers of Little Falls Bancorp, Inc.
                                          and/or
                                     Little Falls Bank

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

Della Talerico                        Michael J. Allen                        Mary Denise Hopper
Vice President                         Vice President                           Vice President

</TABLE>

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

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

       Special Counsel:                           Transfer Agent and Registrar:
       Malizia, Spidi, Sloane & Fisch, P.C.       Chase Mellon Shareholder
       One Franklin Square                        Services, L.L.C.
       1301 K Street, N.W., Suite 700 East        450 West 33rd Street
       Washington, D.C.  20005                    New York, New York  10001-2697

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


      The  Company's  Annual  Report for the Year Ended  December 31, 1996 filed
      with the Securities and Exchange  Commission on Form 10-K without exhibits
      is available  without charge upon written request.  For a copy of the Form
      10-K or any other investor information,  please write the Secretary of the
      Company  at 86 Main  Street,  Little  Falls,  New  Jersey.  Copies  of any
      exhibits to the Form 10-K are  available  at cost.  The Annual  Meeting of
      Stockholders  will be held on April 17, 1997 at 3:30 p.m. at the office of
      the Company.

                                      -51-




<PAGE>




                               OFFICE LOCATIONS

                          LITTLE FALLS BANCORP, INC.
                                86 Main Street
                        Little Falls, New Jersey  07424
                                (201) 256-6100

                               LITTLE FALLS BANK

                                  Main Office
                                86 Main Street
                        Little Falls, New Jersey  07424
                                (201) 256-6100

                                Branch Offices

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

                                  Spruce Run
                                220 Main Street
                        Glen Gardner, New Jersey  08826

                                    Milford
                               34 Bridge Street
                           Milford, New Jersey 08848

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

                                   Kingwood
                               Route 12 and 519
                         Baptistown, New Jersey  08825