EXHIBIT 13


                            FARNSWORTH BANCORP, INC.
                       1998 ANNUAL REPORT TO STOCKHOLDERS





<PAGE>



                            FARNSWORTH BANCORP, INC.
                                  ANNUAL REPORT







TABLE OF CONTENTS

                                                                         Page
                                                                         ----

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

Corporate Profile and Stock Price Information...............................2

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

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

Reports of Independent Auditors.............................................F-1

Consolidated Financial Statements...........................................F-3

Notes to Consolidated Financial Statements..................................F-8

Corporate Information......................................................13

                                        i

<PAGE>




                      [FARNSWORTH BANCORP, INC. LETTERHEAD]



To Our Stockholders:

         On behalf of our Board of Directors  and  employees,  we are pleased to
present the first Annual Report to Stockholders of Farnsworth Bancorp, Inc. (the
"Company").  As you will see from the Annual  Report,  1998 was an eventful year
for the Company  and its  wholly-owned  subsidiary,  Peoples  Savings  Bank (the
"Bank").

         On September 29, 1998, the Bank  successfully  completed its conversion
from the mutual to stock form of organization and the concurrent public offering
of 379,858 shares of the Company's common stock (the "Conversion"). Net proceeds
to the Company and the Bank from the Conversion were approximately $3.4 million.
While the Company is in the early stages of investing  the net proceeds from the
Conversion,  we expect  that the  investment  of these  proceeds  will  generate
increased core earnings in future periods.

         For the fiscal  year ended  September  30,  1998,  the  Company  earned
$198,000  or $.57 per share,  as  compared to net income of $192,000 or $.55 per
share for the fiscal year ended September 30, 1997.

         At September 30, 1998, the Company's assets totalled $41.8 million,  as
compared to $37.6 million at September 30, 1997.  Stockholders'  equity was $5.4
million or $15.57 per share at  September  30,  1998,  as  compared  to retained
earnings of $2.1  million at  September  30,  1997.  The  increase in assets and
stockholders'  equity was primarily  attributable  to the net proceeds  received
from the Conversion.

         We sincerely appreciate the confidence shown by our customers and local
community  during  the  Conversion.  The  goal of your  Board of  Directors  and
Management is to continuously strive to enhance your investment in the 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  "Conversion").  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
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 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  deposits
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.

Stock Price Information

The Company's  common stock has been traded on the Nasdaq  SmallCap Market under
the trading  symbol of "FNSW" since it commenced  trading on September 30, 1998.
The number of shareholders of record of common stock as of December 4, 1998, was
approximately  496.  This does not reflect the number of persons or entities who
held stock in nominee or "street"  name  through  various  brokerage  firms.  At
December 4, 1998, there were 379,858 shares outstanding. There were no dividends
paid by the  Company  during  the fiscal  year ended  September  30,  1998.  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 Conversion,  or (2) the
regulatory requirements imposed by the OTS.






                                        2

<PAGE>





Selected Financial Ratios and Other Data



                                                  At or For the Years Ended
                                                         September 30,
                                             ----------------------------------
                                                1998                    1997
                                             ----------              ----------

Return on average assets.....................     .51%                    .51%


Return on average equity.....................    8.19                    9.73


Average equity to average assets ratios......    6.19                    5.29


Equity to assets at period end...............   13.03                    5.55


Net interest rate spread.....................    3.26                    3.28


Net yield on average interest-earning            3.65                    3.50
assets.......................................


Non-performing loans to total assets.........     .69                     .53


Allowance for loan loss to total loans.......     .44                     .25




                                        3

<PAGE>



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

The  following  is a  discussion  of the  financial  condition  and  results  of
operations of the Company and the Bank, and should be read in  conjunction  with
the accompanying Consolidated Financial Statements.

General

     The Company has recently  been formed and,  accordingly,  has no results of
operations.  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  noninterest  income,  including,
primarily,  income from customer  deposit  account  service  charges,  gains and
losses  from  the  sale  of  investments  and  mortgage-backed   securities  and
noninterest 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  reprice  within  that time  period.  If the Bank's
assets  mature  or  reprice  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 reprice
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  historical
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. In addition,  the
Bank has invested in adjustable-rate  mortgage-backed  securities as an interest
rate risk management strategy.


                                        4

<PAGE>



         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, 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, 1998,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS.

<TABLE>
<CAPTION>
       Changes
      in Market                                 Net Portfolio Value
      in Market          ----------------------------------------------------------------
    Interest Rates            $ Amount              $ Change               % Change             NPV Ratio(1)
    --------------       ------------------   ---------------------   -------------------  -----------------

    (basis points)                 (Dollars in Thousands)

           <S>               <C>                      <C>                     <C>                 <C>  
            +400               3,127                   -2,100                   -40%                7.85%

            +300               3,715                   -1,511                   -29                 9.15

            +200               4,304                     -922                   -18                10.41

            +100               4,820                     -407                    -8                11.46

               0               5,227                                                               12.26

            -100               5,430                      203                    +4                12.61

            -200               5,638                      411                    +8                12.97

            -300               5,985                      759                   +15                13.59

            -400               6,325                    1,099                   +21                14.18

</TABLE>

----------------
(1) Calculated as the estimated NPV divided by present value of total assets.

         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  repricing,  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

                                        5

<PAGE>



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  reviews the Bank's asset and  liability
policies on an annual basis.  The board of directors  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.

Financial Condition

     Total assets  increased $4.2 million or 11.0% to $41.8 million at September
30, 1998 from $37.6  million at September  30, 1997.  The increase was primarily
attributable to a $4.6 million increase in the Bank's loans receivable, net, and
a $1.6  million  increase  in cash and due from  banks,  partially  offset  by a
decrease in securities held-to-maturity of $1.0 million as well as a decrease in
mortgage-backed  securities  of  $1.1  million.  The  Bank's  total  liabilities
increased  $800,000 or 2.2%,  to $36.3  million at September 30, 1998 from $35.5
million at September  30, 1997.  The increase was  primarily  attributable  to a
$600,000  increase in deposits.  Deposits  increased  primarily due to increased
marketing efforts through greater advertising.  The increase in loans receivable
was due to greater  marketing and increased  demand in the Bank's primary market
area.  The  decrease  in  securities  held-to-maturity  was a result of maturing
instruments.

         The Bank had no FHLB advances at September  30, 1998 as its  borrowings
were repaid during 1997 using funds provided by the increase in deposits.

         Retained earnings  increased  $198,000 to $2.2 million or 5.3% of total
assets at  September  30,  1998,  as compared  to $2.1  million or 5.6% of total
assets at September 30, 1997.  The increases in retained  earnings are primarily
attributable to 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,
                                                  ----------------------------------------------------------------------------------
                                                                        1998                                     1997
                                                  --------------------------------------------   -----------------------------------
                                                                                     Average                                Average
                                                         Average                      Yield/        Average                 Yield/
                                                         Balance     Interest         Cost           Balance    Interest     Cost
                                                                                  (Dollar in thousands)
<S>                                                   <C>           <C>             <C>            <C>          <C>        <C>  
Interest-earning assets:
  Loans receivable(1)..........................        $  28,699     $  2,295          8.00%         $24,832      $2,034       8.19%
  Mortgage-backed securities...................            2,531          159          6.27            2,962         177       5.97
  Investment securities(2).....................            3,082          167          5.43            4,645         318       6.85
  Other interest-earning assets................            2,502          103          4.10            2,559         106       4.13
                                                           -----       ------         -----           ------      ------       ----
     Total interest-earning assets.............           36,814        2,724          7.40           34,998       2,635       7.53
                                                                                      -----                                    ----
Noninterest-earning assets.....................            2,252           --                          2,333          --
                                                         -------       ------                         ------      ------
     Total assets..............................          $39,066       $2,724                        $37,331       2,635
                                                          ======        =====                         ======       -----
Interest-bearing liabilities:
  NOW accounts.................................           $4,220       $  102          2.41          $ 3,830          86       2.24
  Savings accounts.............................            6,940          170          2.45            6,187         152       2.46
  Money market accounts........................            2,423           66          2.71            2,283          60       2.62
  Certificates of deposit......................           19,769        1,042          5.27           19,530       1,031       5.28
  Other liabilities............................               --           --                          1,302          80       6.14
                                                          ------       ------         -----           ------      ------       ----
     Total interest-bearing liabilities........           33,352        1,380          4.14           33,132       1,409       4.25
                                                                                      -----                                    ----
Noninterest-bearing liabilities................            3,294                                       2,225
                                                          ------                                      ------
     Total liabilities.........................           36,646                                      35,357
                                                          ------                                      ------

Stockholders' equity...........................            2,420           --                          1,974          --
                                                           -----       ------                         ------      ------
     Total liabilities and retained earnings...          $39,066      $ 1,380                        $37,331      $1,409
                                                          ======       ======                         ======       =====

Net interest income............................                       $ 1,344                                     $1,226
                                                                       ======                                      =====
Interest rate spread(3)........................                                        3.26%                                   3.28%
                                                                                      =====                                    ====
Net yield on interest-earning assets(4)........                                        3.65%                                   3.50%
                                                                                      =====                                    ====
Ratio of average interest-earning assets to  
  average interest-bearing liabilities.........                                      101.63%                                 105.63%
                                                                                     ======                                  ======
</TABLE>

---------------
(1)  Average balances include non-accrual loans.
(2)  Includes 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,
                                                      1998 vs. 1997
                                           -------------------------------------
                                                   Increase (Decrease)
                                                         Due to
                                           -------------------------------------
                                                               Rate/
                                            Volume     Rate    Volume       Net
                                            ------     ----    ------       ---
                                                        (In thousands)
Interest income:
 Loans receivable ......................    $ 316     $ (47)    $  (7)    $ 262
 Mortgage-backed securities ............      (26)        9        (1)      (18)
 Investment securities .................     (107)      (66)       22      (151)
 Other interest-earning assets .........       (2)       (1)        0        (3)
                                            -----     -----     -----     -----
  Total interest income ................    $ 181     $(105)    $  14     $  90
                                            =====     =====     =====     =====
Interest expense:
 NOW accounts ..........................    $   9     $   8     $   1     $  16
 Savings account .......................       19        (1)       (0)       18
 Money market accounts .................        4         2         0         6
 Certificates of deposit ...............       13        (2)       (0)       11
 Other liabilities .....................        0         0       (80)      (80)
                                            -----     -----     -----     -----
 Total interest expense ................       45         7       (81)      (29)
                                            =====     =====     =====     =====


Change in net interest income ..........    $ 136     $(112)    $  95     $ 119
                                            =====     =====     =====     =====



                                        8

<PAGE>



Results of Operations

         Net Income.  The Bank's net income  increased $6,000 for the year ended
September 30, 1998,  to $198,000 from $192,000 for the year ended  September 30,
1997. This increase was primarily  attributable  to an $118,000  increase in the
Bank's net  interest  income and an $82,000  increase in the Bank's  noninterest
income,  partially offset by a $64,000 increase in the Bank's provision for loan
losses, an increase in noninterest expense of $122,000 and an increase in income
taxes of $8,000.

         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 interest the Bank
pays on its  interest-bearing  liabilities,  primarily  deposits.  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  $54,000,  or
4.4%,  to $1,272,000  for the year ended  September 30, 1998, as compared to the
year ended  September 30, 1997.  The increase was primarily due to the growth in
average  interest-earning  assets to $36.8 million in 1998 from $35.0 million in
1997 and growth in interest  rate  spread to 3.59% in 1998  compared to 3.28% in
1997.

         The  increase  in  average  interest-earning  assets  of  $1.8  million
primarily  reflects  increases of $3.8 million in the Bank's  balance of average
loans,  partially offset by a decrease of $2.0 million in investment  securities
and other  assets.  The  increase in  interest-earning  assets was funded by the
increase in deposits.

         Net  yield on  interest-earning  assets  decreased  for the year  ended
September 30, 1998 compared to the same period in 1997, reflecting a decrease in
average yield on the Bank's  interest-earning assets of 7.4% in 1998 compared to
7.53%  in  1997,   along  with  a  decrease  in  the  Bank's  average  yield  on
interest-bearing deposits of 4.1% in 1998 compared to 4.3% in 1997. The increase
in the Bank's  average  yield on  interest-earning  assets was due to  increased
lending activity.

         The  increase  in  average  interest-bearing  liabilities  of  $220,000
reflects  increases  of  $390,000  in the Bank's  average  interest-bearing  NOW
accounts and $1.1 million in average  savings and  certificates of deposit and a
decrease of $1.3 million in average FHLB borrowings.  The decrease in the Bank's
average FHLB borrowings is primarily due to the increase in deposits.

         Provision  for Loan Losses.  Provision  for loan losses was $72,000 for
the year ended  September  30,  1998,  as  compared to $8,000 for the year ended
September 30, 1997. The increase in the provision was the result of management's
determination  that a higher  allowance for loan losses was necessary.  This, in
turn, was based on the Bank's decision to diversify its loan portfolio. Prior to
this decision,  as of September 30, 1997, the Bank had commercial business loans
of $18,000.  This balance  increased  to $181,000 at September  30, 1998, a 905%
increase.  These  loans are  usually  collateralized  by  illiquid  assets  and,
therefore, they have

                                        9

<PAGE>



greater  credit risk.  For this reason,  the Bank has  allocated  $41,000 of the
provision  to the  allowance  for  these  loans.  Previously,  the  Bank  had no
allowance  for  loss  allocated  to this  category  of  loans.  While  the  Bank
anticipates  increasing  its  loan  loss  allowance  as this  category  of loans
increases,  the Bank does not expect future  increases to the allowance to be of
this same magnitude.

         Additionally,   personal  consumer  loans,   consisting   primarily  of
automobile loans and unsecured loans, which the Bank first began offering during
1997,  increased  $103,000  during the year ended September 30, 1998. Due to the
Bank's increased  emphasis on consumer loans which have greater credit risk than
residential mortgages,  the Bank has increased its provision for losses relating
to consumer loans by $6,000.  Both the Bank's  commercial and  residential  real
estate portfolios also increased  significantly  during the year ended September
30, 1998, as compared to the year ended September 30, 1997. The Bank accordingly
increased  its  provision for loan losses  attributable  to these  portfolios by
$22,000.

         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 increased $82,000 or 50.9% from
$161,000 for the year ended  September  30, 1997 to $243,000 for the same period
in  1998.  This  increase  in  the  Bank's  noninterest  income  was  due to the
collection  of a $54,000  deficiency  judgment and an increase in fees and other
service charges of $40,000 offset by decreases in income on REO and gain on sale
of securities.  The deficiency  judgment  related to lost income and other costs
pertaining to a one- to four-family  property  which had been  foreclosed on and
which was subsequently sold.

         Noninterest  Expense.  Noninterest  expense increased $122,000 or 11.0%
from $1,106,000 for the year ended September 30, 1997 to $1,228,000 for the same
period in 1998.  The  increase  in the Bank's  noninterest  expense was due to a
$14,000  increase in the Bank's  occupancy and  equipment  expense and a $72,000
increase in other  noninterest  expense and an increase of $41,000 in the Bank's
compensation  and  benefits  and a  decrease  of  $5,000 in the  Bank's  federal
insurance premiums. 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 $73,000 for bank processing
fees.

         Income Tax Expense. Income tax expense increased $8,000 from $81,000 in
1997 to  $89,000 in 1998.  This  increase  in income  tax  expense is due to the
increase  in the  Bank's  pretax  income of  $14,000  from  $273,000  in 1997 to
$287,000 in 1998.  The Bank's  effective  tax rate was 31% and 30% for the years
ended September 30, 1998 and 1997, respectively.

Liquidity and Capital Resources

         The Bank is  required to maintain  minimum  levels of liquid  assets as
defined by OTS  regulations.  This  requirement,  which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of the Bank's deposits and short-term

                                       10

<PAGE>



borrowings.  The  required  ratio  currently  is 5.0% and the Bank's  regulatory
liquidity  ratio  average  was 17.9% and 11.6% at  September  30, 1998 and 1997,
respectively.

         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,  amortization and  depreciation,  provision for loan losses) for
the year ended  September  30, 1998 was  $523,000,  an increase of $346,000,  as
compared to the same period in 1997. The increase in 1998 was primarily due to a
$6,000 increase in the Bank's net income,  an increase in the provision for loan
losses of $64,000, and an increase in non-deposit liabilities of $229,000.

         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,  1998,  totalled  $2.7  million,  an increase of $1.2
million.  This  increase was primarily  attributable  to loan  originations  and
purchase  of  investment   securities.   The  decrease  in  cash  was  primarily
attributable  to funding net loan growth of $4.7  million in 1998 as compared to
$3.2 million in 1997 as well as investment purchases of $1.5 million as compared
to $2.5 million in 1997.  The decrease in cash was partially  offset by paydowns
and maturities of investment and  mortgage-backed  securities of $3.6 million in
1998 as compared to $3.9 million in 1997.

         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 decreases in FHLB advances) for the year ended September 30,
1998,  totalled  $3.7  million,  an increase of $500,000 as compared to the year
ended September 30, 1997.

         Approximately  $14.2 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 50% of total first mortgage loans through the FHLB of New
York.

Year 2000 Issues

         The  approaching  millennium is causing  organizations  of all types to
review their computer  systems for the ability to properly  accommodate the year
2000.  When  computer  systems  were first  developed,  two digits  were used to
designate the year in date calculations and "19" was assumed for the century. As
a result, there is significant concern about the integrity

                                       11

<PAGE>



of date sensitive  calculations when the calendar rolls over to January 1, 2000.
An older system could interpret 01/01/00 as January 1, 1900 potentially  causing
major problems calculating interest, payment, delinquency or maturity dates.

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

         In  addition,  the Bank  places a high  degree of  reliance on computer
systems of third parties, such as customers,  suppliers, and other financial and
governmental institutions. Although the Bank is assessing the readiness of these
third parties and preparing  contingency  plans,  there can be no guarantee that
the  failure  of these  third  parties  to modify  their  systems  in advance of
December 31, 1999 would not have a material adverse affect on the Company.

         The Bank's  internal Year 2000 Working  Committee,  comprised of senior
management was formed to address the potential risk that Year 2000 poses for the
Bank.  This  committee  reports to the board of  directors.  In June  1997,  the
committee  compiled a written  Year 2000  Action  Plan to promote  awareness  of
pertinent  issues  and to  provide  for  evaluation  and  testing  of the Bank's
electronic systems, programs and processes.

         Accurate data  processing is essential to the Bank's  operations  and a
lack of  accurate  processing  by the Bank's  vendor or by the Bank could have a
significant  adverse  impact on the Bank's  financial  condition  and results of
operations. The Bank has been assured by its data processing service bureau that
their  computer  services will  function  properly on and after January 1, 2000.
Additional  testing of the system was conducted in August 1998. If by the end of
this year, the Bank's  primary data  processing  service bureau has  encountered
unforseen problems and, as a result,  will not be year 2000 compliant within the
necessary  timeframe,  the Bank will seek a secondary  data  processing  service
provider  to  complete  the  task.  If the Bank is  unable  to do this,  it will
identify those steps  necessary to minimize the negative  impact this could have
on us. The Bank has upgraded its teller  equipment to be year 2000  compliant as
of October 27, 1998.

                                       12


<PAGE>

To the Board of Directors
Farnsworth Bancorp, Inc.


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

We have audited the accompanying  consolidated  statement of financial condition
of Farnsworth  Bancorp,  Inc. and  Subsidiary as of September 30, 1998,  and the
related consolidated  statements of income,  changes in stockholders' equity and
of cash flows for the year 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
audit.

We  conducted  our  audit  in  accordance  with  generally   accepted  auditing
standards.  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  audit
provides 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 Subsidiary at September 30, 1998,  and the results of their  operations
and their  cash  flows  for the year then  ended in  conformity  with  generally
accepted accounting principles.


/s/Kronick Kalada Berdy & Co., P.C.
------------------------------------
KRONICK KALADA BERDY & CO., P.C.

Kingston, Pennsylvania

November 9, 1998


                                      F-1
<PAGE>




To the Board of Directors
Peoples Savings Bank



                          INDEPENDENT AUDITOR'S REPORT
                          ----------------------------

I have audited the  accompanying  statement  of  financial  condition of Peoples
Savings Bank as of September 30, 1997, and the related statements of income and
retained  earnings  and cash  flows for the year  then  ended.  These  financial
statements are the responsibility of the Bank's management. My responsibility is
to express an opinion on these financial statements based on my audit.

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

In my opinion, the financial statements referred to above present fairly, in all
material  respects,  the financial position of Peoples Savings Bank at September
30,  1997,  and the results of its  operations  and cash flows for the year then
ended in conformity with generally accepted accounting principles.



/s/ Lewis W. Parker, III, Certified Public Accountant
-----------------------------------------------------
    Lewis W. Parker, III, Certified Public Accountant

Lawrenceville, New Jersey

October 29, 1997

                                      F-2
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                           September 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                                September 30,      
                                                                     --------------------------------- 
         ASSETS                                                          1998                  1997   
         ------                                                      -----------           -----------

<S>                                                                  <C>                   <C>        
Cash and due from banks                                              $ 3,928,077           $ 2,364,541
Securities available for sale                                            134,187                95,992
Securities held to maturity:
  Mortgage-backed                                                      1,890,642             3,016,352
  Other                                                                2,761,367             3,755,516  
Loans receivable, net                                                 31,041,552            26,408,713
Accrued interest receivable                                              227,318               247,263
Federal Home Loan Bank of New York stock
  at cost substantially restricted                                       261,300               234,100
Premises and equipment                                                 1,468,846             1,463,866
Other assets                                                              60,458                32,263
                                                                     -----------           -----------
         Total assets                                                $41,773,747           $37,618,606
                                                                     ===========           ===========


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

Deposits                                                             $35,777,855           $35,196,576
Advances by borrowers for taxes and
  insurance                                                              214,884               157,843
Accrued and deferred income taxes                                        183,698                84,594
Accrued interest payable                                                  38,692                50,789
Accounts payable and other accrued
  expenses                                                               115,890                40,313
                                                                     -----------           -----------
         Total liabilities                                            36,331,019            35,530,115
                                                                     -----------           -----------
Preferred stock $.10 par value, 1,000,000 shares
  authorized; none issued and outstanding                                 --                    --
Common stock $.10 par value, 5,000,000 shares
  authorized; 379,858 shares issued; shares
  outstanding 379,858 (1998)                                              37,985                --
Additional paid in capital                                             3,396,262                --
Retained earnings substantially restricted                             2,227,363             2,029,176
Unreleased common stock and related additional paid in capital
 acquired by employee stock ownership plan (ESOP)                       (303,880)               --
Net unrealized appreciation on available
  for sale securities net of income taxes                                 84,998                59,315
                                                                     -----------           -----------
         Total stockholders' equity                                    5,442,728             2,088,491
                                                                     -----------           -----------
         Total liabilities and stockholders'
           equity                                                    $41,773,747           $37,618,606
                                                                     ===========           ===========
</TABLE>


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


                                      F-3

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                 For the Years Ended September 30, 1998 and 1997


                                                  1998             1997   
                                              -----------      -----------

Interest income:                                            
  Loans receivable                            $ 2,295,219      $ 2,034,408
  Securities                                      375,951          600,421
  Federal funds sold                               52,670           --    
                                              -----------      -----------
        Total interest income                   2,723,840        2,634,829
                                              -----------      -----------
Interest expense:
  Deposits                                      1,380,112        1,328,640
  Federal Home Loan Bank advances                  --               80,443
                                              -----------      -----------
        Total interest expense                  1,380,112        1,409,083
                                              -----------      -----------
Net interest income                             1,343,728        1,225,746
Provision for loan losses                          72,000            8,000
                                              -----------      -----------

        Net interest income after
          provision for loan losses             1,271,728        1,217,746
                                              -----------      -----------
Noninterest income:
  Fees and other service charges                  188,367          148,251
  Collection on deficiency judgement               54,024           --
  Loss on sale of assets                           --               (1,757)
  Income from REO                                  --                7,966
  Net realized gains on sale of
    available for sale securities                     933            6,977
                                              -----------      -----------
        Total noninterest income                  243,324          161,437
                                              -----------      -----------
Noninterest expense:
  Compensation and benefits                       554,956          513,966
  Occupancy and equipment                         232,385          217,985
  Federal insurance premiums and
    assessments                                    34,790           40,339
  Other                                           405,657          333,646
                                              -----------      -----------
        Total noninterest expense               1,227,788        1,105,936
                                              -----------      -----------
Income before provision for income
  taxes                                           287,264          273,247
Provision for income taxes                         89,077           81,340
                                              -----------      -----------
        Net income                            $   198,187      $   191,907
                                              ===========      ===========

Net income per common share:
  Basic                                       $       .57      $       .55  
                                              ===========      ===========

Shares used in computing basic      
  income per share                                349,470          349,470     
                                              ===========      ===========




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

                                      F-4

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 For the Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>


                                                                                                 Net Unrealized
                                                                   Retained          Common      Appreciation
                                                    Additional     Earnings          Stock       on Securities          Total
                                         Common      Paid in     Substantially      Acquired     Available for         Retained
                                          Stock      Capital       Restricted        By ESOP    Sale, Net of Tax       Earnings 
                                        ---------   ----------   -------------      ---------   ----------------      ----------
<S>                                    <C>         <C>          <C>              <C>             <C>                 <C>          
Balance at September 30, 1996           $   --      $   --       $ 1,837,269      $   --           $  41,353          $1,878,622

Net income for the year ended
  September 30, 1997                        --          --           191,907          --               --                191,907

Change in unrealized appreciation
  on securities available for
  sale, net of tax                          --          --             --             --              17,962              17,962
                                        ---------   ----------   -----------      ---------        ---------          ----------

Balance at September 30, 1997               --          --         2,029,176          --              59,315           2,088,491

Net income for the year ended
  September 30, 1998                        --          --           198,187          --               --                198,187

Net proceeds from issuance of
  common stock                             37,985    3,396,262                                                         3,434,247
Acquisition of common stock
  by ESOP                                                                          (303,880)                            (303,880)
Change in unrealized appreciation
  on securities available for
  sale, net of tax                          --          --             --             --              25,683              25,683
                                        ---------   ----------   -----------      ---------        ---------          ----------

Balance at September 30, 1998           $  37,985   $3,396,262   $ 2,227,363      $(303,880)       $  84,998          $5,442,728
                                        =========   ==========   ===========      =========        =========          ==========

</TABLE>



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

                                      F-5

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 For the Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>

                                                                 1998                1997   
                                                              -----------         -----------

<S>                                                           <C>                 <C>        
Cash flows from operating activities:                      
  Net income                                                  $   198,187         $   191,907
                                                              -----------         -----------
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Depreciation                                                 55,717              57,264
      Provision for loan losses                                    72,000               8,000
      Net (gain) loss on sale of assets                              (933)              5,220
      Decrease in accrued interest receivable                      19,946              10,081
      Decrease (increase) in other assets                         (28,195)             49,279
      Increase in advances from borrowers                          57,041               5,936
      Increase in accrued income taxes and deferred
        income taxes                                               85,872              76,068
      (Decrease) in accrued interest payable                      (12,097)            (20,482)
      Increase (decrease) in other accrued liabilities             75,577            (206,383)
                                                              -----------         -----------
         Total adjustments                                        324,928             (15,017)
                                                              -----------         -----------
         Net cash provided by operating activities                523,115             176,890
                                                              -----------         -----------
Cash flows from investing activities:
  Net increase in loans receivable                             (4,704,839)         (3,155,700)
  Redemption of securities, held to maturity                    2,619,859           2,650,000
  Purchase of securities, held to maturity                       (500,000)         (1,265,606)
  Purchase of securities, available for sale                     (996,156)         (1,215,742)
  Proceeds from sale of securities, available for sale            997,808           1,219,685
  Purchase of Federal Home Loan Bank stock                        (27,200)              --
  Proceeds from sale of real estate owned                          --                 297,690
  Purchase of premises and equipment                              (60,697)            (17,380)
                                                              -----------          -----------
         Net cash used in investing activities                 (2,671,225)         (1,487,053)
                                                             -----------          -----------
</TABLE>


                                  (Continued)

                                      F-6
<PAGE>



                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 For the Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>
                                                                 1998                1997   
                                                              -----------         -----------

<S>                                                           <C>                 <C>        
Cash flows from financing activities:
  Increase in savings accounts and demand deposits                554,677           3,074,729
  Net increase in certificates of deposit                          26,602           2,551,964
  Federal Home Loan Bank repayment                                 --              (2,435,291)
  Net proceeds from issuance of stock                           3,130,367              --    
                                                              -----------         -----------
         Net cash provided by financing
           activities                                           3,711,646           3,191,402
                                                              -----------         -----------
Net increase in cash and due from banks                         1,563,536           1,881,239
Cash and due from banks at beginning of period                  2,364,541             483,302
                                                              -----------         -----------
Cash and due from banks at end of period                      $ 3,928,077         $ 2,364,541
                                                              ===========         ===========

Supplemental disclosure:
  Cash paid during the period for:
    Interest                                                  $ 1,392,209         $ 1,429,565
                                                              ===========         ===========
    Income taxes                                              $     - 0 -         $     2,055
                                                              ===========         ===========
Non-cash items:
  Loan to ESOP                                                $   303,880
                                                              ===========

  Unrealized gain on securities available
    for sale, net of deferred income taxes                    $    25,683         $   17,962
                                                              ===========         ==========
</TABLE>


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

                                       F-7

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

     Farnsworth  Bancorp,  Inc. (the "Company") is a non-operating  bank holding
     company.  Its Subsidiary  (the "Bank")  operates two branches in Burlington
     County, New Jersey.  The Bank offers customary banking services,  including
     accepting checking, savings and time deposits and the making of commercial,
     real estate and consumer  loans, to customers who are  predominantly  small
     and middle-market business and middle-income individuals.

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

     The  consolidated  financial  statements,   which  have  been  prepared  in
     conformity  with  generally  accepted  accounting  principles,  include the
     accounts of the Company and its wholly owned  subsidiary,  Peoples  Savings
     Bank. 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  amount of assets and  liabilities,  the  disclosure of contingent
     assets and  liabilities  and the  reported  revenues and  expenses.  Actual
     results could differ significantly from those estimates.

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

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

     The Bank's lending and real estate  activity is concentrated in real estate
     and loans  secured by real estate  located in the State of New Jersey.  The
     Bank's loan portfolio is predominantly  made up of 1 to 4 family unit first
     mortgage loans in Burlington  County.  These loans are typically secured by
     first lien  positions  on the  respective  real estate  properties  and are
     subject to the Bank's loan underwriting  policies.  In general,  the Bank's
     loan portfolio performance is dependent upon the local economic conditions.



                                      F-8
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

     Net Income Per Common Share 
     ---------------------------

     In February 1997, the FASB issued Statement No. 128,  "Earnings Per Share".
     Statement No. 128 is effective for the years ended after  December 15, 1997
     and  requires  that prior period data be  restated.  Per share  amounts are
     reported in accordance with Statement of No. 128.

     Basic net income per common share is  calculated  by dividing net income by
     the  number  of  shares  of  common  stock  outstanding,  adjusted  for the
     unallocated  portion  of shares  held by the ESOP.  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,  using the treasury
     stock method. The Company has no potentially dilutive securities.

     Per share amounts for the year ended  September 30, 1998 and 1997 have been
     calculated  based on the net  income  for the  entire  year and  assume the
     common stock issued has been outstanding since October 1, 1996.

     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
     mortgage-backed and 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,
     liabilities  will reprice faster than assets,  thereby  reducing the market
     value of  long-term  assets  and net  interest  income.  For  this  reason,
     management  regularly  monitors the maturity structure of the Bank's assets
     and liabilities in order to measure its level of interest-rate  risk and to
     plan for future volatility.


                                      F-9
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      Cash Equivalents
      ----------------

      For the purpose of presentation in the statements of cash flows,  cash and
      cash   equivalents   are  defined  as  those   amounts   included  in  the
      balance-sheet  caption  "cash and due from banks." The Bank  considers all
      highly liquid investments with original maturities of three months or less
      when purchased as cash equivalents.

      Securities
      ----------

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

     o    Securities Held to Maturity. Bonds, notes and debentures 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.

     o    Securities  Available for Sale.  Securities available for sale consist
          of debt and equity  securities not classified as trading or securities
          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.

      Premiums  and  discounts  are  recognized  in  interest  income  using the
      interest method over the period to maturity.


                                      F-10
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

     Impaired loans are measured  based on the present value of expected  future
     cash  flows  discounted  at the loan's  effective  interest  rate,  or as a
     practical  expedient,  at the loan's  observable  market  price or the fair
     value of the  collateral if the loan is collateral  dependent.  These loans
     include all loans, uncollateralized as well as collateralized, except large
     groups of smaller-balance  homogenous loans that are collectively evaluated
     for impairment and loans that are measured at fair value or at the lower of
     cost or fair  value.  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  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.

     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.


                                      F-11

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

     Land is carried at cost.  Premises,  equipment and improvements are carried
     at  cost  less  accumulated   depreciation.   Significant  renovations  and
     additions are  capitalized.  When assets are retired or otherwise  disposed
     of, the cost and related  accumulated  depreciation  are  removed  from the
     accounts  and any  resulting  gain or loss is  reflected  in income for the
     period.  The cost of  maintenance  and  repairs  is  charged  to expense as
     incurred.  Depreciation  is  computed  on a  straight-line  basis  over the
     estimated useful lives of the assets.

     Foreclosed Real Estate
     ----------------------

     Real estate properties  acquired  through,  or in lieu of, loan foreclosure
     are  initially  recorded  at the lower of cost or fair value at the date of
     foreclosure.  Costs relating to development and improvement of property are
     capitalized,  whereas  costs  relating  to  the  holding  of  property  are
     expensed.  Valuations  are  periodically  performed by  management,  and an
     allowance  for  losses  is  established  by a charge to  operations  if the
     carrying value of a property exceeds its fair value less estimated  selling
     cost. Gains and losses from sale of these properties are recognized as they
     occur.  Income from  operating  properties  is recorded  in  operations  as
     earned.  There were no such properties held at either year end.

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

      Deferred tax assets and  liabilities  are  reflected at currently  enacted
      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.

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

      Certain  amounts  for  the  year  ended  September  30,  1997,  have  been
      reclassified to conform with the current period's presentation.


                                      F-12

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

2.   Reorganization and Stockholders' Equity
     ---------------------------------------

     On March 2,  1998,  the Board of  Directors  of the Bank  adopted a Plan of
     Conversion,  pursuant  to which the Bank  would  convert  from a  federally
     chartered mutual savings bank to a federally  chartered stock savings bank,
     with the concurrent  formation of a holding  company.  The holding company,
     Farnsworth  Bancorp,  Inc.,  (the  "Company")  is a New Jersey  corporation
     organized in May 1998 to acquire all of the capital  stock of the Bank upon
     the  completion of the  conversion.  In 1996, the Bank converted from a New
     Jersey  chartered  mutual  savings  bank to a  federally  chartered  mutual
     savings bank. Concurrently,  the Bank changed its name from Peoples Savings
     Bank, SLA to Peoples Savings Bank.

     On September 29, 1998,  the  conversion  and initial  public stock offering
     were completed with the issuance of 379,858 shares of the Company's  common
     stock, par value $.10 per share, for $3,130,367 net of conversion costs and
     the  effect  of the  shares  acquired  by the ESOP.  Concurrently  with the
     issuance of the Company's  common stock,  the Company  purchased all of the
     outstanding capital stock of the Bank.

      At the time of the  conversion,  the Bank,  in order to grant  priority to
      eligible  depositors  in the event of future  liquidation,  established  a
      liquidation account of $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 accounting in an amount proportionate to
      their current adjusted qualifying balances. The balance of the liquidation
      account on September 30, 1998 has not been determined.

      The ability of the Company to pay dividends to  stockholders  is dependent
      upon the receipt of income 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").

                                      F-13

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

     The carrying  amounts and fair values of these  securities at September 30,
     1998 and 1997 are summarized as follows:

<TABLE>
<CAPTION>
                                                                       September 30, 1998                
                                                     ------------------------------------------------------                
                                                                         Gross Unrealized   
                                                      Amortized      -------------------------    
                                                        Cost           Gains          Losses     Fair Value
                                                     -----------     ----------     ----------   ----------
<S>                                                  <C>             <C>            <C>          <C>       
      Held to maturity:
          U.S. Government and agency
            securities                               $ 2,662,152     $  122,328     $   10,915   $2,773,565
          Municipal securities                            99,215         16,003         --          115,218
                                                     -----------     ----------     ----------   ----------

                                                     $ 2,761,367     $  138,331     $   10,915   $2,888,783
                                                     ===========     ==========     ==========   ==========

                                                                       September 30, 1998                
                                                     ------------------------------------------------------                
                                                                         Gross Unrealized   
                                                      Amortized      -------------------------    
                                                        Cost           Gains          Losses     Fair Value
                                                     -----------     ----------     ----------   ----------
      Held to maturity:
          U.S. Government and agency
            securities                               $ 3,656,359     $   --         $  105,428   $3,550,931
          Municipal securities                            99,157         11,714         --          110,871
                                                     -----------     ----------     ----------   ----------

                                                     $ 3,755,516     $   11,714     $  105,428   $3,661,802
                                                     ===========     ==========     ==========   ==========

                                                                       September 30, 1998                
                                                     ------------------------------------------------------                
      Available for sale securities:
        Equity securities                            $     3,339     $  130,848     $    --      $  134,187
                                                     ===========     ==========     ==========   ==========

                                                                       September 30, 1998                
                                                     ------------------------------------------------------                
      Available for sale securities:
        Equity securities                            $     3,339     $   92,653     $    --      $   95,992
                                                     ===========     ==========     ==========   ==========
</TABLE>

     The schedule of maturities of securities  held to maturity at September 30,
     1998 were as follows:

                                            Held-to-Maturity
                                               Securities        
                                    ----------------------------------
                                    Amortized                  Fair
                                      Cost                     Value   
                                    ----------              ---------- 
      Due in one year or less       $    --                 $    --
      Due after one to five years    1,247,958               1,325,260
      Due after five to ten years    1,414,194               1,448,305
      Due after ten years               99,215                 115,218
                                    ----------              ----------
                                    $2,761,367              $2,888,783
                                    ==========              ==========

4.    Mortgage Backed Securities, Held to Maturity
      --------------------------------------------

     Investments in  mortgage-backed  and related securities are stated at cost,
     adjusted for amortization of premiums and accretion of discounts.  The Bank
     has adequate  liquidity and capital,  and it is  management's  intention to
     hold such assets to maturity.

                                      F-14

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


4.    Mortgage Backed Securities, Held to Maturity (Continued)
      --------------------------------------------

     The principal  values,  carrying values and fair values of  mortgage-backed
     securities are summarized as follows:

<TABLE>
<CAPTION>

                                                                      September 30, 1998
                                       ---------------------------------------------------------------------------- 
                                        Principal          Unamortized                Unearned            Carrying
                                         Balance             Premiums                 Discounts             Value 
                                       ----------          -----------                ---------          ----------  
     <S>                              <C>                 <C>                        <C>                <C>       
      GNMA Certificates                $  780,645          $    11,717                $   --             $  792,362
      FHLMC and FNMA
        Certificates                    1,106,679                  190                    8,589           1,098,280
                                       ----------          -----------                ---------          ----------
                                       $1,887,324          $    11,907                $   8,589          $1,890,642
                                       ==========          ===========                =========          ==========

                                                                      September 30, 1998
                                       ---------------------------------------------------------------------------- 
                                                                     Gross Unrealized 
                                        Carrying           ------------------------------------             Fair
                                         Value                Gains                    Losses               Value  
                                       ----------          -----------                ---------          ----------  
      GNMA Certificates                $  792,362          $     7,586                $   --             $  799,948
      FHLMC and FNMA
        Certificates                    1,098,280               22,148                    1,566           1,118,862
                                       ----------          -----------                ---------          ----------
                                       $1,890,642          $    29,734                $   1,566          $1,918,810
                                       ==========          ===========                =========          ==========

                                                                      September 30, 1998
                                       ---------------------------------------------------------------------------- 
                                        Principal          Unamortized                Unearned            Carrying
                                         Balance             Premiums                 Discounts             Value 
                                       ----------          -----------                ---------          ----------  
      GNMA Certificates                $  991,502          $    15,221                $  --              $1,006,723
      FHLMC and FNMA
        Certificates                    2,020,626               --                       10,997           2,009,629
                                       ----------          -----------                ---------          ----------
                                       $3,012,128          $    15,221                $  10,997          $3,016,352
                                       ==========          ===========                =========          ==========

                                                                      September 30, 1998
                                       ---------------------------------------------------------------------------- 
                                                                     Gross Unrealized 
                                        Carrying           ------------------------------------             Fair
                                         Value                Gains                    Losses               Value  
                                       ----------          -----------                ---------          ----------  
      GNMA Certificates                $1,006,723          $    15,047                $  --              $1,021,770
      FHLMC and FNMA
        Certificates                    2,009,629               --                        3,563           2,006,066
                                       ----------          -----------                ---------          ----------
                                       $3,016,352          $    15,047                $   3,563          $3,027,836
                                       ==========          ===========                =========          ==========
</TABLE>

     Mortgage-backed securities with a carrying value and fair value of $548,540
     and  $546,683  at  September  30,  1998 and of  $692,592  and  $687,379  at
     September  30, 1997,  respectively  are pledged as security for deposits of
     governmental  entities  under the provisions of  Governmental  Unit Deposit
     Protection Act (GUDPA).

5.    Loans Receivable
      ----------------

      Loans receivable at September 30, are summarized as follows:

                                                           September 30,      
                                                    ---------------------------
                                                       1998            1997
                                                    -----------    ------------
      First mortgage loans 
        Principal balance:                      
          Secured by one to four family residence    $24,736,226    $20,220,605
          Construction loans                           2,434,619      2,842,410
          Commercial real estate                       1,019,284      1,143,688
                                                     -----------    -----------
                                                      28,190,129     24,206,703
      Less:
        Loans in process - real estate                  (500,262)      (894,743)
        Unearned discounts                               (12,466)       (12,466)
        Deferred loan origination fees, net             (187,000)      (141,171)
                                                     -----------    -----------
         Total first mortgage loans                   27,490,401     23,158,323
                                                     -----------    -----------

                                      F-15

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


5.    Loans Receivable (Continued)
      ----------------
    
                                                             September 30,      
                                                    ---------------------------
                                                        1998           1997   
                                                    -----------    ------------
      Consumer and other loans
        Principal balances:    
          Home equity                                 3,196,534      3,003,459
          Personal loans                                151,720         48,939
          Loans secured by savings                      157,248        246,442
          Commercial business loans                     180,649         17,550
                                                    -----------    -----------
           Total consumer and other loans             3,686,151      3,316,390
                                                    -----------    -----------
           Total Loans                               31,176,552     26,474,713

      Less allowance for loan losses                   (135,000)       (66,000)
                                                    -----------    -----------
           Total loans receivable                   $31,041,552    $26,408,713
                                                    ===========    ===========


Loans having carrying values of approximately $290,714 and $199,000 at September
30, 1998 and September 30, 1997,  respectively,  are  considered to be impaired.
There are no impaired loans for which there is a specific allowance. The average
recorded investment in impaired loans was approximately $210,000 for 1998.

At September  30, 1998 and 1997,  nonaccrual  loans for which  interest had been
discontinued  totalled  approximately   $290,714  and  $126,512,   respectively.
Interest income actually recognized is summarized as follows:

                                                           September 30,      
                                                    --------------------------
                                                      1998              1997  
                                                    -----------    -----------
      Interest income that would          
        have been recorded                          $    27,162    $     9,478
      Interest income recognized                         10,065          4,677
                                                    -----------     -----------
      Interest income not recognized                $    17,097    $     4,801
                                                    ===========    ===========
                                      
      An analysis of the change in the allowance for loan losses:

                                                           September 30,      
                                                    --------------------------
                                                      1998              1997  
                                                    -----------    -----------
      Allowance for loan losses:      
        General valuation allowance:
          Beginning of year                         $    66,000    $    58,000
            Additional provisions                        72,000          8,000
            Charge offs                                   3,000          --    
                                                    -----------    -----------
          End of year                               $   135,000    $    66,000
                                                    ===========    ===========

      The activity with respect to loans to directors,  officers and  associates
      of such persons, is summarized as follows:
                                                           September 30,      
                                                    --------------------------
                                                      1998              1997  
                                                    -----------    -----------
      Beginning of period                           $   291,218    $   301,675
      Loans originated                                    --            25,000
      Collection of principal                            73,944         35,457
                                                    -----------    -----------
      End of period                                 $   217,274    $   291,218
                                                    ===========    ===========

      All loans are collateralized by deposits and/or real estate.

                                      F-16

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      Accrued interest receivable is summarized as follows:

                                                           September 30,      
                                                    --------------------------
                                                      1998              1997  
                                                    -----------    -----------
      Loans receivable                              $   196,729    $   185,970
      Mortgage backed securities                          9,467         15,996
      Other held to maturity securities                  21,122         45,297
                                                    -----------    -----------
                                                    $   227,318    $   247,263
                                                    ===========    ===========

7.    Premises and Equipment
      ----------------------
 
      Premises and equipment are summarized by major classification as follows:

                                                           September 30,      
                                                    --------------------------
                                                      1998              1997  
                                                    -----------    -----------

      Land                                          $   126,435    $   126,435
      Land improvements                                  13,608         --
      Office building (Bordentown)                    1,350,262      1,349,960
      Office building (Florence)                         38,299         38,299
      Furniture, fixtures and                
        equipment                                       331,532        284,745
                                                    -----------    -----------
                                                      1,860,136      1,799,439
      Less accumulated                      
        depreciation                                    391,290        335,573
                                                    -----------    -----------
                                                    $ 1,468,846    $ 1,463,866
                                                    ===========    ===========
                                  
      Depreciation  charged to operations  was $55,717 and $57,264 for the years
      ended 1998 and 1997, respectively. Useful lives used in the calculation of
      depreciation are as follows:

      Buildings                                          25 to 40 years
      Building improvements and land improvements         7 to 40 years
      Furniture, fixtures and equipment                   5 to  7 years

8.    Deposits
      --------
 
      Deposits as of September 30, are summarized as follows:

                                           1998                1997    
                                        -----------         -----------
                                           Amount              Amount  
                                        -----------         -----------
      NOW accounts                      $ 4,230,556         $ 3,518,176
      Money Market accounts               2,206,431           2,912,054
      Passbook and club accounts          6,631,263           5,963,246
      Non Interest Bearing                2,813,028           2,933,125
                                        -----------         -----------
                  Subtotal               15,881,278          15,326,601
                                        -----------         -----------

      Certificates of deposit:
        3.01% to 4.0%                       485,579             660,029
        4.01% to 5.0%                     3,287,304           2,278,310
        5.01% to 6.0%                    15,360,755          15,905,072
        6.01% to 7.0%                       762,939           1,026,564
                                        -----------         -----------
      Total Certificates of Deposit      19,896,577          19,869,975
                                        -----------         -----------
      Total Deposits                    $35,777,855         $35,196,576
                                        ===========         ===========


                                      F-17


<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

      Deposits  of  officers  and  directors  totalled  $249,488  in  1998.  The
      aggregate  amount  of  jumbo   certificates  of  deposit  with  a  minimum
      denomination  of $100,000 was  approximately  $1,499,000 and $2,237,000 at
      September 30, 1998 and 1997. 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, 1998 and 1997, scheduled maturities of certificates of
      deposit (rounded to the nearest $1,000) are summarized as follows:

                                                     September 30,      
                                          ------------------------------------
                                             1998                     1997    
                                          -----------              -----------
                              
      Due in 3 months or less             $ 3,874,000              $ 4,070,000
      Due after 3 months to 1 year         10,341,000               11,151,000
      Due after 1 year to 3 years           3,726,000                4,040,000
      Due after 3 years to 5 years          1,956,000                  609,000
                                          -----------              -----------
                                          $19,897,000              $19,870,000
                                          ===========              ===========
                         
      Interest  expense on deposits for the years ended  September  30, 1998 and
      1997 is summarized as follows:

                                                     September 30,      
                                          ------------------------------------
                                             1998                     1997    
                                          -----------              -----------
      NOW accounts                        $   101,832              $    87,530
      Money market accounts                    65,745                   56,397
      Passbook and club accounts              170,102                  174,929
      Certificates of deposit               1,042,433                1,009,784
                                          -----------              -----------
                                          $ 1,380,112              $ 1,328,640
                                          ===========              ===========

9.    Other Borrowed Funds
      --------------------
 
     Interest was payable on advances in the year ended  September  30, 1997, at
     rates ranging from 5.54% to 5.86% with  maturities due October and December
     of 1996.  These  advances  were  collateralized  by Federal  Home Loan Bank
     stock,  investments  in  securities  and  mortgages.  The  Association  has
     $9,404,651 available for borrowing as of September 30, 1998.

10.   Gains on Sale of Interest Earning Assets
      ----------------------------------------
     
                                                     September 30,      
                                          -----------------------------------
                                             1998                     1997    
                                          -----------             -----------
      Realized gains on sales of:
        available-for-sale securities     $       933             $     6,977
                                          ===========             ===========

      There were no losses  realized on the sale of securities  during either of
      these periods.

                                      F-18

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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  rate  was 8%  before  such  deduction.  Retained
     earnings  at  September  30,  1998 and 1997  included  untaxed  earnings of
     approximately  $407,133 and $432,775,  respectively,  representing such bad
     debt deductions.

     On August 21,  1996,  legislation  was signed into law which  repealed  the
     percentage of taxable income method for tax bad debt deductions. The repeal
     is effective  for the Bank's  taxable year  beginning  October 1, 1996.  In
     addition,  the  legislation  requires the Bank to include in taxable income
     its bad debt  reserves  in  excess of its base  year  reserves  over a six,
     seven,  or eight year period  depending upon the attainment of certain loan
     origination  levels.  Since the  percentage  of taxable  income  method for
     federal  tax bad debt  deductions  and the  corresponding  increase  in the
     Federal tax bad debt reserve in excess of the base year have been reflected
     as temporary  differences with deferred income taxes recorded thereon, this
     change in the tax law did not have a material  adverse  effect on financial
     position or operations.

     Retained  earnings at September  30, 1998 and 1997  includes  approximately
     $128,208 and $153,850,  respectively,  of tax bad debt deductions which are
     considered a temporary  difference between the book and income tax basis of
     loans  receivable,  but for which income taxes have not been  provided.  If
     such  amount is used for  purposes  other than bad debt  losses,  including
     distributions in liquidation,  it will be subject to income tax at the then
     current rate.

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

                                                           September 30,      
                                                  ------------------------------
                                                     1998               1997    
                                                  ------------      ------------
      Statutory tax rate                                34%               34%
      Tax at federal statutory rate               $    97,670       $    92,904
      New Jersey savings institution tax                5,688             5,410
      Decrease in tax:
        Tax exempt income                              (2,000)           (2,000)
        Miscellaneous                                 (12,281)          (14,974)
                                                  -----------        ----------
                                                  $    89,077       $    81,340
                                                  ===========        ==========

      Effective tax rate                               .31%               30%


                                      F-19
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      The tax provision is summarized as follows:
                                                           September 30,      
                                                  ------------------------------
                                                     1998               1997    
                                                  ------------     -------------
      Current federal                            $   114,265        $     3,006
      Deferred federal                               (32,598)            71,238
      Current state                                   10,800                620
      Deferred state                                  (3,390)             6,476
                                                 -----------        -----------
                                                 $    89,077        $    81,340
                                                 ===========        ===========
                                  
      The following  temporary  differences gave rise to deferred tax assets and
      liabilities:      

                                                  September          September
                                                   30, 1998           30, 1997 
                                                 ----------         ----------
      Deferred tax assets:
        Allowance for loan losses                $   47,490         $   22,167
        Deferred loan origination fees, net          22,010             30,920
        Accrued payroll                              10,150              8,350
                                                 ----------         ----------
           Total deferred tax assets                 79,650             61,437
                                                 ----------         ----------
     Deferred tax liabilities:
        Premises and equipment                       23,050            17,390
        Unrealized appreciation on investments       47,070            33,340
        Tax reserve for loan losses                  68,212            91,647
                                                 ----------        ----------
           Total deferred tax liabilities           138,332           142,377
                                                 ----------        ----------
          Net deferred tax asset (liability)     $  (58,682)       $  (80,940)
                                                 ==========        ==========

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

      At September 30, 1998 the Bank had the following commitments  outstanding.
   
                                  Amounts          Rate              Term  
                                -----------     --------------     -------------
                                (Unaudited)

      Mortgages (fixed rate)    $   295,200     5.375% to 7.13%    3 to 30 years
                                                 0 to 3 points

      Commercial loan               600,000     8.25% to 9.50%     1 to 15 years
                                                 0 to 1 points

      Home Equity Loan              193,000     7.5% to 8.99%      7 to 15 years
                                -----------      0 points                   
                                $ 1,088,200
                                ===========
  
                                      F-20

<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

12.  Commitments (Continued)
     -----------

     There are four letters of credit  outstanding.  An annual fee of 1 point is
     due on each of the letters of credit.  Interest is due at various  rates if
     the letters of credit are  utilized.  The value of all four letters  totals
     $145,000.  The Bank also has  lines of  credit  with  undrawn  balances  of
     $739,369.

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

     Fair Values of Financial Instruments
     ------------------------------------
 
     The following  methods and assumptions  were used by the Bank in estimating
     fair values of financial instruments as disclosed herein:

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

     The carrying  amounts of cash and due from banks are based on quoted market
     prices.

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

     Fair values for securities are based on quoted market prices. Fair value of
     the Federal Home Loan Bank of New York stock is its cost.

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

     For  variable-rate  loans that reprice  frequently  and with no significant
     credit risk, fair values are based on carrying  values.  The fair values of
     all other loans are estimated using  discounted  cash flow analysis,  using
     interest rates currently  offered for loans with similar terms to borrowers
     of similar credit risk.  Fair values for impaired loans are estimated using
     discounted  cash flows analyses  determined by the loan review  function or
     underlying collateral values, where applicable.

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

     The fair values disclosed for 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 on time deposits.

                                      F-21
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

     Accrued Interest Receivable and Payable
     ---------------------------------------

     The carrying amounts of accrued interest approximate their fair values.

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

     Fair values for  off-balance-sheet  lending  commitments  are based on fees
     currently charged to enter into similar agreements, taking into account the
     remaining terms of the agreements and the counterparties' credit standings.

     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
     and to reduce its own exposure to  fluctuations  in interest  rates.  These
     financial   instruments   consist  of  commitments  to  extend  credit  and
     commerical  letters of 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  mortgages,  commercial  loans and home equity loan
     originations. The Bank's exposure to credit loss from nonperformance by the
     other party to the financial  instruments  for commitments to extend credit
     is represented by the  contractual  amount of those  instruments.  The Bank
     uses the  same  credit  policies  in  making  commitments  and  conditional
     obligations  as  it  does  for  on-balance-sheet  instruments.   Generally,
     collateral,  usually in the form of real  estate,  is  required  to support
     financial  instruments  with credit risk.  Such financial  instruments  are
     recorded in the financial  statements  when they are funded or related fees
     are incurred or received.


                                      F-22


<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      The estimated fair values of the Bank's financial instruments were as
      follows at:  (000's omitted)
<TABLE>
<CAPTION>
                                                    September 30, 1998         September 30, 1997 
                                                    --------------------       --------------------
                                                    Carrying      Fair         Carrying      Fair
      Financial Assets                               Amount       Value         Amount       Value 
      ----------------                              --------     -------       --------     ------- 
<S>                                                <C>          <C>           <C>          <C>   
      Cash and due from banks                       $  3,928     $ 3,928       $  2,364     $ 2,364
      Securities held to maturity                      4,652       4,808          6,772       6,690
      Securities available for sale                      134         134             96          96
      Federal Home Loan Bank Stock                       261         261            234         234
      Loans receivable                                31,042      31,293         26,409      26,107
      Accrued interest receivable                        227         227            247         247

      Financial Liabilities
      ---------------------

      Deposit liabilities                             35,778      35,981         35,197      35,170
    
</TABLE>

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

     Defined Contribution Plan
     -------------------------

     A salary  reduction thrift plan covers all employees with 1 year of service
     of at least 1,000 hours. The employee may defer up to 9% of his salary. The
     Bank matches elective  employee  deferrals at a rate of 50% of the deferral
     for the first 6% deferred.  Employer  contributions  were $6,767 and $3,672
     for 1998 and 1997, respectively.

     ESOP
     ----

     Effective  upon  conversion,  an ESOP  was  established  for  all  eligible
     employees.  The ESOP used a $303,880 term loan from the Company to purchase
     30,385  shares of Company  common stock in the initial  offering.  The term
     loan from the Company to the ESOP, including interest,  is payable over 180
     equal  monthly  installments.  The  initial  interest  rate is 8.25% and is
     subject to  semi-annual  adjustment  based on the prime  rate.  The Company
     intends  to make  contributions  to the  ESOP  which  will be  equal to the
     principal  and interest  payment  required  from the ESOP on the term loan.
     Shares  purchased  with the loan proceeds are pledged as collateral for the
     term loan and are held in a suspense  account for future  allocation  among
     participants. Contributions to the ESOP

                                      F-23

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

     and shares  released from the suspense  account will be allocated among the
     participants on the basis of compensation,  as described by the plan in the
     year of  allocation.  ESOP shares  pledged as  collateral  are  reported as
     unreleased  ESOP  shares  in  the  consolidated   statements  of  financial
     condition.  As shares are  committed to be released  from  collateral,  the
     Company reports  compensation  expense equal to the current market price of
     the  shares,  and the shares  become  outstanding  for basic net income per
     common share computations.  Dividends on allocated ESOP shares are recorded
     as a reduction of retained earnings.  Contributions equivalent to dividends
     on unallocated ESOP shares are recorded as a reduction of debt.

      The ESOP shares were as follows:

                                                    1998            
                                               -----------          
      Unreleased shares                             30,388          
                                               -----------          
      Total ESOP shares                             30,388          
                                               ===========          
      Fair value of unreleased shares          $   303,880          
                                               ===========          

15.   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 total risk-based
     capital equal to at least 8.0% of its risk-weighted assets.

                                      F-24

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

     The Bank at September 30, 1998 and 1997 meets the regulatory  core capital,
     tangible capital,  Tier I capital and total risk based 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 
                                       ------        -----        ------        ------      ------        ------ 
                                                              (Dollars to Thousands)
    <S>                               <C>            <C>           <C>           <C>         <C>          <C>  
      As of September 30, 1997:
        Risk-based capital            $  2,095        11.52         1,454         8.00        1,818        10.00
        Tier 1 capital                   2,029        11.16          N/A          N/A         1,091         6.00
        Core capital                     2,029         5.40         1,503         4.00        1,878         5.00
        Tangible capital                 2,029         5.40           563         1.50         N/A          N/A
      As of September 30, 1998:
        Risk-based capital            $  4,685        22.61         1,658         8.00        2,073        10.00
        Tier 1 capital                   4,465        22.55          N/A          N/A         1,188         6.00
        Core capital                     4,465        10.71         1,668         4.00        2,085         5.00
        Tangible capital                 4,465        10.71           625         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,  core  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, 1998, that the Bank
     meets all capital adequacy requirements to which it is subject.

     As of September 19, 1997,  the most recent  notification  from the OTS, the
     Bank was categorized as well capitalized under the regulatory framework for
     prompt corrective  action. To be categorized as well capitalized,  the Bank
     must maintain minimum risk-based, Tier I and total core 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-25

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


16.   Special Deposit Insurance Assessment
      ------------------------------------

     On  September  30, 1996,  congressional  legislation  was enacted  which is
     designed to recapitalize the Savings Association  Insurance Fund (SAIF) and
     to  eliminate  the  substantial  deposit  premium  disparity  between  Bank
     Insurance Fund (BIF) and SAIF-insured institutions. The legislation imposed
     a one-time assessment on all SAIF-insured  deposits,  as of March 31, 1995.
     For the Bank, the  assessment  totalled  $191,615,  and is reflected in the
     non-interest expenses section of the statement of income for the year ended
     September 30, 1996.

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

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

     The Company operates one wholly owned subsidiary, the Bank. The earnings of
     the  Bank  are  recognized  by the  Company  using  the  equity  method  of
     accounting. Accordingly, the earnings of the Bank are recorded as increases
     in the  Company's  investment  in the  subsidiary.  The  following  are the
     condensed financial  statements for the Company (parent company only) as of
     September  30,  1998 and for the period  then  ended.  The  Company  had no
     operations  prior to the Bank's  conversion  to stock form on September 29,
     1998.

                                      F-26
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


17.   Parent Only Financial Information (Continued)
      ---------------------------------


                                                         September 30,
                                                         -------------
      Statement of Financial Condition                       1998     
                                                         -------------
      Assets
      Cash                                               $     638,692
      Investment in subsidiary                               2,548,435
                                                         -------------

           Total assets                                  $   3,187,127
                                                         =============


      Liabilities, accrued expenses                      $      56,760
                                                         -------------

      Stockholders' equity

      Common stock                                              37,985
      Additional paid in capital                             3,396,262
      Common stock and additional paid in capital
        acquired by employee stock ownership plan             (303,880)
                                                         ------------- 
           Total stockholders' equity                        3,130,367
                                                         ------------- 

      Liabilities and stockholders' equity               $   3,187,127
                                                         =============

 

                                              From
                                            Inception
                                           September 29,
                                              1998 to
                                           September 30,
      Statement of Income                      1998     
                                           -------------
         
            Revenues and net income          $    --      
                                           =============



                                                                    From
                                                                 Inception
                                                                September 29,
                                                                   1998 to
                                                                September 30,
      Statement of Cash Flows                                       1998     
                                                                ------------- 
      Cash flows from operating activities, 
        increase in accrued expenses                            $      56,759
      Cash flows from investing activities,
        investment in subsidiary                                   (2,548,435)

      Cash flows from financing activities,
        issuance of common stock, net                               3,130,367
                                                                -------------

      Increase in cash and cash, ending                         $     638,692
                                                                =============
      Non cash transaction 
        Loan to ESOP                                            $     303,880
                                                                =============







                                      F-27


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

                              PEOPLES SAVINGS BANK

            Main Office                          Florence Office
       789 Farnsworth Avenue                      4 Broad Street
      Bordentown, New Jersey                   Florence, New Jersey

                               Board of Directors

            Herman Gutstein                      G. Edward Koenig, Jr.
         Chairman of the Board          President - E.J.Koenig, Inc. (petroleum
   Retired - Convenience Store Owner      products/heating & air-conditioning)

        George G. Aaronson, Jr.                     Edgar N. Peppler
       Realtor - Falconer & Bell            President - Peppler Funeral Home

            Charles E. Adams                   William H. Wainwright, Jr.
Retired - Florence Township Administrator       Retired - Loan Officer

                                Gary N. Pelehaty
                      President and Chief Executive Officer

                               Executive Officers

                                Gary N. Pelehaty
                      President and Chief Executive Officer

                                 Charles Alessi
                         Vice President, Chief Financial
                        Officer, Secretary and Treasurer

                             ----------------------
Local Counsel                         Independent Auditor
Wells, Singer, Rubin & Musuline       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, Sloane & Fisch, P.C.  American Securities Transfer & Trust, Inc.
One Franklin Square                   1825 Lawrence Street, Suite 444
1301 K Street, N.W., Suite 700 East   Denver, Colorado 80201
Washington, D.C. 20005

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

The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 1998 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 April 6,
1999 at 2:00 p.m. at the Company's office.

                                       13