FARNSWORTH BANCORP, INC.
                       2004 ANNUAL REPORT TO STOCKHOLDERS



<PAGE>



                            FARNSWORTH BANCORP, INC.
                               2004 ANNUAL REPORT



                                TABLE OF CONTENTS

                                                                           Page
                                                                           ----

Letter to Stockholders.......................................................1

Corporate Profile............................................................2

Stock Price Information......................................................2

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

Management's Discussion and Analysis.........................................4

Report of Independent Registered Public Accounting Firm....................F-1

Consolidated Statements of Financial Condition.............................F-2

Notes to Consolidated Financial Statements.................................F-6

Corporate Information.......................................................11

<PAGE>

                            FARNSWORTH BANCORP, INC.

To Our Stockholders:

         On behalf of our Board of Directors  and  employees,  we are pleased to
present our 2004 Annual Report to Stockholders.

         For the fiscal  year ended  September  30,  2004,  the  Company  earned
$606,000 or $1.22 per share,  as compared to $614,000 or $1.26 per share for the
fiscal year ended  September  30, 2003.  At September  30, 2004,  the  Company's
assets  totaled  $95.6  million,  as compared to $91.8  million at September 30,
2003. Stockholders' equity was $7.3 million or $13.38 per share at September 30,
2004,  compared to $6.6 million or $14.52 per share at September  30, 2003.  The
increase in assets was primarily due to an increase in loans receivable, net.

         In order to fulfill the Company's  capital needs, the Company completed
a private stock  offering in November 2004 in which 120,027 shares of its common
stock were sold at $17.25 per share for  aggregate  gross  offering  proceeds of
$2.1  million.  This stock  offering  was made to a limited  number of investors
pursuant to an exemption from the  registration  requirements  of the securities
laws and improved the Company's capital for future growth.

         The Board of Directors  has recently been expanded with the addition of
two new  directors:  Mr. Coby M. Frier,  the  president  and general  manager of
Eastampton  Auto Center,  Inc., and Mr. John J. Maley,  Jr., a certified  public
accountant.

         The Company also continued its dividend policy in 2004 by paying a $.05
per share cash  dividend in May 2004 and in  November  2004.  The  Company  also
declared a 20% stock dividend in March 2004. These dividends reflect the Board's
continuing  commitment to enhance  shareholder  value in the Company and reflect
the Company's positive earnings trend.

         Our goal  remains  the same as it has  always  been,  to  enhance  your
investment in our Company.

                                           Sincerely,


                                           /s/Gary N. Pelehaty

                                           Gary N. Pelehaty
                                           President and Chief Executive Officer

                                        1

<PAGE>

Corporate Profile

Farnsworth  Bancorp,  Inc.  (the  "Company")  is the parent  company for Peoples
Savings Bank (the "Bank"). The Company was formed as a New Jersey corporation in
May 1998 at the direction of the Bank in connection  with the Bank's  conversion
from a mutual  to stock  form of  ownership.  The  Company  acquired  all of the
capital stock issued by the Bank upon its conversion. On September 29, 1998, the
Bank completed its conversion in connection  with a $3.8 million  initial public
offering of the Company's common stock.  The Company is a grandfathered  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, the Company conducts no significant  business
or operations of its own other than holding all of the outstanding  stock of the
Bank and  investing the  Company's  portion of the net proceeds  obtained in the
mutual-to-stock conversion.

Peoples Savings Bank, founded in 1880 under the name of "The Bordentown Building
and Loan Association," is a federally chartered stock savings bank headquartered
in Bordentown,  New Jersey. The Bank is subject to examination and comprehensive
regulation by the Office of Thrift  Supervision (the "OTS") and its deposits are
federally  insured by the Federal  Deposit  Insurance  Corporation  (the "FDIC")
under the Savings Association  Insurance Fund (the "SAIF"). The Bank is a member
of, and owns  capital  stock in, the Federal  Home Loan Bank (the "FHLB") of New
York, which is one of the twelve regional banks in the FHLB system.

The Bank  operates a  traditional  savings  bank  business,  attracting  deposit
accounts from the general public and using those  deposits,  together with other
funds, primarily to originate and invest in loans secured by one- to four-family
residential real estate.

In addition  to the Bank,  the Company  has one  subsidiary,  Peoples  Financial
Services, Inc., a New Jersey corporation which was incorporated in 2000. Peoples
Financial Services,  Inc. was organized for the purpose of providing  securities
brokerage and investment advisory services and products to customers of the Bank
and the general  public.  Peoples  Financial  Services,  Inc.  has a  networking
agreement  with a third party and offers such  products  and  services  from the
Bank's main and branch offices.

Stock Price Information

The Company's common stock has been traded in the over the counter market on the
OTC-Electronic  Bulletin  Board  under the  trading  symbol  of "FNSW"  since it
commenced  trading on September 30, 1998. The following  table reflects high and
low  bid  prices  as  reported  on  www.nasdaq.com  for  the  calendar  quarters
indicated.  The quotations reflect inter-dealer prices,  without retail mark-up,
markdown or commission and may not represent actual transactions.

                                        2

<PAGE>



                                                             Cash Dividends
Quarter Ended                   High               Low            Per Share
-------------                   ----               ---            ---------
December 31, 2002..........   $12.30             $12.30             $0.05
March 31, 2003.............   $14.99             $12.92                 -
June 30, 2003..............   $15.21             $14.17             $0.05
September 30, 2003.........   $16.50             $15.25                 -

December 31, 2003..........   $18.00             $16.75             $0.05
March 31, 2004.............   $21.00             $16.67                 -
June 30, 2004 .............   $18.00             $16.50             $0.05
September 30, 2004.........   $20.75             $16.15                 -

         The number of shareholders of record of common stock as of December 10,
2004,  was  approximately  406.  This does not  reflect the number of persons or
entities who held stock in nominee or "street"  name through  various  brokerage
firms. At December 21, 2004, there were 650,311 shares outstanding.

         The  Company's  ability to pay  dividends  to  stockholders  is largely
dependent upon the dividends it receives from the Bank. The Bank may not declare
or pay a cash dividend on any of its stock if the effect thereof would cause the
Bank's  regulatory  capital to be reduced below (1) the amount  required for the
liquidation   account   established  in  connection  with  the   mutual-to-stock
conversion, or (2) the regulatory requirements imposed by the OTS.

                    Selected Financial Ratios and Other Data


                                                       At or For the Years Ended
                                                             September 30,
                                                       -------------------------
                                                           2004          2003
                                                           ----          ----
Return on average assets..........................         0.646%        0.705%
Return on average equity..........................          8.97          9.51
Average equity to average assets ratio............          7.20          7.41
Equity to assets at period end....................          7.60          7.15
Net interest rate spread..........................          3.87          3.98
Net yield on average interest-earning assets......          4.09          4.19
Non-performing loans to total assets..............          0.79          0.52
Allowance for loan losses to total loans..........          0.64          0.52
Dividend payout ratio.............................          9.17          6.62


                                        3

<PAGE>

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

         The  following  discussion  of the  financial  condition and results of
operations  of the Company and its  subsidiaries  should be read in  conjunction
with the accompanying Consolidated Financial Statements.

General

         The following discussion relates only to the Bank's financial condition
and results of operations.

         The Bank's  results of  operations  depend  primarily  on net  interest
income,  which is determined by (i) the difference between rates of interest the
Bank  earns on its  interest-earning  assets  and the  rates  the  Bank  pays on
interest-bearing  liabilities  (interest  rate  spread),  and (ii) the  relative
amounts of interest-earning assets and interest-bearing  liabilities. The Bank's
results of  operations  are also  affected by  non-interest  income,  including,
primarily,  income from customer  deposit  account  service  charges,  gains and
losses  from  the  sale  of  investment  securities  and  non-interest  expense,
including,  primarily,  compensation  and  employee  benefits,  federal  deposit
insurance premiums,  office occupancy cost, and data processing cost. The Bank's
results of operations  are also affected  significantly  by general and economic
and  competitive  conditions,  particularly  changes in market  interest  rates,
government  policies  and actions of  regulatory  authorities,  all of which are
beyond the Bank's control.

Market Risk Analysis

         Qualitative Analysis. The Bank's assets and liabilities may be analyzed
by  examining  the  extent to which  they are  interest  rate  sensitive  and by
monitoring  the  expected  effects of  interest  rate  changes on the Bank's net
portfolio  value.  An asset or liability  is interest  rate  sensitive  within a
specific time period if it will mature or re-price  within that time period.  If
the Bank's assets  mature or re-price  more quickly or to a greater  extent than
its  liabilities,  the Bank's net portfolio  value and net interest income would
tend to increase  during periods of rising  interest  rates but decrease  during
periods of falling  interest rates.  Conversely,  if the Bank's assets mature or
re-price more slowly or to a lesser extent than its liabilities,  the Bank's net
portfolio value and net interest income would tend to decrease during periods of
rising interest rates but increase during periods of falling interest rates. The
Bank's policy has been to address the interest rate risk inherent in the typical
savings institution business of originating long-term loans funded by short-term
deposits by  maintaining  sufficient  liquid  assets for material and  prolonged
changes  in  interest  rates and by  originating  loans  with  shorter  terms to
maturity such as construction, commercial and consumer loans.

         Quantitative  Analysis.  In order to encourage savings  associations to
reduce  their  interest  rate  risk,  the OTS  adopted a rule  incorporating  an
interest rate risk ("IRR") component into the risk-based  capital rules. The IRR
component is a dollar  amount that will be deducted  from total  capital for the
purpose of calculating an institution's  risk-based  capital  requirement and is
measured  in terms of the  sensitivity  of its net  portfolio  value  ("NPV") to
changes in interest rates.  NPV is the difference  between incoming and outgoing
discounted cash flows from assets,

                                        4

<PAGE>

liabilities,  and off-balance sheet contracts.  An institution's IRR is measured
as the change to its NPV as a result of a  hypothetical  200 basis point  ("bp")
change in market  interest  rates. A resulting  change in NPV of more than 2% of
the estimated  present value of total assets ("PV") will require the institution
to deduct from its capital 50% of that excess change. The rules provide that the
OTS will calculate the IRR component  quarterly for each  institution.  Based on
the Bank's asset size and risk-based capital,  the Bank has been informed by the
OTS that it is exempt from this rule. Nevertheless, the following table presents
the Bank's  NPV at  September  30,  2004,  as  calculated  by the OTS,  based on
quarterly information voluntarily provided to the OTS.


        Changes
       In Market                   Net Portfolio Value
       ---------        -------------------------------------------
    Interest Rates      $ Amount        $ Change         % Change   NPV Ratio(1)
    --------------      --------        --------         --------   ------------
   (basis points)(2)     (Dollars in thousands)
           +300            5,814          -5,425             -48%         6.22%
           +200            7,746          -3,493             -31%         8.08%
           +100            9,639          -1,601             -14%         9.82%
              0           11,239              --              --%        11.21%
           -100           11,546             306              +3%        11.41%

----------------
(1)  Calculated as the estimated NPV divided by present value of total assets.
(2)  the  -200bp  and  -300bp  scenarios  are not shown due to the  current  low
     interest rate environment.

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  prepayments and deposit  run-offs and should not be relied upon
as  indicative  of actual  results.  Certain  shortcomings  are inherent in such
computations.   Although   certain  assets  and  liabilities  may  have  similar
maturities or periods of  re-pricing,  they may react at different  times and in
different degrees to changes in market rates of interest.  The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market interest rates,  while rates on other types of assets and liabilities may
lag  behind  changes  in  market  interest  rates.  In the  event of a change in
interest  rates,   prepayments  and  early   withdrawal   levels  could  deviate
significantly  from those  assumed in making the  calculations  set forth above.
Additionally,  an  increased  credit  risk may result as many  borrowers  may be
unable to service their debt in the event of an interest rate increase.

         The Bank's  Board of Directors  review the Bank's  asset and  liability
policies on a quarterly basis. The Board meets quarterly to review interest rate
risk and  trends,  as well as  liquidity  and capital  ratios and  requirements.
Management administers the policies and determinations of the Board of Directors
with respect to the Bank's asset and liability  goals and  strategies.  The Bank
expects that its asset and liability  policies and  strategies  will continue as
described so long as  competitive  and  regulatory  conditions  in the financial
institution  industry and market  interest rates continue as they have in recent
years.

                                        5

<PAGE>

Financial Condition

         Total  assets  increased  $3.8  million  or 4.14% to $95.6  million  at
September 30, 2004 from $91.8 million at September<-1-160>30, 2003. The increase
was  primarily  attributable  to a $5.1  million  increase  in the Bank's  loans
receivable net, a $4.3 million increase in available for sale securities,  and a
$100,000  increase in equipment,  partially offset by a decrease of $5.5 million
in cash and due from  banks  and a  decrease  of  $200,000  in  held-to-maturity
investment  securities.  The  increase  in loans  receivable  was due to greater
marketing and increased  demand in the Bank's  primary market area. The Bank has
increased its commercial real estate loan portfolio in recent periods.

         The Bank's total  liabilities  increased  $3.0 million or 3.5% to $88.3
million at September 30, 2004 from $85.3 million at  September<-1-160>30,  2003.
The increase was primarily  attributable to a $3.1 million increase in deposits,
offset by a $100,000 decrease in FHLB advances. Deposits increased primarily due
to  stock  market  conditions  and  the  resulting  shift  of  investments  into
certificates  of  deposit  and money  market  and NOW  accounts,  and  increased
deposits at the new Marlton branch.

         Stockholders'  equity  was  $7.3  million  or 7.6% of total  assets  at
September  30,  2004,  as  compared to $6.6  million or 7.1% of total  assets at
September 30, 2003. The increase resulted primarily from net income.

                                        6

<PAGE>

Average Balance Sheet

         The following table sets forth a summary of average  balances of assets
and liabilities as well as average yield and rate information.  Average balances
are based upon month-end balances, however, the Bank does not believe the use of
month-end  balances  differs  significantly  from an  average  based  upon daily
balances. There have been no tax equivalent adjustments made to yields.

<TABLE>
<CAPTION>
                                                                                Year Ended September 30,
                                                    -----------------------------------------------------------------------------
                                                                     2004                                    2003
                                                    ------------------------------------     ------------------------------------
                                                                                Average                                 Average
                                                      Average                    Yield/       Average                    Yield/
                                                      Balance      Interest       Cost        Balance     Interest        Cost
                                                      -------      --------       ----        -------     --------        ----
                                                                             (Dollars in thousands)
<S>                                                <C>           <C>           <C>         <C>          <C>            <C>
Interest-earning assets:
    Loans receivable(1).........................      $66,798       $4,448         6.66%      $61,146      $4,426          7.24%
    Investment securities(2)....................       26,359          887         3.37        23,640         866          3.66
                                                      -------        -----       ------       -------       -----        ------
        Total interest-earning assets...........       93,157        5,335         5.73        84,786       5,292          6.24
Noninterest-earning assets......................          736           --       ------         2,401          --        ------
                                                      -------        -----                    -------       -----
        Total assets............................      $93,893        5,335                    $87,187       5,292
                                                      =======        =====                    =======       =====
Interest-bearing liabilities:
    NOW accounts................................      $10,663           89         0.84       $17,216          95          0.55
    Savings accounts............................       18,248          185         1.01        10,870         257          2.36
    Money market accounts.......................       10,904          151         1.38         7,245         126          1.74
    Certificates of deposit.....................       41,448        1,052         2.54        40,403       1,197          2.96
    FHLB - Advances.............................          890           52         5.83         1,022          61          5.95
                                                      -------        -----       ------       -------       -----        ------
        Total interest-bearing liabilities......       82,153        1,529         1.86        76,756       1,736          2.26
                                                                     -----       ------                     -----        ------
Noninterest-bearing liabilities.................        4,980                                   3,968
                                                      -------                                 -------
        Total liabilities.......................       87,133                                  80,724
Stockholders' equity............................        6,760                                   6,463
                                                      -------                                 -------
        Total liabilities and
        stockholders' equity....................      $93,893                                 $87,187
                                                      =======                                 =======
Net interest income.............................                    $3,806                                 $3,556
                                                                    ======                                 ======
Interest rate spread(3).........................                                   3.87%                                   3.98%
                                                                                 ======                                  ======
Net yield on interest-earning assets(4).........                                   4.09%                                   4.19%
                                                                                 ======                                  ======
Ratio of average interest-earning assets
    to average interest-bearing liabilities.....                                 113.39%                                 110.46%
                                                                                 ======                                  ======
</TABLE>
----------------
(1)  Average balances include non-accrual loans.
(2)  Includes    mortgage-backed    securities,    investment   securities   and
     interest-bearing deposits in other financial institutions.
(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.

                                        7

<PAGE>

Rate/Volume Analysis

         The table below sets forth certain information regarding changes in the
Bank's interest income and interest expense 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 old rate); (ii)changes in rates (changes in rate
multiplied by old average volume);  (iii)changes in rate-volume (changes in rate
multiplied by the change in average volume).


                                                   Year Ended September 30,
                                                          2004 vs 2003
                                           ------------------------------------
                                                      Increase (Decrease)
                                                           Due to
                                           ------------------------------------
                                                                Rate/
                                           Volume      Rate     Volume     Net
                                           ------      ----     ------     ---
                                                      (In thousands)
Interest income:
    Loans receivable ...................    $ 409     $(355)    $ (32)    $  22
    Investment securities ..............       99       (70)       (8)       21
                                            -----     -----     -----     -----
        Total interest income ..........    $ 508     $(425)    $ (40)    $  43
                                            =====     =====     =====     =====

Interest expense:
    NOW accounts .......................    $ (36)    $  49     $ (19)    $  (6)
    Savings account ....................      174      (146)     (100)      (72)
    Money market accounts ..............       64       (26)      (13)       25
    Certificates of deposits ...........       30      (171)       (4)     (145)
    FHLB advances ......................       (8)       (1)       --        (9)
                                            -----     -----     -----     -----
        Total interest expense .........    $ 224     $(295)    $(136)    $(207)
                                            =====     =====     =====     =====

Change in net interest income ..........    $ 284     $(130)    $  96     $ 250
                                            =====     =====     =====     =====


Results of Operations

         Net Income.  The Bank's net income  decreased $8,000 for the year ended
September 30, 2004,  to $606,000 from $614,000 for the year ended  September 30,
2003.  This decrease was  primarily  attributable  to a decrease in  noninterest
income of $134,000 and an increase in noninterest expense of $119,000, offset by
increased net interest  income after provision for loan losses of $198,000 and a
decrease in income taxes of $47,000.

         Net  Interest  Income.  Net  interest  income  is the most  significant
component  of the Bank's  income from  operations.  Net  interest  income is the
difference  between interest the Bank received on its  interest-earning  assets,
primarily loans, investment and mortgage-backed securities and

                                        8

<PAGE>

interest the Bank pays on its interest-bearing  liabilities,  primarily deposits
and borrowings. Net interest income depends on the volume of and rates earned on
interest-earning  assets and the  volume of and rates  paid on  interest-bearing
liabilities.

         Net interest income after provision for loan losses increased  $198,000
or 5.7%, to $3.7 million for the year ended  September  30, 2004.  This increase
was primarily  due to an increase in interest  earned on loans of $19,000 and an
increase in interest  earned on investments of $23,000,  coupled with a decrease
in interest paid on deposits of $199,000 and a decrease in interest paid on FHLB
advances of $9,000,  offset by an increase in the  provision  for loan losses of
$52,000.

         The increase in the average balance of interest-earning  assets of $8.3
million primarily reflects increases of approximately $5.6 million in the Bank's
average balance of loans and $2.7 million in the average balance of securities.

         The increase in average  interest-bearing  liabilities  of $5.4 million
reflects an increase of $12.0 million in the average  balance of savings,  money
market and  certificates  of  deposit,  partially  offset by a decrease  of $1.0
million in the average balance of FHLB borrowings and a decrease of $6.5 million
in the average balance of interest-bearing NOW accounts.

         Provision  for Loan Losses.  Provision for loan losses was $123,000 for
the year ended  September  30,  2004,  as compared to $71,000 for the year ended
September 30, 2003.  The provision is  established  to adjust the balance of the
allowance for loan losses to a level  management  feels is appropriate  based on
the risk characteristics of the loan portfolio.

         Management believes the allowance for loan losses is at a level that is
adequate to provide for  estimated  losses.  However,  there can be no assurance
that further  additions  will not be made to the  allowance and that such losses
will not exceed the estimated amount.

         Noninterest Income. Noninterest income decreased $134,000 or 26.5% from
$505,000  for the year ended  September  30,  2003 to  $372,000  for 2004.  This
decrease in the Bank's  noninterest  income was due to a decrease of $138,000 in
net  realized  gains on the sale of  available  for sale  securities  and loans,
offset by an increase in fees and other service charges of $4,000.

         Noninterest  Expense.  Noninterest  expense increased  $119,000 or 4.0%
from $3.0 million for the year ended  September  30,  2003,  to $3.1 million for
2004.  The  increase  in the  Bank's  noninterest  expense  was due to a $22,000
increase  in other  noninterest  expense,  an increase of $114,000 in the Bank's
compensation  and  benefits  and an  increase  of $1,000 in the  Bank's  federal
insurance  premiums,  partially  offset  by a  $18,000  decrease  in the  Bank's
occupancy and equipment expense.  The category of non-interest expense described
as "other" is  comprised  of expenses  related to  advertising,  fees charged by
banks, loan processing fees, NOW expenses, costs related to supplies and various
professional  fees.  The  highest  of  these  expenses  was  $159,000  for  bank
processing  fees. The increase in compensation  and benefits  expense was due in
part to additional  personnel  required to support the new branch office and the
Bank's continued growth.

         Income Tax Expense.  Income tax expense decreased $46,000 from $411,000
for the year ended  September  30, 2003 to $365,000 for 2004.  This  decrease in
income tax expense was

                                        9

<PAGE>

primarily  due to the decrease in net taxable  earnings of the Bank.  The Bank's
effective  tax rate was 37.6% and 40.1% for the years ended  September  30, 2004
and 2003, respectively.

Liquidity and Capital Resources

         The Bank is required to maintain  adequate  levels of liquid assets for
its safe and sound operation.

         The Bank's  primary  sources of funds are deposits,  repayment of loans
and  mortgage-backed   securities,   maturities  of  investment  securities  and
interest-bearing  deposits with other banks, advances from the FHLB of New York,
and funds  provided from  operations.  While  scheduled  repayments of loans and
mortgage-backed   securities  and   maturities  of  investment   securities  are
predictable  sources of funds,  deposit flows,  and loan prepayments are greatly
influenced  by the general  level of interest  rates,  economic  conditions  and
competition.  The Bank uses its liquidity resources principally to fund existing
and future loan commitments, maturing certificates of deposit and demand deposit
withdrawals,  to invest in other interest-earning assets, to maintain liquidity,
and meet operating expenses.

         Net cash provided by the Bank's operating  activities (the cash effects
of  transactions  that enter into the Bank's  determination  of net income e.g.,
non-cash  items,  depreciation,  provision  for loan  losses) for the year ended
September<-1-160>30,  2004 totaled $901,000, an increase of $178,000 as compared
to 2003.

         Net  cash  used  by  the  Bank's  investing   activities   (i.e.,  cash
disbursements,  primarily for the purchase of the Bank's  investment  securities
and mortgage-backed securities portfolios and the Bank's loan portfolio) for the
year ended  September  30,  2004,  totaled  $9.5  million,  an  increase of $2.8
million.  The increase in cash used was  primarily  attributable  to funding net
loan  growth  of $5.2  million  in  2004 as  compared  to $3.5  million  in 2003
partially offset by net purchases of available for sale investment securities in
2004 of $4.0  million.  Additional  uses of cash were to purchase  premises  and
equipment of $238,000 and redemption of Federal Home Loan Bank stock of $17,000.
The  use  of  cash  was   partially   offset  by  paydowns  and   maturities  of
held-to-maturity investment securities of $200,000 in 2004.

         Net cash  provided  in the  Bank's  financing  activities  (i.e.,  cash
receipts  primarily from net proceeds from stock issuance and from net increases
in deposits and net increases in FHLB advances) for the year ended September 30,
2004  totaled $3.0  million,  a decrease of $5.3 million as compared to the year
ended September 30, 2003. This increase was primarily  attributable to increased
deposits of $3.1 million  offset by repayment of FHLB advances of $150,000,  net
of new advances and the purchase of stock for the Bank's  restricted  stock plan
of $150,000.

         Approximately  $23.5 million of the Bank's time deposits  mature within
the next 12  months.  The Bank  expects  such  deposits  to be renewed at market
rates.  In  addition to this source of  continuing  funding,  the Bank has total
borrowing capacity of 25% of total assets through the FHLB of New York.

                                       10

<PAGE>
       The following table discloses our contractual obligations and commitments
as of September 30, 2004.

<TABLE>
<CAPTION>
                                               Total
                                             Amounts         Less Than                                       Over
                                           Committed          1 Year        1-3 Years     4-5 Years       5 Years
                                           ---------          ------        ---------     ---------       -------
<S>                                         <C>             <C>              <C>           <C>            <C>
Construction loans in process.............    $1,041          $1,041           $  -          $  -           $  -
Other commitments to extend credit........     6,875           6,875              -             -              -
                                              ------          ------           ----          ----           ----
    Total.................................    $7,916          $7,916           $  -          $  -           $  -
                                              ======          ======           ====          ====           ====
</TABLE>

<TABLE>
<CAPTION>

                                                             Less Than                                      After
                                               Total          1 Year        1-3 Years     4-5 Years       5 Years
                                               -----          ------        ---------     ---------       -------
<S>                                          <C>               <C>            <C>           <C>            <C>
FHLB advances.............................    $  810            $155           $341          $314           $  -
Rentals under operating leases............       999              55             94           103            747
                                              ------            ----           ----          ----           ----
    Total.................................    $1,809            $210           $435          $417           $747
                                              ======            ====           ====          ====           ====

</TABLE>
                                       11
<PAGE>





To the Board of Directors
Farnsworth Bancorp, Inc.


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


We have audited the accompanying  consolidated statements of financial condition
of Farnsworth Bancorp,  Inc. and Subsidiaries as of September 30, 2004 and 2003,
and the related  consolidated  statements  of income and  comprehensive  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.

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

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Farnsworth Bancorp,
Inc. and  Subsidiaries  at September 30, 2004 and 2003, and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.







/S/ KRONICK KALADA BERDY & CO., P.C.

Kingston, Pennsylvania
December 1, 2004

                                      F-1
<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS

                           SEPTEMBER 30, 2004 AND 2003


<TABLE>
<CAPTION>
                                                                     2004            2003
                                                                ------------    ------------
<S>                                                           <C>             <C>
                                       ASSETS
                                       ------
Cash and due from banks                                         $  6,009,330    $ 11,539,886
Securities available for sale                                     19,288,779      15,003,778
Securities held to maturity (fair value $269,191 and $475,189
  at September 30, 2004 and 2003, respectively)                      261,301         461,443
Loans receivable, net                                             66,502,369      61,462,266
Accrued interest receivable                                          448,194         415,259
Federal Home Loan Bank of New York stock at
  cost, substantially restricted                                     490,200         507,400
Premises and equipment                                             2,340,641       2,262,157
Deferred income taxes                                                137,719         125,667
Other assets                                                         126,650          51,712
                                                                ------------    ------------

        Total assets                                            $ 95,605,183    $ 91,829,568
                                                                ============    ============

                        LIABILITIES AND STOCKHOLDERS' EQUITY
                        ------------------------------------

Deposits:
   Non interest bearing                                         $  5,105,499    $  3,733,030
   Interest bearing                                               81,720,306      79,980,941
Federal Home Loan Bank advance                                       810,013         956,436
Advances by borrowers for taxes and insurance                        373,531         328,379
Accrued income taxes                                                 123,102          97,788
Accrued interest payable                                              63,219          23,122
Accounts payable and other accrued expenses                          146,039         146,405
                                                                ------------    ------------

        Total liabilities                                         88,341,709      85,266,101
                                                                ------------    ------------

Preferred stock $.10 par value, 1,000,000 shares
  authorized; none issued and outstanding                                  -               -
Common stock $.10 par value, 5,000,000 shares
  authorized; 542,666 and 452,023 shares issued for 2004
  and 2003 respectively; shares outstanding 530,284 and 433,031
  for 2004 and 2003, respectively                                     54,267          45,202
Additional paid in capital                                         6,515,350       4,688,162
Treasury stock at cost, 12,382 and 18,992
  for 2004 and 2003, respectively                                   (120,658)       (185,172)
Retained earnings substantially restricted                         1,068,643       2,260,041
Common stock acquired by employee stock
  ownership plan (ESOP)                                             (113,694)       (144,054)
Common stock acquired by restricted stock plans (RSPs)               (55,100)         (3,645)
Accumulated other comprehensive loss, unrealized depreciation
  on available for sale securities, net of income taxes              (85,334)        (97,067)
                                                                ------------    ------------

Total stockholders' equity                                         7,263,474       6,563,467
                                                                ------------    ------------

Total liabilities and stockholders' equity                      $ 95,605,183    $ 91,829,568
                                                                ============    ============
</TABLE>

                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-2
<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


<TABLE>
<CAPTION>
                                                                                        2004           2003
                                                                                    -----------    -----------
<S>                                                                               <C>            <C>
Interest income:
  Loans receivable                                                                  $ 4,448,345    $ 4,428,888
  Investments                                                                           886,175        863,151
                                                                                    -----------    -----------

        Total interest income                                                         5,334,520      5,292,039
                                                                                    -----------    -----------

Interest expense:
  Deposits                                                                            1,476,477      1,674,955
  Federal Home Loan Bank advances                                                        51,897         60,821
                                                                                    -----------    -----------

        Total interest expense                                                        1,528,374      1,735,776
                                                                                    -----------    -----------

        Net interest income                                                           3,806,146      3,556,263
Provision for loan losses                                                               122,700         70,879
                                                                                    -----------    -----------

        Net interest income after provision
          for loan losses                                                             3,683,446      3,485,384
                                                                                    -----------    -----------

Noninterest income:
  Fees and other service charges                                                        285,804        281,356
  Net realized gains on sale of:
    Available for sale securities                                                        51,433        167,441
    Loans                                                                                34,344         56,778
                                                                                    -----------    -----------

        Total noninterest income                                                        371,581        505,575
                                                                                    -----------    -----------

Noninterest expense:
  Compensation and benefits                                                           1,751,740      1,638,397
  Occupancy and equipment                                                               605,966        623,661
  Federal insurance premiums and assessments                                             13,667         12,118
  Service fees                                                                          122,584        105,999
  Professional fees                                                                     124,435        131,791
  Other                                                                                 465,551        453,337
                                                                                    -----------    -----------

        Total noninterest expense                                                     3,083,943      2,965,303
                                                                                    -----------    -----------

Income before provision for income taxes                                                971,084      1,025,656

Provision for income taxes                                                              364,819        411,227
                                                                                    -----------    -----------

        Net income                                                                      606,265        614,429

Other comprehensive income (loss):
  Unrealized gain (loss) on securities available for sale, arising during
     the period, net of tax expense (benefit) of  $28,190, 2004; $(115,076), 2003        42,637       (182,825)
  Reclassification adjustment, net of taxes of $20,529, 2004; $66,870, 2003             (30,904)      (100,571)
                                                                                    -----------    -----------
        Comprehensive income                                                        $   617,998    $   331,033
                                                                                    ===========    ===========

Net income per common share:
  Basic                                                                             $      1.22    $      1.26
                                                                                    ===========    ===========
  Diluted                                                                           $      1.13    $      1.21
                                                                                    ===========    ===========

Weighted average number of shares outstanding during the year:
  Basic                                                                                 497,803        487,418
                                                                                    ===========    ===========
  Diluted                                                                               534,384        509,767
                                                                                    ===========    ===========
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-3
<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003


<TABLE>
<CAPTION>
                                                                                                           Appreciation
                                                                     Retained      Common      Common    (Depreciation)      Total
                                         Additional                  Earnings      Stock       Stock     on Securities       Stock-
                              Common      Paid in      Treasury    Substantially  Acquired    Acquired   Available for      holders'
                              Stock       Capital       Stock       Restricted    By ESOP      By RSP    Sale, Net of Tax    Equity
                            ---------  ------------  ----------- ------------- -----------  -----------  ---------------- ----------
<S>                        <C>        <C>           <C>          <C>          <C>           <C>             <C>        <C>
Balance at
  September 30, 2002         $ 37,985   $ 3,396,262   $ (185,172)  $ 2,980,935  $ (174,414)   $ (54,765)      $ 186,329  $6,187,160

Net income for the
  year ended
September 30, 2003                  -             -            -       614,429           -            -               -     614,429

RSP shares allocated                -             -                          -           -       51,120               -      51,120
ESOP shares allocated               -             -            -             -      30,360            -               -      30,360
Unrealized
  depreciation on
  securities                        -             -            -             -           -            -               -           -
  available for
  sale, net of tax                  -             -            -             -           -            -        (283,396)   (283,396)
Cash dividends
  ($.10 per share)                  -             -            -       (36,206)          -            -               -     (36,206)
20% stock dividend              7,217     1,291,900                 (1,299,117)                                                   -
                             --------   -----------   ----------   -----------  ----------    ---------       ---------  ----------

Balance at
  September 30, 2003           45,202     4,688,162     (185,172)    2,260,041    (144,054)      (3,645)        (97,067)  6,563,467

Net income for the
  year ended
  September 30, 2004                -             -                    606,265           -                            -     606,265

Issuance of additional
  common stock                    274        19,904                          -           -                            -      20,178
Acquisition of common
  stock by RSP                      -        67,686       64,514             -           -     (132,200)              -           -
RSP shares allocated                -             -                          -           -       80,745               -      80,745
ESOP shares allocated               -             -            -             -      30,360            -               -      30,360
Unrealized appreciation
  on securities                     -             -            -             -           -            -               -           -
  available for sale,
  net of tax                        -             -            -             -           -            -          11,733      11,733
Cash dividends
  ($.10 per share)                  -             -            -       (49,274)          -            -               -     (49,274)
20% stock dividend              8,791     1,739,598                 (1,748,389)                                                   -
                             --------   -----------   ----------   -----------  ----------    ---------       ---------  ----------

Balance at
  September 30, 2004         $ 54,267   $ 6,515,350   $ (120,658)  $ 1,068,643  $ (113,694)   $ (55,100)      $ (85,334) $7,263,474
                             ========   ===========   ==========   ===========  ==========    =========       =========  ==========
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-4
<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 FOR THE YEARS ENDED SEPTEMBER 30, 2004 AND 2003

<TABLE>
<CAPTION>

                                                               2004            2003
                                                          ------------    ------------
<S>                                                     <C>             <C>
Cash flows from operating activities:
  Net income                                              $    606,265    $    614,429
                                                          ------------    ------------

Adjustments  to reconcile net income to  net cash
  provided by operating activities:
    Depreciation                                               160,395         145,737
    Provision for loan losses                                  122,700          70,879
    Net gain on sale of investments                            (51,433)       (167,441)
    Stock compensation                                         111,105          81,480
    Increase in accrued interest receivable                    (32,935)        (24,800)
    (Increase) decrease in other assets                        (74,938)         18,228
    Increase (decrease) in income taxes                         19,810         (17,094)
    Increase (decrease) in accrued interest payable             40,097         (12,862)
    Increase (decrease) in accounts payable
      and other accrued liabilities                               (366)         14,177
                                                          ------------    ------------

        Total adjustments                                      294,435         108,304
                                                          ------------    ------------

        Net cash provided by operations                        900,700         722,733
                                                          ------------    ------------

Cash flows from investing activities:
  Net increase in loans receivable                          (5,162,803)     (3,506,927)
  Redemption and principal payments of
     held to maturity securities                               200,142         685,857
  Purchase of available for sale securities                (16,182,517)    (32,305,734)
  Proceeds from sale of available for sale securities       11,954,134      28,727,187
  Redemption (purchase) of Federal Home Loan Bank stock         17,200          (7,600)
  Purchase of premises and equipment                          (238,879)       (260,597)
                                                          ------------    ------------

        Net cash used in investing activities               (9,412,723)     (6,667,814)
                                                          ------------    ------------

Cash flows from financing activities:
  Issuance of additional common stock                           20,178               -
  Increase in deposits                                       3,111,834       8,424,984
  Federal Home Loan Bank repayments                           (146,423)       (138,038)
  Increase in advances by borrowers                             45,152          72,426
  Cash dividends                                               (49,274)        (36,206)
                                                          ------------    ------------

        Net cash provided by financing activities            2,981,467       8,323,166
                                                          ------------    ------------

Net increase (decrease) in cash and due from banks          (5,530,556)      2,378,085

Cash and due from banks at beginning of year                11,539,886       9,161,801
                                                          ------------    ------------

Cash and due from banks at end of year                    $  6,009,330    $ 11,539,886
                                                          ============    ============

Supplement disclosure:
  Cash paid during the period for:
    Interest                                              $  1,488,277    $  1,748,638
                                                          ============    ============
    Income taxes                                          $    382,513    $    424,571
                                                          ============    ============
  Non cash items:
    Unrealized gain (loss) on securities available for
      sale, net of deferred income taxes                  $     11,733    $   (283,396)
                                                          ============    ============
   Stock dividend                                         $  1,748,389    $  1,299,117
                                                          ============    ============
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-5
<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.    Operations and Summary of Significant Accounting Policies
      ---------------------------------------------------------

      Basis of Financial Statement Presentation
      -----------------------------------------

      The  consolidated  financial  statements,  which  have  been  prepared  in
      conformity with  accounting  principles  generally  accepted in the United
      States of America,  include the accounts of Farnsworth  Bancorp,  Inc. and
      its wholly  owned  subsidiaries,  Peoples  Savings  Bank (the  "Bank") and
      Peoples  Financial  Services,  Inc. (PFSI).  All significant  intercompany
      accounts  and  transactions  have been  eliminated  in  consolidation.  In
      preparing  the  financial  statements,  management  is  required  to  make
      estimates and assumptions  that affect the reported  amounts of assets and
      liabilities and disclosure of contingent  assets and liabilities as of the
      date of the statements of financial  condition and the reported amounts of
      revenues and expenses for the  reporting  periods.  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 and the assessment of
      prepayment risks associated with  mortgage-backed  securities.  Management
      believes  that the  allowance  for loan losses is adequate and  prepayment
      risks associated with mortgage-backed  securities are properly recognized.
      While management uses available  information to recognize losses on loans,
      future  additions to the allowance for loan losses 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.

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

      Nature of Operations
      --------------------

      The Bank, which operates four branches in Burlington  County,  New Jersey,
      offers  customary  banking  services,  including  accepting  of  checking,
      savings and time  deposits and the making of  commercial,  real estate and
      consumer loans, to customers who are predominantly small and middle-market
      businesses  and  middle-income   individuals.   PFSI  provides  securities
      brokerage and  investment  advisory  services and products to customers of
      the Bank. Farnsworth is a non-operating holding company

      Concentration of Risk
      ---------------------

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

      Interest-rate Risk
      ------------------

      The Bank is  principally  engaged in the business of  attracting  deposits
      from the general  public and using these deposits to make loans secured by
      real  estate  and,  to a lesser  extent,  consumer  loans and to  purchase
      investment  securities.  The potential for interest-rate  risk exists as a
      result  of  the  shorter   duration   of  the  Bank's   interest-sensitive
      liabilities    compared   to   the    generally    longer    duration   of
      interest-sensitive assets. In a rising interest rate environment, interest
      sensitive  liabilities will reprice faster than interest sensitive 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  assets and  liabilities  in order to measure its
      level of interest-rate risk and to plan for future volatility.

                                      F-6

<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


1. Operations and Summary of Significant Accounting Policies (Continued)
   ---------------------------------------------------------------------

      Investment Securities
      ---------------------

      The Bank's  investments in securities are classified in two categories and
accounted for as follows:

          o    Securities Held to Maturity. Mortgage backed securities for which
               ---------------------------
               the Bank has the positive  intent and ability to hold to maturity
               are reported at cost,  adjusted for  amortization of premiums and
               accretion of discounts  which are  recognized in interest  income
               using the interest method over the period to maturity.

          o    Securities Available for Sale.  Securities available for sale are
               -----------------------------
               reported at market  value and consist of certain  debt and equity
               securities  not classified as trading or securities to be held to
               maturity.

      Declines in the fair value of  individual  held to maturity and  available
      for sale  securities  below their cost that are other than  temporary will
      result in write-downs  of the  individual  securities to their fair value.
      The related write-downs will be included in earnings as realized losses.

      Unrealized holding gains and losses,  net of tax, on securities  available
      for sale are  reported as a net amount in a separate  component  of equity
      until realized.

      Gains  and  losses  on the  sale of  securities  available  for  sale  are
      determined using the specific-identification method.

      Loans Receivable
      ----------------

      Loans  receivable that management has the intent and ability to hold until
      maturity or pay-off are reported at their outstanding  principal  balances
      adjusted for the allowance for loan losses, and any deferred fees or costs
      on originated loans.

      Loan origination fees and certain direct origination costs are capitalized
      and recognized as an adjustment of the yield over the contractual  life of
      the loan, using the interest method.

      Loans  classified as impaired,  if any, are measured  based on the present
      value of expected  future cash flows  discounted  at the loan's  effective
      interest  rate or, as a  practical  expedient,  at the  loan's  observable
      market price or the fair value of the collateral if the loan is collateral
      dependent.  A loan evaluated for impairment is deemed to be impaired when,
      based on current information and events, it is probable that the Bank will
      be unable to collect all amounts due according to the contractual terms of
      the loan  agreement.  All  loans  identified  as  impaired  are  evaluated
      independently.  The accrual of interest on impaired loans is  discontinued
      when, in management's opinion, the borrower may be unable to meet payments
      as they become due.  When  interest  accrual is  discontinued,  all unpaid
      accrued interest is reversed.  Interest income is subsequently  recognized
      only to the extent cash payments are received. No loans were identified as
      impaired as of September 30, 2004 and 2003, respectively, or for the years
      then ended.

      The  allowance  for loan  losses is  increased  by  charges  to income and
      decreased  by  charge-offs  (net  of  recoveries).  Management's  periodic
      evaluation  of the  adequacy of the  allowance is based on the Bank's past
      loan loss experience,  known and inherent risks in the portfolio,  adverse
      situations that may affect the borrower's  ability to repay, the estimated
      value of any underlying collateral, and current economic conditions.

                                      F-7
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


1. Operations and Summary of Significant Accounting Policies (Continued)
   --------------------------------------------------------------------

      Loans Sold
      ----------

      Loans sold were one-to-four  family residential  mortgages  originated and
      intended  for sale in the  secondary  market.  The loans  were  carried in
      aggregate at lower of cost or estimated  market value,  based upon current
      delivery  prices in the secondary  market.  Gains or losses on the sale of
      these  loans are  recognized  in  non-interest  income at the time of sale
      using the  specific  identification  method.  All  loans are sold  without
      recourse. No loans were held for sale at either year end.

      Premises and Equipment
      ----------------------

      Land is carried at cost.  Bank  premises and equipment are carried at cost
      less accumulated depreciation.  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  income  for  the  period.  The  cost of
      maintenance  and  repairs is charged  to  expense  as  incurred.  The Bank
      computes  depreciation on a straight-line  basis over the estimated useful
      lives of the assets.

      Income Taxes
      ------------

      Deferred  tax assets and  liabilities  are  reflected  at income tax rates
      applicable  to the period in which the deferred tax assets or  liabilities
      are  expected to be  realized or settled.  As changes in tax laws or rates
      are enacted,  deferred tax assets and liabilities are adjusted through the
      provision  for  income  taxes or as an  adjustment  to  accumulated  other
      comprehensive income.

2.    Stockholders' Equity
      --------------------

      On March 2, 1998,  the Board of  Directors  of the Bank  adopted a Plan of
      Conversion,  pursuant  to  which  the  Bank  converted  from  a  federally
      chartered mutual savings bank to a federally chartered stock savings bank,
      with the concurrent formation of a holding company.

      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 $2,225,315,  an amount equal to its total net worth
      as of June  30,  1998,  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
      the account holder's current adjusted qualifying balances.  The balance of
      the  liquidation  account  on  September  30,  2004  and 2003 has not been
      determined.

                                      F-8
<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

2. Stockholders' Equity (Continued)
   --------------------------------

      The Board of  Directors  declared a 20% stock  dividend  in 2004 and 2003.
      Basic and  diluted  earnings  per share  have  been  restated  for 2003 to
      reflect the stock  dividend.  Employee  stock option plans and  restricted
      stock plans have also been  restated to reflect  the stock  dividend.  The
      ability of Farnsworth  Bancorp,  Inc. to pay dividends to  stockholders is
      dependent  upon the receipt of dividends  from the 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").  At September 30, 2004,
      the amount of  dividends  that the Bank could pay to  Farnsworth  Bancorp,
      Inc. was approximately $1,639,300.

3.    Held to Maturity and Available for Sale Securities
      --------------------------------------------------

      The carrying amounts and fair values of these investments at September 30,
      2004 and 2003 are summarized as follows:

<TABLE>
<CAPTION>
                                                              September 30, 2004
                                              --------------------------------------------------------
                                                 Carrying        Gross    Unrealized        Fair
                                                              ------------------------
Held to maturity:                                 Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                               <C>            <C>           <C>         <C>
    Mortgage backed securities                     $ 261,301      $ 8,127       $ 237       $ 269,191
                                              =============== =========== ============ ===============
</TABLE>

<TABLE>
<CAPTION>

                                                              September 30, 2003
                                              --------------------------------------------------------
                                                 Carrying        Gross    Unrealized        Fair
                                                              ------------------------
Held to maturity:                                 Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                              <C>           <C>             <C>        <C>
    Mortgage backed securities                     $ 461,443     $ 13,793        $ 47       $ 475,189
                                              =============== ===========  =========== ===============
</TABLE>

<TABLE>
<CAPTION>
                                                              September 30, 2004
                                              --------------------------------------------------------
                                                 Carrying        Gross    Unrealized        Fair
                                                              ------------------------
                                                  Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                            <C>             <C>        <C>           <C>
Available for sale securities:
  U.S. Government and agency securities          $11,590,017     $ 12,973   $ 164,486     $11,438,504
  Mortgage backed securities                       7,839,741        6,831      61,537       7,785,035
                                              --------------- ------------------------ ---------------
     Total debt securities                        19,429,758       19,804     226,023      19,223,539
  Equity securities                                    1,243       63,997           -          65,240
                                              --------------- ------------------------ ---------------

                                                 $19,431,001     $ 83,801   $ 226,023     $19,288,779
                                              =============== ===========  =========== ===============
</TABLE>

<TABLE>
<CAPTION>

                                                              September 30, 2003
                                              --------------------------------------------------------
                                                 Carrying        Gross    Unrealized        Fair
                                                              ------------------------
                                                  Value          Gains      Losses         Value
                                              --------------- ------------------------ ---------------
<S>                                            <C>                 <C>     <C>            <C>
Available for sale securities:
  U.S. Government and agency securities           $6,592,693          $ -   $ 225,830      $6,366,863
  Corporate bonds                                    503,474            -      13,024         490,450
  Mortgage backed securities                       8,067,985       37,363      11,233       8,094,115
                                              --------------- ------------------------ ---------------
     Total debt securities                        15,164,152       37,363     250,087      14,951,428
  Equity securities                                    1,243       51,107           -          52,350
                                              --------------- ------------------------ ---------------

                                                 $15,165,395     $ 88,470   $ 250,087     $15,003,778
                                              =============== =========== ============ ===============
</TABLE>
                                      F-9
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

3. Held to Maturity and Available for Sale Securities (Continued)
   -------------------------------------------------------------

      The  schedule of  maturities  of  available  for sale debt  securities  at
      September 30, 2004 is as follows:

                                                 Amortized         Fair
                                                    Cost           Value
                                                -----------     -----------

        Due in one year to five years           $ 1,643,808     $ 1,614,156
        Due after five to ten years               4,986,040       4,897,190
        Due after ten years                       4,960,169       4,927,158
                                                -----------     -----------
                                                 11,590,017      11,438,504
        Mortgage backed securities                7,839,741       7,785,035
                                                -----------     -----------
                                                $19,429,758     $19,223,539
                                                ===========     ===========

      There is no schedule of maturities for mortgage backed securities  because
      these investments are subject to prepayment.

      Mortgage-backed  securities  with a  carrying  value  and  fair  value  of
      $161,882 and  $165,950 at September  30, 2004 and $260,551 and $267,339 at
      September  30, 2003 are pledged as security for  deposits of  governmental
      entities under the provisions of the Governmental Unit Deposit  Protection
      Act.

      Information  pertaining  to  securities  with gross  unrealized  losses at
      September 30, 2004 is as follows:

<TABLE>
<CAPTION>
                                                   Less than twelve months                Over twelve months
                                                -------------------------------     -------------------------------
                                                    Gross                              Gross
                                                 Unrealized           Fair           Unrealized          Fair
     Securities available for sale                 Losses            Value             Losses            Value
                                                --------------    -------------     -------------    --------------
<S>                                                 <C>           <C>                 <C>             <C>
         U.S. Government and agency securities        $     -       $        -          $164,486        $6,430,923
         Mortgage-backed securities                    53,844        4,378,182             7,693         2,181,580
                                                --------------    -------------     -------------    --------------
                  Total                               $53,844       $4,378,182          $172,179        $8,612,503
                                                ==============    =============     =============    ==============
</TABLE>

      Management evaluates securities for other-than-temporary  impairment on at
      least a quarterly basis.  Consideration is given to the (1) length of time
      and  extent  to which  the fair  value as been  less  than  cost,  (2) the
      financial  condition  of the issuer and, (3) the intent and ability of the
      Bank to retain the investment for a period of time sufficient to allow for
      any anticipated  recovery in fair value. At September 30, 2004, the eleven
      securities  with  unrealized  losses have  depreciated  2% from the Bank's
      amortized cost basis.  All these  securities are either  guaranteed by the
      U.S.  Government or secured by mortgage  loans.  These  unrealized  losses
      relate  principally  to  current  interest  rates  for  similar  types  of
      securities.  As management has the ability to hold these  securities until
      maturity,  or for the  foreseeable  future,  no declines  are deemed to be
      other-than temporary.

                                      F-10
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

4. Loans Receivable
   ----------------

      Loans receivable are summarized as follows:

                                                    2004            2003
                                                -----------     -----------

     First mortgage loans
       Secured by one to four family residence  $32,510,389     $31,628,121
       Construction loans                         3,382,055         988,911
       Commercial real estate                    24,830,014      18,556,448
       Land loans                                         -         985,945
                                                -----------     -----------
                                                 60,722,458      52,159,425
                                                -----------     -----------
     Less:
       Loans in process - real estate            (2,875,877)     (1,179,011)
       Net deferred loan origination fees          (109,749)       (272,007)
                                                -----------     -----------
     Total first mortgage loans                  57,736,832      50,708,407
                                                -----------     -----------
     Consumer and other loans:
       Home equity                                3,540,660       8,204,003
       Personal loans                               374,127         302,898
       Loans secured by savings                     226,073         205,008
       Commercial business loans                  1,315,687          66,000
       Mobile and automobile                      3,759,690       2,303,950
                                                -----------     -----------
     Total consumer and other loans               9,216,237      11,081,859
                                                -----------     -----------
     Total loans                                 66,953,069      61,790,266
     Less allowance for loan losses                (450,700)       (328,000)
                                                -----------     -----------
                                                $66,502,369     $61,462,266
                                                ===========     ===========

At September  30, 2004 and 2003,  nonaccrual  loans for which  interest had been
discontinued totaled approximately $754,000 and $191,000, respectively. Interest
income actually recognized is summarized as follows:

                                                    2004            2003
                                                -----------     ------------
      Interest income that would have
        been recognized                         $    65,628     $      9,774
      Income recognized                              34,994            1,256
                                                -----------     ------------
      Interest income foregone                  $    30,634     $      8,518
                                                ===========     ============

      An analysis of the change in the allowance for loan losses:

                                                    2004            2003
                                                -----------     ------------
      Allowance for loan losses:
        Beginning of year                       $   328,000     $    280,000
        Additional provisions                       122,700           70,879
        Charge offs                                       -          (22,879)
                                                -----------     ------------
                                                $   450,700     $    328,000
                                                ===========     ============

                                      F-11

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

4. Loans Receivable (Continued)
   ---------------------------

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

                                                    2004            2003
                                                -----------     ------------
        Beginning of year                       $   580,080     $    574,731
        Loans originated                            527,893          141,192
        Collection of principal                    (346,719)        (135,843)
                                                -----------     ------------
        End of year                             $   761,254     $    580,080
                                                ===========     ============


      All loans to  directors,  officers  and  associates  of such  persons  are
collateralized by deposits and/or real estate.

5. Servicing
   ---------

      Loans   serviced  for  others  are  not   included  in  the   accompanying
      consolidated  statements  of  financial  position.  The  unpaid  principal
      balances of mortgage and other loans  serviced for others were  $8,490,794
      and $5,411,116 at September 30, 2004 and 2003, respectively.

6. Accrued Interest Receivable
   ---------------------------

      Accrued interest receivable is summarized as follows:

                                                    2004            2003
                                                -----------     ------------
      Loans receivable                          $   282,684     $    291,154
      Morgage backed securiies                       30,068           36,434
      Other securities                              135,442           87,671
                                                -----------     ------------
                                                $   448,194     $    415,259
                                                ===========     ============

7. Premises and Equipment
   ----------------------

      Premises and equipment are summarized by major classification as follows:

<TABLE>
<CAPTION>
                                                    2004              2003        Useful lives
                                                -----------       -----------   ----------------

<S>                                             <C>               <C>          <C>
     Land                                         $ 125,553         $ 125,553
     Office building improvements (Marlton)         119,022           119,022     7 to 40 years
     Office building (Bordentown)                 1,361,417         1,361,417    25 to 40 years
     Office building (Florence)                      55,876            53,032    25 to 40 years
     Office building (Mount Laurel)                 680,877           674,336    25 to 40 years
     Furniture, fixtures and equipment              994,610           817,039     5 to 7 years
                                                -----------       -----------
                                                  3,337,355         3,150,399
     Less accumulated depreciation                1,068,066           917,749
                                                -----------       -----------
                                                $ 2,269,289       $ 2,232,650
                                                ===========       ===========
</TABLE>
                                      F-12
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

7. Premises and Equipment (Continued)
   ---------------------------------

      Depreciation  charged to operations was $160,395 and $145,737 for 2004 and
      2003, respectively. The Bank leases the Marlton building and has renovated
      the leased space as a branch, which opened in the second quarter of fiscal
      year 2003. This lease is included in footnote 12.

8. Deposits
   --------

      Deposits as of September 30 are summarized as follows:

                                                    2004            2003
                                                -----------     -----------
        NOW accounts                            $ 9,932,646      $10,302,694
        Money market accounts                    11,758,807       10,050,161
        Passbook and club accounts               18,106,102       18,189,985
        Non interest bearing                      5,105,499        3,733,030
                                                -----------      -----------
        Subtotal                                 44,903,054       42,275,870
                                                -----------      -----------
        Certificates of deposit:
          1.01% to 2.00%                         16,976,225       18,127,556
          2.01% to 3.0%                           8,245,361        9,664,781
          3.01% to 4.0%                          12,103,945       10,075,146
          4.01% to 5.0%                           4,388,071        2,990,317
          5.01% to 6.0%                             209,149          580,301
                                                -----------      -----------
        Subtotal                                 41,922,751       41,438,101
                                                -----------      -----------
                                                $86,825,805      $83,713,971
                                                ===========      ===========

      Deposits  of  officers  and  directors  totaled  $363,000  and  $70,000 at
      September 30, 2004 and 2003,  respectively.  The aggregate amount of jumbo
      certificates  of  deposit  with a minimum  denomination  of  $100,000  was
      approximately  $4,054,000 and  $13,795,000 at September 30, 2004 and 2003.
      These  certificates  of  deposit  do not  receive  preferential  rates  of
      interest. Deposits in excess of $100,000 are not federally insured.

      As of September 30, 2004 and 2003, scheduled maturities of certificates of
      deposit (rounded to the nearest $1,000) are summarized as follows:

                                                    2004            2003
                                                -----------     -----------
        Due in 3 months or less                 $ 7,176,000      $ 8,223,000
        Due after 3 months to 1 year             16,333,000       17,322,000
        Due after 1 year to 3 years              11,438,000        9,190,000
        Due after 3 years to 5 years              6,976,000        6,703,000
                                                -----------      -----------
                                                $41,923,000      $41,438,000
                                                ===========      ===========

                                      F-13

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

8. Deposits (Continued)
   -------------------

      Interest  expense on deposits for the years ended  September  30, 2004 and
      2003 is summarized as follows:

                                                    2004            2003
                                                -----------     -----------
        NOW accounts                            $    89,142      $    95,428
        Money market accounts                       150,521          126,129
        Passbook and club accounts                  184,909          256,509
        Certificates of deposit                   1,051,905        1,196,889
                                                -----------      -----------
                                                $ 1,476,477      $ 1,674,955
                                                ===========      ===========


9. Federal Home Loan Bank Advance
   ------------------------------

      This advance bears fixed interest at 5.9% and matures in April 2009. It is
      collateralized  by FHLB  stock  and  investment  securities.  The Bank has
      approximately  $23,090,000  available  for  borrowing as of September  30,
      2004.

   Principal payment are as follow:

                  2005                       $ 155,318
                  2006                         164,754
                  2007                         174,762
                  2008                         186,292
               Thereafter                      128,887
                                             ---------
                 Total                       $ 810,013
                                             =========


10.  Net Gain on Sale of Investments
     -------------------------------

      For the years ended  September  30, 2004 and 2003,  proceeds from sales of
      securities  available for sale amounted to  $11,954,134  and  $28,727,187,
      respectively.  Gross  realized  gains  amounted to $51,433  and  $167,441,
      respectively.   Gross   realized   losses   amounted  to  $-0-  and  $-0-,
      respectively.

11.  Income Taxes
     ------------

      The Bank has qualified as a Savings  Institution  under  provisions of the
      Internal  Revenue Code. Prior to January 1, 1996 the Bank was permitted to
      deduct  from  taxable  income  an  allowance  for  bad  debts  based  on a
      percentage-of   taxable  income.   Such  percentage  was  8%  before  such
      deduction.  Retained  earnings at  September  30,  2004 and 2003  included
      untaxed  earnings of  approximately  $253,000 and $278,700,  respectively,
      representing such bad debt deductions.

      Retained  earnings at September 30, 2004 and 2003  includes  approximately
      $153,850  of tax bad debt  deductions  which 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.

                                      F-14
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

11. Income Taxes (Continued)
    -----------------------

    The  provision for federal and state income taxes differs from that computed
    at the statutory rate as follows:


                                                            2004         2003
                                                         ---------    ---------
             Statutory tax rates                            34%          34%
             Tax at statutory rates                        330,168      348,733
             New Jersey Savings Institution Tax and
                Corporation Income Tax                      44,050       59,066
             Change in enacted state tax rate                    -        7,890
             Miscellaneous                                  (9,399)      (4,462)
                                                         ---------    ---------
                                                         $ 364,819    $ 411,227
                                                         =========    =========


      The tax provision is summarized as follows:

                                                          2004         2003
                                                         ---------    ---------
             Current federal                               282,380      339,687
             Deferred federal                               (6,737)     (20,962)
             Current state                                 102,249       98,414
             Deferred state                                (13,073)      (5,912)
                                                         ---------    ---------
                                                         $ 364,819    $ 411,227
                                                         =========    =========


      The following  temporary  differences gave rise to deferred tax assets and
      liabilities:

                                                            2004           2003
                                                          ---------    ---------
             Deferred tax assets:
               Allowance for loan losses                  $ 180,280    $ 131,200
               Unrealized depreciation on investments        56,889       64,647
               Loans                                         31,293       23,523
               Accrued compensation                          24,078       23,767
                                                          ---------    ---------
               Total deferred tax assets                    292,540      243,137
                                                          ---------    ---------

             Deferred tax liabilities:
               Premises and equipment                       115,068       67,460
               Tax reserve for loan losses                   39,753       50,010
                                                          ---------    ---------
               Total deferred tax liabilities               154,821      117,470
                                                          ---------    ---------
               Net deferred tax asset (liability)         $ 137,719    $ 125,667
                                                          =========    =========
                                      F-15
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


12. Commitments
    -----------

      At September 30, 2004 the Bank had the following commitments  outstanding.
      Mortgage  commitments are for 45 days. Home equity  commitments are for 60
      days.  Commitments  on other loans are for 90 days.  The  commitments  are
      summarized as follows:

                              Amounts             Rate                  Term
                              -------             ----                  ----

Mortgages (fixed rate)          $ 664,800  5.25% to 6.25%      15 to 30 years
                                             0 to 1 point
Home equity loans                 379,000  5.75% to 6.50%      7 to 15 years
                                             0 points
Other loans                     6,875,200  4.00% to 6.25%      .5 to 25 years
                              -----------
                              $ 7,919,000  0 to 1 points
                              ===========



      There are twelve  letters of credit  outstanding at September 30, 2004. An
      annual  fee of 1/2 to 1 percent  is due on each of the  letters of credit.
      Interest is due at various  rates if the  letters of credit are  utilized.
      The  amount  of the  twelve  letters  totals  $744,828.  The Bank also has
      consumer  and  commercial   lines  of  credit  with  undrawn  balances  of
      $2,454,266 and $59,000, respectively.

      The Bank has available  two lines of credit  through the Federal Home Loan
      Bank.  An  overnight  line  of  credit  is  available  in  the  amount  of
      $4,796,900.  Additionally,  a one month overnight repricing line of credit
      is available in the amount of $4,796,900.

      Future minimum lease payments under  noncancellable  operating  leases for
      branch building and transportation equipment are as follows:

                        2005            $  54,666
                        2006               47,643
                        2007               46,772
                        2008               49,578
                        2009               52,806
                     Thereafter           747,631
                                       ----------
                        Total          $  999,096
                                       ==========

13. Financial Instruments
    ---------------------

      Fair Values of Financial Instruments
      ------------------------------------

     The following  methods and assumptions  were used in estimating fair values
     of financial instruments as disclosed herein:

      Cash and Due from Banks
      -----------------------

      The  carrying  amounts of cash and due from banks  approximate  their fair
      value.

                                      F-16
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

13. Financial Instruments (Continued)
    --------------------------------

     Available for Sale and Held to Maturity Securities and FHLB Stock
     -----------------------------------------------------------------

     Fair values for securities,  excluding FHLB securities, are based on quoted
     market prices.  The carrying  values of FHLB  securities  approximate  fair
     values based on the redemption provisions of the Federal Home Loan Bank.

     Loans Receivable
     ----------------

     For  variable-rate  loans that reprice  frequently  and have no significant
     credit  risk,  fair  values are based on carrying  values.  Fair values for
     fixed rate mortgage loans,  excluding  commercial loans, and other consumer
     loans  are  based  on  quoted  market  prices  of  similar  loans  sold  in
     conjunction with securitization  transactions,  adjusted for differences in
     loan characteristics. Fair values for fixed rate commercial real estate and
     other  commercial  loans are estimated using discounted cash flow analyses,
     using interest rates  currently  being offered for loans with similar terms
     to borrowers of similar credit quality.

     Deposit Liabilities
     -------------------

     The fair values of demand deposits are, by definition, equal to the  amount
     payable  on  demand   at  the  reporting  date.  The  carrying  amounts  of
     variable-rate,   fixed-term  money-market  accounts  and  certificates   of
     deposit (CDs)  approximate  their fair values at the reporting  date.  Fair
     values for  fixed-rate  CDs are  estimated  using a  discounted  cash  flow
     calculation  that   applies  interest  rates  currently  being  offered  on
     certificates to a schedule of aggregated  expected  monthly  maturities  of
     certificates.

     Accrued Interest
     ----------------

     The carrying amounts of accrued interest approximate their fair values.

     FHLB Advances
     -------------

     The fair value of FHLB  advances  is  estimated  based on  rates  currently
     available to the Bank for debt with similar terms.

     Advances by Borrowers and Accounts Payable and Other Accrued Expenses
     ---------------------------------------------------------------------

     The carrying amounts of these liabilities approximate their fair values.

     Off-Balance-Sheet Instruments
     -----------------------------

     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  consist  of  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
     loans and  letters  of  credit.  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  as  it  does  for  on-balance-sheet  instruments.   Generally,
     collateral,  usually in the form of real  estate,  is  required  to support
     financial  instruments with credit risk.  Commitments  generally have fixed
     expirations dates or other termination clauses and may require a payment of
     a fee. Since many of the  commitments  are expected to expire without being
     drawn upon by customers,  the total  commitment  amounts do not necessarily
     represent  future cash  requirements.  The Bank evaluates  each  customer's
     credit  worthiness  on a  case-by-case  basis.  The  amount  of  collateral
     obtained,  if it is deemed  necessary by the Bank upon extension of credit,
     is based on management's  credit evaluation of the  counterparty.  The fair
     value of commitments is not considered significant.

                                      F-17
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

13. Financial Instruments (Continued)
    --------------------------------

      The  carrying   amounts  and  estimated   fair  values  of  the  financial
      instruments were as follows:


<TABLE>
<CAPTION>
                                                          Carrying        Fair         Carrying         Fair
                                                           Amount         Value         Amount         Value
                                                      ------------- -------------- -------------- -------------

             Financial Assets (000's omitted)
             ---------------------------------------
<S>                                                     <C>            <C>            <C>           <C>
             Cash and due from banks                      $ 6,009        $ 6,009        $11,540       $11,540
             Securities held to maturity                      261            269            461           475
             Securities available for sale                 19,289         19,289         15,004        15,004
             FHLB stock                                       490            490            507           507
             Loans receivable                              66,502         67,052         61,462        64,186
             Accrued interest receivable                      448            448            415           415

             Financial Liabilities (000's omitted)
             ---------------------------------------
             Deposit liabilities                           86,826         87,037         83,714        85,129
             FHLB advances                                    810            900            956         1,076
             Accrued interest payable                          63             63             23            23
             Other liabilities                                643            643            572           572
</TABLE>

14. Benefit Plans
    -------------

      401 (k) Plan
      ------------

      A  401  (k)  Plan  covers  substantially  all  employees.   Employees  may
      contribute  up to 15  percent  of their  compensation  subject  to certain
      limits  based  on  federal  tax  laws.  The  Corporation   makes  matching
      discretionary  contributions equal to 50 percent of the first 6 percent of
      an employee's compensation contributed to the Plan. Matching contributions
      vest immediately. For the years ended September 30, 2004 and 2003, expense
      attributable to the Plan amounted to $26,105 and $22,965, respectively.

      Employee Stock Option Plan (ESOP)
      ---------------------------------

      Effective  upon  conversion  (Note  2),  an ESOP was  established  for all
      eligible  employees.  The ESOP used  $303,880 of proceeds from a term loan
      from  Farnsworth to purchase  43,759 shares of Company common stock in the
      initial  offering.  The term  loan of  $121,008  at  September  30,  2004,
      including interest, is payable in equal monthly installments through March
      2008.  The interest rate is 8.50% fixed for the term of the loan. The Bank
      is making  contributions  to the ESOP which are equal to the principal and
      interest  payment  required  from the ESOP on the term  loan.  Unallocated
      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.  Shares  released  from the suspense  account are  allocated
      among the participants on the basis of  compensation.  ESOP shares pledged
      as  collateral  are  reported  as  common  stock  acquired  by ESOP in the
      consolidated statements of financial condition. As shares are committed to
      be released from  collateral the shares become  outstanding for net income
      per common share  computations.  Dividends  on  allocated  ESOP shares are
      recorded as a reduction of retained earnings.

                                                    2004                2003
                                                  ---------          ---------

             Allocated shares                      $ 26,251           $ 21,875
             Unallocated shares                      17,508             21,884
                                                  ---------          ---------

             Total ESOP shares                     $ 43,759           $ 43,759
                                                   ========           ========

             Fair value of unallocated shares     $ 350,160          $ 246,090
                                                  =========          =========

                                      F-18
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

14. Benefit Plans (Continued)
    ------------------------

      Restricted Stock Plans (RSP)
      ----------------------------

      On April 16, 2000 the Bank established a RSP to provide both key employees
      and  outside  directors  with a  proprietary  interest  in it in a  manner
      designed to  encourage  such  person to remain  with the Bank.  A total of
      21,879  restricted  shares were  purchased  at an average  market value of
      $7.27.  Rights to a total of  15,308  shares  were  issued to the board of
      directors  and two  executive  officers  in 2000.  The fair value of these
      shares is being  charged to  expense  over the five year  vesting  period.
      During the years ended September 30, 2004 and 2003, 1,531 and 2,554 shares
      vested, respectively. At September 30, 2004, all shares were vested.

      On September 5, 2002 the Bank  established  an  additional  RSP to provide
      both key employees and outside directors with a proprietary interest in it
      in a manner  designed to encourage such person to remain with the Bank. To
      fund this plan, the Bank purchased a total of 6,571 restricted shares from
      the RSP Plan  established on April 16, 2000 and 6,610 shares in March 2004
      at a market  value of $20 a share.  An  additional  2,409  shares  will be
      purchased as vesting requirements need to be satisfied.  Rights to a total
      of 15,590  shares were  issued to the board of  directors,  two  executive
      officers  and three  employees.  The fair  value of these  shares is being
      charged to expense over the four year vesting  period.  During each of the
      years ended September 30, 2004 and 2003, 3,900 shares vested. At September
      30, 2004 and 2003, 11,695 and 7,795 shares were vested.

      The awards become fully vested upon termination of employment due to death
      or disability.

      Stock-based compensation plan
      -----------------------------

      Farnsworth  has a stock  option  plan that  provides  for the  granting of
      non-qualified stock options. In April 1999, it issued 38,279 options at an
      exercise price of $7.38 per share to key Bank  employees and  non-employee
      members  of its  Board of  Directors.  The  options  vest  ratably  on the
      anniversary  date over five years.  The options expire ten years after the
      initial  grant date.  At  September  30, 2004 and 2003,  a total number of
      35,545 and 30,628 options were vested,  respectively.  During 2004,  2,734
      shares were exercised.

      In September 2002,  Farnsworth  issued 31,177 options at an exercise price
      of $10.07 per share to key and non-key  Bank  employees  and  non-employee
      members  of  its  Board  Directors.   The  options  vest  ratably  on  the
      anniversary  date over three years. The options expire ten years after the
      initial  grant date.  At  September  30, 2004 and 2003,  a total number of
      31,177  and  20,785  options  were  vested,  respectively,  and none  were
      exercised or forfeited.

      In  accordance  with  an  election  under  generally  accepted  accounting
      principles  for stock options no  compensation  cost has been recorded for
      the stock options in the accompanying  consolidated  financial statements.
      Had compensation cost been determined based on the fair value at the grant
      dates for awards  under the plan,  the net income and  earnings  per share
      would have been reduced to the proforma amounts disclosed below:

                                                   2004                2003
                                                 ---------          ---------
             Net income:
                As reported                      $ 606,265          $ 614,429
                Proforma                           591,218            595,323

             Earnings per common share
                As reported
                      Basic                           1.22               1.26
                      Diluted                         1.13               1.21
                Proforma
                      Basic                           1.19               1.22
                      Diluted                         1.11               1.16

                                      F-19
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

14. Benefit Plans (Continued)
    ------------------------

      Stock-based compensation plan (Continued)
      ----------------------------------------

      The fair values were  determined  using the  Black-Scholes  option pricing
      model with the following  weighted  average  assumptions  for the 1999 and
      2002 plans,  respectively:  0% and 1% dividend yield, 5.88% and 5.75% risk
      free  interest  rate,  5 and 3 year  expected  life and 4.85%  and  10.18%
      volatility.

15.   Net Income Per Common Share
      ---------------------------

      Basic net income per common share is  calculated by dividing net income by
      the number of shares of common  stock  outstanding,  less shares that have
      not been  committed  to be  released.  Diluted  net  income  per  share is
      calculated by adjusting  the number of shares of common stock  outstanding
      to include the effect of stock options,  stock-based  compensation  grants
      and other  securities,  if dilutive,  generally  using the treasury  stock
      method.

<TABLE>
<CAPTION>
                                                        2004                                  2003
                                     -------------------------------------  -------------------------------------
                                                      Weighted      Per-                    Weighted       Per-
                                                      Average      Share                     Average      Share
                                          Income       Shares      Amount       Income       Shares       Amount
                                     ------------- ----------- -----------  ------------ ------------ -----------
<S>                                     <C>           <C>                     <C>            <C>         <C>
        Net income available to
        Common Shareholders             $ 606,265      525,259                $ 614,429      433,031
        ESOP shares, not
        committed to be released                       (20,751)                              (24,072)
        RSP shares                                      (6,705)                               (8,147)
                                     ------------- ----------- -----------  ------------ ------------ -----------
        Basic earnings per share          606,265      497,803     $ 1.22       614,429      487,418      $ 1.26
        Common stock
        equivalents                                     36,581                                22,349
                                     ------------- ----------- -----------  ------------ ------------ -----------
        Diluted earnings
        Per  share                      $ 606,265      534,384     $ 1.13     $ 614,429      509,767      $ 1.21
                                     ============= =========== ===========  ============ ============ ===========
</TABLE>

16. Regulatory Capital Requirement
    ------------------------------

      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 effect on the Bank's  financial  statements.
      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  Office  of  Thrift   Supervision   ("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 adjusted  total
      assets  and core  capital  equal to at least  4.0% of its  adjusted  total
      assets.  The Capital Rule further  requires  each savings  institution  to
      maintain  risk-based  capital equal to at least 8.0% of its  risk-weighted
      assets.

                                      F-20
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



16.  Regulatory Capital Requirement (Continued)
     ------------------------------------------

      The Bank at September  30, 2004 and 2003 meets the  regulatory  risk based
      capital, Tier 1 capital, core capital and tangible capital requirements as
      summarized below:

<TABLE>
<CAPTION>
                                                                                                   To Be Well
                                                                                                Capitalized Under
                                                                           For Capital          Prompt Corrective
                                                  Actual                Adequacy Purposes       Action Provisions
                                        -------------------------- ------------------------- -----------------------
                                             Amount        Ratio        Amount       Ratio      Amount       Ratio
                                        ------------  ------------ ------------ ------------ ---------- ------------
<S>                                       <C>            <C>         <C>            <C>      <C>           <C>
             As of September 30, 2004:
               Risk-based capital           $ 7,284        13.11%      $ 4,445        8.00%    $ 5,557       10.00%
               Tier 1 capital                 6,741        12.13%          N/A         N/A       3,334        6.00%
               Core capital                   6,741         7.05%        3,827        4.00%      4,779        5.00%
               Tangible capital               6,741         7.05%        1,434        1.50%        N/A         N/A

             As of September 30, 2003:
               Risk-based capital           $ 6,473        12.72%      $ 4,071        8.00%    $ 5,089       10.00%
               Tier 1 capital                 6,145        12.08%          N/A         N/A       3,053        6.00%
               Core capital                   6,145         6.71%        3,665        4.00%      4,582        5.00%
               Tangible capital               6,145         6.71%        1,375        1.50%        N/A          N/A

</TABLE>

      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 September 30, 2004, that the Bank
      meets all capital adequacy requirements to which it is subject.

      As of September  2004, the date of 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 risk based capital, Tier I capital and
      core  capital  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 Bank's category.

      Management  believes that,  under the current  regulations,  the Bank will
      continue  to meet its  minimum  capital  requirements  in the  foreseeable
      future.  However,  events  beyond the control of the Bank could  adversely
      affect its future minimum capital requirements.

                                      F-21
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



17.   Parent Only Financial Information

      The earnings of the  subsidiaries  are recognized by Farnsworth  using the
      equity method of accounting. Accordingly, the earnings of the subsidiaries
      are recorded as increases in Farnsworth's investment in subsidiaries.  The
      following are the condensed  financial  statements for Farnsworth  (parent
      company  only) as of  September  30,  2004 and 2003 and for the years then
      ended.


<TABLE>
<CAPTION>
             Statement of Financial Condition                     2004                2003
                                                               -----------         -----------
<S>                                                          <C>                 <C>
             Assets
             Cash                                              $   367,808         $   296,863
             ESOP loan receivable                                  121,008             151,396
             Investment in subsidiaries                          4,564,879           4,062,319
             Other assets                                           98,430              75,373
                                                               -----------         -----------
             Total assets                                      $ 5,152,125         $ 4,585,951
                                                               ===========         ===========

             Liabilities
             Accrued expenses                                  $    26,474         $    17,291
                                                               -----------         -----------
             Total liabilities                                      26,474              17,291

             Stockholders' equity                                5,125,651           4,568,660
                                                               -----------         -----------

             Total liabilities and
                 stockholders' equity                          $ 5,152,125         $ 4,585,951
                                                               ===========         ===========

                                                                   2004                2003
                                                                 ---------           ---------

             Income from subsidiaries                            $ 654,936           $ 666,198
             Interest income                                        14,127              16,848
                                                                 ---------           ---------
             Total income                                          669,063             683,046

             Meeting expenses                                       10,340              13,961
             Stock transfer fees                                         -               6,938
             Printing                                               10,000                   -
             Professional fees                                      67,531              74,386
                                                                 ---------           ---------
             Total expenses                                         87,871              95,285

             Income before income taxes                            581,192             587,761
             Income tax benefit                                     25,073              26,668
                                                                 ---------           ---------
             Net income                                          $ 606,265           $ 614,429
                                                                 =========           =========
</TABLE>

                                      F-22
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



17. Parent Only Financial Information (Continued)
    --------------------------------------------
<TABLE>
<CAPTION>

             Statement of Cash Flows                                                     2004                2003
                                                                                      ---------            ---------
<S>                                                                                 <C>                  <C>
             Cash flows from operations activities:
               Net income                                                             $ 606,265            $ 614,429
               Adjustments to reconcile net income to net cash
                  Used in operating activities:
                Increase (decrease) in accrued expenses                                   9,183               (5,863)
                Equity in undistributed earnings of subsidiaries                       (654,936)            (645,939)
                Increase in other assets                                                (23,057)             (27,210)
                                                                                      ---------            ---------

                            Net cash provided by (used in) operating activities         (62,545)             (64,583)
                                                                                      ---------            ---------

             Cash flows from investing activities:
               Repayment of ESOP loan                                                    30,388               30,932
                                                                                      ---------            ---------

                             Net cash provided by investing activities                   30,388               30,932
                                                                                      ---------            ---------

             Cash flows from financing activities:
               Issuance of stock                                                        152,376
               Dividends                                                                (49,274)             (36,206)
                                                                                      ---------            ---------
                            Net cash provided by (used in) financing activities         103,102              (36,206)
                                                                                      ---------            ---------

             Net increase (decrease) in cash                                             70,945              (69,857)
             Cash - beginning                                                           296,863              366,720
                                                                                      ---------            ---------

             Cash - ending                                                            $ 367,808            $ 296,863
                                                                                      =========            =========
</TABLE>


18. Subsequent Event
    ----------------

     Subsequent  to September 30, 2004,  Farnsworth  Bancorp,  Inc.  completed a
     private placement offering for 120,027 shares for approximately $2,070,000.

                                      F-23








<PAGE>

Corporate Information
---------------------
                            FARNSWORTH BANCORP, INC.
                              789 Farnsworth Avenue
                          Bordentown, New Jersey 08505
                                 (609) 298-0723

                              PEOPLES SAVINGS BANK

                                   Main Office
                              789 Farnsworth Avenue
                             Bordentown, New Jersey

<TABLE>
<CAPTION>
<S>                     <C>                            <C>
    Florence Office                Marlton Office             Mt. Laurel Office
    4 Broad Street           320 Evesboro-Medford Road        101 Gaither Drive
 Florence, New Jersey           Marlton, New Jersey         Mt. Laurel, New Jersey

                               Board of Directors

                                    Chairman
                                Edgar N. Peppler
                   Retired - President - Peppler Funeral Home

       George G. Aaronson, Jr.                       G. Edward Koenig, Jr.
               Realtor                                      Retired
           Falconer & Bell                        President - E.J.Koenig, Inc.
           Charles E. Adams                             Gary N. Pelehaty
               Retired                       President and Chief Executive Officer
   Florence Township Administrator     Farnsworth Bancorp, Inc. and Peoples Savings Bank
           Joseph H. Kelly                         William H. Wainwright, Jr.
              President                                     Retired
          Kelly Enterprises                               Loan Officer
          John J. Maley, Jr.                             Coby M. Frier
   Certified Public Accountant and               President and General Manager
   Registered Municipal Accountant                Eastampton Auto Center, Inc.

                               Executive Officers

          Gary N. Pelehaty                             Charles Alessi
President and Chief Executive Officer          Vice President, Chief Financial
                                              Officer, Secretary and Treasurer

                                    Officers

                Elaine C. Denelsbeck                 Christopher Nunn
                Assistant Secretary                 Assistant Treasurer


                        PEOPLES FINANCIAL SERVICES, INC.
                               BOARD OF DIRECTORS
                   Gary N. Pelehaty                   Charles Alessi
                      President                  Vice President, Chief Financial
                                                Officer, Secretary and Treasurer
                 R. Theodore Hinderer                 Jonas Singer
                   President                            Attorney
             Credit Lenders Title Agency        Wells, Singer, Rubin & Musulin
</TABLE>

<PAGE>

                            ________________________

     Local Counsel                             Independent Auditors
     Wells, Singer, Rubin & Musulin            Kronick Kalada Berdy & Co.
     6 East Park Street                        190 Lathrop Street
     Bordentown, New Jersey 08505              Kingston, Pennsylvania 18704

     Special Counsel                           Transfer Agent and Registrar
     Malizia Spidi & Fisch, PC                 Computershare Trust Company, Inc.
     1100 New York Avenue, N.W.                350 Indiana Street
     Suite 340 West                            Suite 800
     Washington, D.C. 20005                    Golden, Colorado 80401
                            ________________________

The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 2004 is available  without  charge upon written  request.  For a copy of the
Form 10-KSB,  please write or call Mr.  Charles  Alessi,  Vice  President at the
Company's  Office.  The Annual Meeting of Stockholders  will be held on February
22, 2005 at 10:00 a.m. at the Days Inn, 1073 Route 206, Bordentown, New Jersey.