EXHIBIT 13


<PAGE>

                            FARNSWORTH BANCORP, INC.
                       1999 ANNUAL REPORT TO STOCKHOLDERS




<PAGE>



                            FARNSWORTH BANCORP, INC.
                               1999 ANNUAL REPORT





TABLE OF CONTENTS

                                                                        Page
                                                                        ----

Letter to Stockholders..................................................3

Corporate Profile and Stock Price Information...........................4

Selected Financial Ratios and Other Data................................4

Management's Discussion and Analysis....................................5 - 10

Independent Auditor's Report............................................11

Consolidated Statements of Financial Condition..........................12 - 15

Notes to Consolidated Financial Statements..............................16 - 31

Corporate Information...................................................32

<PAGE>

                            FARNSWORTH BANCORP, INC.

Gary N. Pelehaty
President
Chief Executive Officer

To Our Stockholders:

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

     For the fiscal year ended  September 30, 1999, the Company earned  $224,191
or $.66 per share,  as  compared to net income of $198,187 or $.57 per share for
the fiscal year ended  September 30, 1998. At September 30, 1999,  the Company's
assets  totaled  $56.0  million,  as compared to $41.7  million at September 30,
1998. Stockholders' equity was $5.3 million or $13.92 per share at September 30,
1999, as compared to  stockholders'  equity of $5.4 million or $$14.33 per share
at September 30, 1998.

     In  December  1999,  we received  regulatory  approval to open a new branch
office in Mount Laurel, New Jersey. This new office will provide a full range of
banking products and services to the local community, including ATM and drive-up
tellers. We expect to open the branch office in the first quarter of 2000.

     We have also recently  entered into an agreement  with NCR  Corporation  to
design and implement  Internet  banking for the Bank.  Under the agreement,  NCR
will assist us in creating a  transactional  web site for Peoples  Savings Bank.
Customers of the Bank will be able to transact  most  business over the Internet
once this site is  operational.  We expect this to occur in the third quarter of
2000.

     As you can see,  the Year 2000  promises  to be an  exciting  time for your
Company.  Please know that we remain  committed  to the goal of  enhancing  your
investment in our Company.

                                           Sincerely,


                                           /s/Gary N. Pelehaty
                                           -------------------------------------
                                           Gary N. Pelehaty
                                           President and Chief Executive Officer


 789 Farnsworth Avenue - Bordentown, NJ 08505 - 609-298-0723 FAX 609-298-5321
<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  deposit
accounts from the general public and using those  deposits,  together with other
funds, primarily to originate and invest in loans secured by one- to four-family
residential real estate.

Stock Price Information

The  Company's  common  stock has been traded on the  OTC-Bulletin  Board 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, 1999,
was  approximately  440. This does not reflect the number of persons or entities
who held stock in nominee or "street" name through various  brokerage  firms. At
December 1, 1999, there were 379,858 shares outstanding. There were no dividends
paid by the  Company  during  the fiscal  year ended  September  30,  1999.  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.

Selected Financial Ratios and Other Data


                                                  At or For the Years Ended
                                                          September 30,
                                                  -------------------------
                                                  1999                 1998
                                                  ----                 ----

Return on average assets.......................    .45%                 .51%

Return on average equity.......................   4.11                 8.19

Average equity to average assets...............  10.96                 6.19

Equity to assets at period end.................   9.44                13.03

Net interest rate spread.......................   3.08                 3.26

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

Non-performing loans to total assets...........   1.09                  .69

Allowance for loan loss to total loans.........    .45                  .43


                                       4
<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 following discussion relates only to the Bank's financial condition
and results of operations.

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

Market Risk Analysis

         Qualitative Analysis. The Bank's assets and liabilities may be analyzed
by  examining  the  extent to which  they are  interest  rate  sensitive  and by
monitoring  the  expected  effects of  interest  rate  changes on the Bank's net
portfolio value.

         An asset or liability is interest rate sensitive within a specific time
period if it will mature or  re-price  within  that time  period.  If the Bank's
assets  mature  or  re-price  more  quickly  or to a  greater  extent  than  its
liabilities,  the Bank's net portfolio  value and net interest income would tend
to increase  during periods of rising interest rates but decrease during periods
of falling interest rates.  Conversely,  if the Bank's assets mature or re-price
more slowly or to a lesser extent than its liabilities, the Bank's net portfolio
value and net interest  income would tend to decrease  during  periods of rising
interest rates but increase during periods of falling interest rates. The Bank's
policy has been to address the  interest  rate risk  inherent in the  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.

         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, 1999,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS.

                                       5
<PAGE>


       Changes                   Net Portfolio Value
      In Market       --------------------------------------
    Interest Rates      $ Amount      $ Change     % Change    NPV Ratio(1)
    --------------    -----------   -----------  -----------  -------------
    (basis points)      (Dollars in Thousands)

              +300         2,054        -3,338         -62%         3.95%
              +200         3,172        -2,219         -41%         5.95%
              +100         4,317        -1,075         -20%         7.88%
                 0         5,392                                    9.60%
              -100         6,261           869         +16%        10.91%
              -200         7,035         1,643         +30%        12.02%
              -300         7,827         2,435         +45%        13.10%

----------------
(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  re-pricing,  they may react at different  times and in
different degrees to changes in market rates of interest.  The interest rates on
certain types of assets and  liabilities  may fluctuate in advance of changes in
market interest rates,  while rates on other types of assets and liabilities may
lag  behind  changes  in  market  interest  rates.  In the  event of a change in
interest  rates,   prepayments  and  early   withdrawal   levels  could  deviate
significantly  from those  assumed in making the  calculations  set forth above.
Additionally,  an  increased  credit  risk may result as many  borrowers  may be
unable to service their debt in the event of an interest rate increase.

         The Bank's  Board of Directors  review the Bank's  asset and  liability
policies on 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  $14.2  million  or 33.0% to $56.0  million at
September 30, 1999 from $41.8  million at September  30, 1998.  The increase was
primarily   attributable  to  a  $7.8  million  increase  in  the  Bank's  loans
receivable,  net, and a $8.6 million  increase in available for sale securities,
partially  offset by a decrease in securities  held-to-maturity  of $500,000,  a
decrease  in cash and due from banks of $2.0  million,  as well as a decrease in
mortgage-backed  securities of $100,000.  The Bank's total liabilities increased
$14.4  million or 39.7%,  to $50.7  million  at  September  30,  1999 from $36.3
million at September 30, 1998. The increase was primarily attributable to a $6.6
million  increase in  deposits,  and a $7.7 million  increase in FHLB  advances.
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.

         Retained earnings  increased  $224,000 to $2.4 million or 4.4% of total
assets at  September  30,  1999,  as compared  to $2.2  million or 5.3% of total
assets at September 30, 1998.  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,
                                                 ----------------------------------------------------------------------------------
                                                                   1999                                     1998
                                                 ----------------------------------------------------------------------------------
                                                                                  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).......................          $35,051      $ 2,809         8.00%        $28,699         $2,295        8.00%
  Mortgage-backed securities................            1,785          113         6.33           2,531            159        6.27
  Investment securities(2)..................            8,565          355         4.14           3,082            167        5.43
  Other interest-earning assets.............            1,901           86         4.52           2,502            103        4.10
                                                       ------        -----         ----          ------          -----        ----
     Total interest-earning assets..........           47,302        3,363         7.11          36,814          2,724        7.40
                                                                                   ----                          -----        ----
Noninterest-earning assets..................            2,436           --                        2,252             --
                                                       ------        -----                       ------          -----
     Total assets...........................          $49,738      $ 3,363                      $39,066         $2,724
                                                       ======        =====                       ======          =====
Interest-bearing liabilities:
  NOW accounts..............................           $5,093          $99         1.94         $ 4,220           $102        2.41
  Savings accounts..........................            7,277          178         2.45           6,940            170        2.45
  Money market accounts.....................            2,582           69         2.67           2,423             66        2.71
  Certificates of deposit...................           21,652        1,096         5.06          19,769          1,042        5.27
  FHLB - Advances...........................            3,962          193         4.87              --             --          --
                                                       ------        -----         ----          ------         ------        ----
     Total interest-bearing liabilities.....           40,566        1,635         4.03          33,352          1,380        4.14
                                                                                   ----                                       ----
Noninterest-bearing liabilities.............            3,720                                     3,294
                                                       ------                                    ------
     Total liabilities......................           44,286                                    36,646
                                                       ------                                    ------

Stockholders' equity........................            5,452           --                        2,420             --
                                                       ------       ------                       ------          -----
     Total liabilities and retained earnings          $49,738      $ 1,635                      $39,066         $1,380
                                                       ======       ======                       ======          =====

Net interest income.........................                       $ 1,728                                      $1,344
                                                                    ======                                       =====
Interest rate spread(3).....................                                       3.08%                                      3.26%
                                                                                 ======                                     ======
Net yield on interest-earning assets(4).....                                       3.65%                                      3.65%
                                                                                 ======                                     ======
Ratio of average interest-earning assets to
  average interest-bearing liabilities......                                     116.61%                                    101.38%
                                                                                 ======                                     ======
</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,
                                                     1999 vs. 1998
                                                ------------------------

                                                  Increase (Decrease)
                                                       Due to
                                                ------------------------
                                                            Rate/
                                         Volume    Rate    Volume       Net
                                        --------  ------  --------     -----

                                                   (In thousands)
  Interest income:
         Loans receivable.............   $508     $  6      $  1       $515
         Mortgage-backed securities...    (47)       2        (1)       (46)
         Investment securities........    298      (39)      (70)       189
         Other interest-earning assets    (25)      10        (2)       (17)
                                          ---      ----      ----       ---
         Total interest income........   $734     $(21)     $(72)      $641
                                          ===      ====      ====       ===
  Interest expense:
         NOW accounts ................   $ 21     $(19)    $  (5)      $ (3)
         Savings account..............      8        0         0          8
         Money market accounts........      4       (1)        0          3
         Certificates of deposit......     99      (41)       (4)        54
         FHLB - Advances..............      0        0       193        193
                                          ---      ---       ---        ---
         Total interest expense.......    132      (61)      184        255
                                          ===      ===       ===        ===

          Change in net interest income  $602      $40     $(256)      $386
                                          ===       ==      ====        ===

Results of Operations

         Net Income.  The Bank's net income increased $26,000 for the year ended
September 30, 1999,  to $224,000 from $198,000 for the year ended  September 30,
1998.  This increase was primarily  attributable  to a $396,000  increase in the
Bank's net interest income after provisions for loan losses, partially offset by
an increase in  noninterest  expense of $342,000 and an increase in income taxes
of $20,000.

         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  $396,000
or 31.1%,  to $1,668,000  for the year ended  September 30, 1999, as compared to
the year ended  September 30, 1998. The increase was primarily due to the growth
in average  interest-earning  assets to $47.3 million in 1999 from $36.8 million
in 1998.

         The  increase  in  average  interest-earning  assets  of $10.5  million
primarily  reflects  increases of $6.3 million in the Bank's  balance of average
loans and $5.5 million in investment securities,  partially offset by a decrease
of $1.3 million in mortgage backed securities and other assets.  The increase in
interest-earning assets was funded by the increase in deposits and advances from
the FHLB-NY.


                                       8
<PAGE>
         Net yield on  interest-earning  assets did not  change  during the year
ended  September 30, 1999  compared to the same period in 1998.  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 $7.2 million
reflects  increases  of  $870,000  in the Bank's  average  interest-bearing  NOW
accounts and $2.4 million in average savings and  certificates of deposit and an
increase of $3.9 million in average FHLB borrowings.

         Provision  for Loan Losses.  Provision  for loan losses was $60,600 for
the year ended  September  30,  1999,  as compared to $72,000 for the year ended
September 30, 1998. The current provision is required to keep the balance of the
allowance for loan losses at a level management feels is sufficient based on the
current loan portfolio.

         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 $2,000.  Both the Bank's
commercial and residential real estate  portfolios also increased  significantly
during  the year  ended  September  30,  1999,  as  compared  to the year  ended
September  30, 1998.  Accordingly,  the Bank  increased  its  provision for loan
losses attributable to these portfolios by $39,000.

         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 decreased $8,000 or 3.3% from
$243,000 for the year ended  September  30, 1998 to $235,000 for the same period
in  1999.  This  decrease  in  the  Bank's  noninterest  income  was  due to the
collection  during the year ended  September  30,  1998 of a $54,000  deficiency
judgment and decreases in income on REO and gain on sale of securities offset by
an  increase  in fees and other  service  charges  of  $44,000.  The  deficiency
judgment in 1998 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 $342,000 or 27.8%
from $1.2 million for the year ended September 30, 1998, to $1.6 million for the
same period in 1999. The increase in the Bank's noninterest expense was due to a
$75,000  increase in the Bank's  occupancy  and  equipment  expense,  an $82,000
increase in other noninterest  expense and an increase of $198,000 in the Bank's
compensation  and  benefits  partially  offset by a  decrease  of $13,000 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 $80,000 for
bank processing fees.

         Income Tax Expense.  Income tax expense  increased $20,000 from $89,000
for the year ended  September  30, 1998 to $109,000 for the same period in 1999.
This  increase in income tax expense is due to the increase in the Bank's pretax
income  of  $46,000  from  $287,000  in 1998 to  $333,000  in 1999.  The  Bank's
effective  tax rate was 33% and 31% for the years ended  September  30, 1999 and
1998 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  borrowings.  The required ratio currently
is 4.0% and the Bank's regulatory liquidity ratio average was 17.9% and 17.9% at
September 30, 1999 and 1998, 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.

                                       9
<PAGE>

         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, 1999 was  $150,000,  a decrease of  $373,000,  as
compared to the same period in 1998. The decrease in 1998 was primarily due to a
$26,000  increase  in the  Bank's  net income an  increase  in accrued  interest
receivable  of  $216,000  and a  decrease  in  the  non-deposit  liabilities  of
$158,000.

         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, 1999,  totaled  $16.4  million,  an increase of $13.8
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 $7.9  million in 1999 as compared to
$4.7  million  in 1998 as well as  investment  purchases  of  $10.8  million  as
compared to $1.5 million in 1998.  The decrease in cash was partially  offset by
paydowns and  maturities of investment  and  mortgage-backed  securities of $2.5
million in 1999 as compared to $3.6 million in 1998.

         Net cash  provided  in the  Bank's  financing  activities  (i.e.,  cash
receipts  primarily from net proceeds from stock issuance and from net increases
in deposits and net increases in FHLB advances) for the year ended September 30,
1999,  totaled  $14.3  million,  an increase of $10.6 million as compared to the
year ended September 30, 1998. This increase in cash was primarily  attributable
to increased  deposits of $6.7 million and an increase in FHLB  advances of $7.7
million.

         Approximately  $16.2 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 Readiness Disclosure

         Rapid and  accurate  data  processing  is  essential  to the  Company's
operations.  Many  computer  programs  that can only  distinguish  the final two
digits of the year  entered  (a  common  programming  practice  in the past) are
expected  to read  entries  for the year  2000 as the  year  1900 or as zero and
incorrectly attempt to compute interest, payment, delinquency, maturity dates or
other data.

         The following  discussion of the  implications of the Year 2000 for the
Company  contains  numerous  forward-looking   statements  based  on  inherently
uncertain  information.  Successful and timely  preparation for the Year 2000 is
based on management's best estimates derived from various  assumptions of future
events,  which are inherently  uncertain,  including the progress and results of
the Company's data processing  service bureau,  and all vendors'  suppliers' and
customers'  readiness.   Moreover,  failure  of  these  third  parties  to  have
successfully  modified their systems could have a material adverse affect on the
Company.

         The Company has been advised by its data processing service bureau that
their computer services will function properly on and after January 1, 2000. The
Company has performed  significant  testing of the software utilized by its data
processing service bureau with successful results. If the Company's primary data
processing  service bureau encounters  unforeseen  problems and, as a result, is
unable to function  properly,  the Company would likely  experience  significant
data processing delays, mistakes or failures. These delays, mistakes or failures
could have a significant adverse impact on the consolidated financial statements
of the Company.

         All costs to replace certain  non-compliant  software and hardware have
been  expended as of  September  30,1999.  The Company has  upgraded  all of its
teller  equipment to be year 2000 compliant.  All other PCs have been tested and
replaced, if necessary, as of September 30, 1999.

         Despite the best efforts of  management to address the Year 2000 issue,
the vast number of external  entities  that have  direct and  indirect  business
relationships  with the Company,  such as  customers,  vendors,  payment  system
providers and other financial institutions and governmental institutions,  makes
it impossible  to assure that a failure to achieve  compliance by one or more of
these entities  would not have material  adverse impact on the operations of the
Company.

                                       10
<PAGE>
INDEPENDENT AUDITORS' REPORT
--------------------------------------------------------------------------------

[LOGO]    Kronick
          Kalada
          Berdy & Co.
          A Professional Corporation

     Certified Public Accountants


To the Board of Directors
Farnsworth Bancorp, Inc. and Subsidiary


We have audited the accompanying  consolidated statements of financial condition
of Farnsworth  Bancorp,  Inc. and  Subsidiary as of September 30, 1999 and 1998,
and the related  consolidated  statements  of income and  comprehensive  income,
changes in stockholders'  equity and cash flows for the years then ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  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  audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Farnsworth Bancorp,
Inc. and  Subsidiary  at September  30, 1999 and 1998,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
generally accepted accounting principles.



Kingston, Pennsylvania
November 15, 1999


                                        /s/ Kronick Kalada Berdy & Co.



190 Lathrop Street - Kingston, PA 18704 - (717)283-2727 - (717)283-1670 Telefax
--------------------------------------------------------------------------------

301 Market Street        101 West Broad Street         24 N. Seventh Street
Berwick, PA 18603        Hazelton, PA 18201            Stroudsburg, PA 18360
(717) 759-8625           (717) 459-1373                (717 420-9500
--------------------------------------------------------------------------------
<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS

                          September 30, 1999 and 1998
<TABLE>
<CAPTION>
                                                                          September 30,
                                                                       --------------------------------------------
                                                                              1999                    1998
                                                                       --------------------    --------------------
                                     ASSETS
                                     ------
<S>                                                                          <C>                     <C>
Cash and due from banks                                                        $ 1,883,104             $ 3,928,077
Securities available for sale                                                    8,672,614                 134,187
Securities held to maturity                                                      2,267,216               2,761,367
Mortgage backed securites held to maturity                                       1,755,110               1,890,642
Loans receivable, net                                                           38,832,141              31,041,552
Accrued interest receivable                                                        423,706                 227,318
Federal Home Loan Bank of New York stock at
    cost, substantially restricted                                                 418,700                 261,300
Premises and equipment                                                           1,516,252               1,468,846
Deferred income taxes                                                               99,359
Real estate owned                                                                   88,013
Other assets                                                                        72,236                  60,458
                                                                       --------------------    --------------------
Total assets                                                                  $ 56,028,451            $ 41,773,747
                                                                       ====================    ====================
              LIABILITIES AND STOCKHOLDERS' EQUITY
              ------------------------------------
Deposits                                                                      $ 42,490,162            $ 35,777,855
Federal Home Loan Bank advances                                                  7,712,940
Advances by borrowers for taxes and insurance                                      213,653                 214,884
Accrued and deferred income taxes                                                   78,160                 183,698
Accrued interest payable                                                            97,119                  38,692
Accounts payable and other accrued expenses                                        149,254                 115,890
                                                                       --------------------    --------------------
Total liabilities                                                               50,741,288              36,331,019
                                                                       --------------------    --------------------
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 and
     outstanding                                                                    37,985                  37,985
Additional paid in capital                                                       3,396,262               3,396,262
Retained earnings substantially restricted                                       2,451,554               2,227,363
Common stock acquired by employee stock
     ownership plan (ESOP)                                                        (303,880)               (303,880)
Common stock acquired by restricted stock
     plan (RSP)                                                                   (159,364)
Accumulated other comprehensive income,
     unrealized (depreciation) appreciation on
     available for sale securities, net of taxes                                  (135,394)                 84,998
                                                                       --------------------    --------------------
Total stockholders' equity                                                       5,287,163               5,442,728
                                                                       --------------------    --------------------
Total liabilities and stockholders' equity                                    $ 56,028,451            $ 41,773,747
                                                                       ====================    ====================
</TABLE>
The  accompanying  notes are an integral  part of these  consoldiated  financial
statements.

                                       12
<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                       CONSOLIDATED STATEMENTS OF INCOME
                            AND COMPREHENSIVE INCOME

                For the Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
                                                                                 1999                  1998
                                                                           -----------------     -----------------
<S>                                                                           <C>                   <C>
Interest income:
     Loans receivable                                                           $ 2,809,244           $ 2,295,219
     Securities                                                                     500,293               375,951
     Federal funds sold                                                              53,774                52,670
                                                                           -----------------     -----------------

         Total interest income                                                    3,363,311             2,723,840
                                                                           -----------------     -----------------
Interest expense:
     Deposits                                                                     1,441,946             1,380,112
     Federal Home Loan Bank advances                                                192,962                     -
                                                                           -----------------     -----------------
         Total interest expense                                                   1,634,908             1,380,112
                                                                           -----------------     -----------------
         Net interest income                                                      1,728,403             1,343,728
Provision for loan losses                                                            60,579                72,000
                                                                           -----------------     -----------------
         Net interest income after provision
             for loan losses                                                      1,667,824             1,271,728
                                                                           -----------------     -----------------
Noninterest income:
     Fees and other service charges                                                 232,123               188,367
     Collection on deficiency judgement                                                   -                54,024
     Net realized gains on sale of available for sale
       securities                                                                     3,359                   933
                                                                           -----------------     -----------------
         Total noninterest income                                                   235,482               243,324
                                                                           -----------------     -----------------
Noninterest expense:
      Compensation and benefits                                                     752,890               554,956
      Occupancy and equipment                                                       307,337               232,385
      Federal insurance premiums and assessments                                     21,897                34,790
      Other                                                                         488,302               405,657
                                                                           -----------------     -----------------
         Total noninterest expense                                                1,570,426             1,227,788
                                                                           -----------------     -----------------

Income before provision for income taxes                                            332,880               287,264
Provision for income taxes                                                          108,689                89,077
                                                                           -----------------     -----------------
         Net income                                                                 224,191               198,187

Other comprehensive income, net of taxes:
     Unrealized holding gain (loss) on securities available
       for sale arising during the period                                          (217,033)               26,616
     Reclassification adjustment for gains included in
       net income                                                                    (3,359)                 (933)
                                                                           -----------------     -----------------
         Total comprehensive income                                                 $ 3,799             $ 223,870
                                                                           =================     =================
Net income per common shares: Basic                                                  $ 0.66                $ 0.57
                                                                           =================     =================
Weighted average number of shares outstanding during the year                       337,314               349,470
                                                                           =================     =================
</TABLE>
The  accompanying  notes are an integral  part of these  consoldiated  financial
statements.
                                       13
<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                For the Years Ended September 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                                    Unrealized
                                                                                                    Appreciation
                                                                Retained       Common      Common  (Depreciation)
                                                 Additional    Earnings       Stock        Stock    on Securities     Total
                                        Common     Paid in   Substantially    Acquired    Acquired   Available for    Retained
                                        Stock      Capital     Restricted      By RSP      By ESOP Sale, Net of Tax   Earnings
                                      --------- -----------  ------------  ----------   ---------- ---------------- -----------

<S>                                  <C>       <C>          <C>           <C>          <C>           <C>           <C>
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
   (depreciation) 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

Net income for the year ended
September 30, 1999                           -           -       224,191                        -            -         224,191
Acquisition of common stock by RSP           -           -             -    (159,364)           -            -        (159,364)
Change in unrealized appreciation
    (depreciation) on securities
    available for sale, net of tax           -           -             -           -            -     (220,392)       (220,392)
                                      --------- -----------  ------------  ----------   ---------- ------------     -----------
Balance at September 30, 1999         $ 37,985  $3,396,262   $ 2,451,554   $(159,364)   $(303,880)  $ (135,394)     $5,287,163
                                      ========= ===========  ============  ==========   ========== ============     ===========

</TABLE>
The  accompanying  notes are an integral  part of these  consoldiated  financial
statements.
                                       14
<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                For the Years Ended September 30, 1999 and 1998

<TABLE>
<CAPTION>
                                                                                1999             1998
                                                                            ------------    ------------
<S>                                                                             <C>               <C>
Cash flows from operating activities:
Net income                                                                  $    224,191    $    198,187
                                                                            ------------    ------------
Adjustments to reconcile net income to net cash
  provided by operating activities:
     Depreciation and amortization                                                78,468          55,717
     Provision for loan losses                                                    45,579          72,000
     Net gain on sale of assets                                                   (3,359)           (933)
     (Increase)decrease in accrued interest receivable                          (196,388)         19,946
     Increase in other assets                                                     (6,541)        (28,195)
     (Decrease)increase in advances from borrowers                                (1,231)         57,041
     (Decrease)increase in accrued income taxes
         and deferred income taxes                                               (82,954)         85,872
     Increase(decrease) in accrued interest payable                               58,427         (12,097)
     Increase in other accrued liabilities                                        33,363          75,577
                                                                            ------------    ------------
Total adjustments                                                                (74,636)        324,928
                                                                            ------------    ------------
Net cash provided by operations                                                  149,555         523,115
                                                                            ------------    ------------

Cash flows from investing activities:
     Net increase in loans receivable                                         (7,924,181)     (4,704,839)
     Redemption of securities, to be held to maturity                          1,133,776       2,619,859
     Purchase of securities, to be held to maturity                             (503,574)       (500,000)
     Purchase of securities, available for sale                              (10,342,453)       (996,156)
     Proceeds from sale and redemptions of securities, available for sale      1,464,532         997,808
     Purchase of Federal Home Loan Bank stock                                   (157,400)        (27,200)
     Purchase of premises and equipment                                         (131,111)        (60,697)
                                                                            ------------    ------------
     Net cash used in investing activities                                   (16,460,411)     (2,671,225)
                                                                            ------------    ------------
Cash flows from financing activities:
     Increase in savings accounts and demand deposits                          6,712,307         581,279
     Federal Home Loan Bank advances                                           7,712,940            --
     Purchase of RSP shares                                                     (159,364)
     Net proceeds from issuance of stock                                       3,130,367
                                                                            ------------    ------------
     Net cash provided by financing activities                                14,265,883       3,711,646
                                                                            ------------    ------------

Net (decrease)increase in cash and due from banks                             (2,044,973)      1,563,536

Cash and due from banks at beginning of year                                   3,928,077       2,364,541
                                                                            ------------    ------------
Cash and due from banks at end of year                                      $  1,883,104    $  3,928,077
                                                                            ============    ============
Supplement disclosure:
     Cash paid during the period for:
         Interest                                                           $  1,576,481    $  1,392,209
                                                                            ============    ============
         Income taxes                                                       $     64,000    $       --
                                                                            ============    ============
Non cash items:
   Unrealized gain(loss) on securities available for
      sale, net of deferred income taxes                                    $   (220,392)   $     25,683
                                                                            ============    ============
   Acquistion of real estate in settlement of loans                         $     88,013    $       --
                                                                            ============    ============
</TABLE>
The  accompanying  notes are an integral  part of these  consoldiated  financial
statements.
                                       15
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998

1.    Summary of Significant Accounting Policies:
      ------------------------------------------

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

      Farnsworth Bancorp,  Inc. and Subsidiary  (together the "Company") operate
      two branches in Burlington  County,  New Jersey. The Bank offers customary
      banking  services,  including  accepting  of  checking,  savings  and time
      deposits and the making of commercial,  real estate and consumer loans, to
      customers  who are  predominantly  small and  middle-market  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 (the "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 and the disclosure of
      contingent  assets  and  liabilities  as of the date of the  statement  of
      financial  position  and  revenues and expenses for the period then ended.
      Actual results could differ  significantly from those estimates.  Material
      estimates that are particularly  susceptible to significant changes in the
      near term relate to the  determination  of the  allowance for loan losses,
      the valuation of foreclosed  real estate and the  assessment of prepayment
      risks associated with mortgage-backed securities. Management believes that
      the  allowance  for loan  losses is  adequate,  foreclosed  real estate is
      appropriately  valued and prepayment risks associated with mortgage-backed
      securities  are  properly  recognized.  While  management  uses  available
      information  to  recognize  losses on loans and  foreclosed  real  estate,
      future additions to the allowance for loan losses or further writedowns of
      foreclosed  real  estate may be  necessary  based on  changes in  economic
      conditions  in the market area.  Additionally,  assessments  of prepayment
      risks related to mortgage-backed  securities are based upon current market
      conditions, which are subject to frequent change.

      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  activity  is  concentrated  in loans  secured by real
      estate  located in the State of New Jersey.  The Bank's loan  portfolio is
      predominantly  made up of 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.  In addition,
      the  Bank  had  cash  balances  at  the  Federal  Home  Loan  Bank  (FHLB)
      aggregating $1,824,000 at September 30, 1999.

      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 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.

                                       16
<PAGE>

      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.

      Investment and Mortgaged-backed 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 which are recognized in interest income using
            the interest method over the period to maturity.

      o     Securities Available for Sale. Securities available for sale consist
            of certain 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.

      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.

      The Bank follows the provisions of FASB Statements No. 114, "Accounting by
      Creditors for Impairment of a Loan," and No. 118, "Accounting by Creditors
      for  Impairment  of a Loan -  Income  Recognition  and  Disclosures."  The
      provisions   of   these   statements   are   applicable   to  all   loans,
      uncollateralized  as  well  as  collateralized,  except  large  groups  of
      smaller-balance  homogeneous  loans that are  collectively  evaluated  for
      impairment  and loans that are  measured  at fair value or at the lower of
      cost or fair value.  Loans classified as impaired are to be measured based
      on the present  value of  expected  future  cash flows  discounted  at the
      loan's effective interest rate, or as a practical expedient, at the loan's
      observable market price or the fair value of the collateral if the loan is
      collateral  dependent.  A loan  evaluated  for  impairment is deemed to be
      impaired when based on current information and events, it is probable that
      the Bank  will be unable to  collect  all  amounts  due  according  to the
      contractual terms of the loan agreement.  All loans identified as impaired
      are evaluated  independently.  No loans were  identified as impaired as of
      September 30, 1999 and 1998, respectively.

      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.

                                       17

<PAGE>

      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.

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

      Land is carried at cost.  Bank  premises and equipment 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.  The Bank
      computes  depreciation 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

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

      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.

      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.


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.  ("Farnsworth"),  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 Farnsworth's common stock, par value $.10 per share.

      At the time of the  conversion,  the Bank,  in order to grant  priority to
      eligible  depositors  in the event of future  liquidation,  established  a
      liquidation account of $2,225,315,  an amount equal to its total net worth
      as of June  30,  1998,  the  date of the  latest  statement  of  financial
      condition appearing in the final prospectus.  The liquidation account will
      be maintained for the benefit of eligible  account holders who continue to
      maintain their accounts at the bank after the conversion.  The liquidation
      account  will be reduced  annually  to the extent  that  eligible  account
      holders have reduced their qualifying  deposits.  Subsequent  increases in
      the deposit account will not restore an eligible account holder's interest
      in  the  liquidation   account.  In  the  unlikely  event  of  a  complete
      liquidation,  each eligible  account  holder will be entitled to receive a
      distribution  from the liquidation  account in an amount  proportionate to
      their current adjusted qualifying balances. The balance of the liquidation
      account on September 30, 1999 has not been determined.

      The ability of Farnsworth 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").

                                       18
<PAGE>

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

      The carrying  amounts and fair values of  investments  in held to maturity
      and  available  for sale  securities  at  September  30, 1999 and 1998 are
      summarized as follows:
<TABLE>
<CAPTION>
                                                                                          1999
                                                       Amortized                    Gross      Unrealized                Fair
                                                                          ---------------------------------------
             Held to maturity:                           Cost                  Gains                Losses              Value
                                                   ------------------     ----------------     ------------------  -----------------
<S>                                                      <C>                     <C>                   <C>              <C>
               U.S. Government and
                 agency securities                       $ 2,167,944             $ 14,442              $ 111,974        $ 2,070,412
               Municipal securities                           99,272                7,707                      -            106,979
                                                   ------------------     ----------------     ------------------  -----------------

                                                         $ 2,267,216             $ 22,149              $ 111,974        $ 2,177,391
                                                   ==================     ================     ==================  =================
</TABLE>
<TABLE>
<CAPTION>
                                                                                          1998
                                                       Amortized                    Gross      Unrealized                Fair
                                                                          ---------------------------------------
             Held to maturity:                           Cost                  Gains                Losses              Value
                                                   ------------------     ----------------     ------------------  -----------------
<S>                                                      <C>                     <C>                   <C>              <C>
               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
                                                   ==================     ================     ==================  =================
</TABLE>
<TABLE>
<CAPTION>
                                                                                          1999
                                                       Amortized                    Gross      Unrealized                Fair
                                                                          ---------------------------------------
             Available for sale securities:              Cost                  Gains                Losses              Value
                                                   ------------------     ----------------     ------------------  -----------------
<S>                                                      <C>                     <C>                   <C>              <C>
               U.S. Government and
                 agency securities                       $ 8,880,762                                   $ 348,756        $ 8,532,006
               Equity securities                               3,339            $ 137,269                                   140,608
                                                   ------------------     ----------------     ------------------  -----------------

                                                         $ 8,884,101            $ 137,269              $ 348,756        $ 8,672,614
                                                   ==================     ================     ==================  =================
</TABLE>
<TABLE>
<CAPTION>
                                                                                          1998
                                                                                    Gross      Unrealized                Fair
                                                                          ---------------------------------------
             Available for sale securities:              Cost                  Gains                Losses              Value
                                                   ------------------     ----------------     ------------------  -----------------
<S>                                                      <C>                     <C>                   <C>              <C>
               Equity securities                             $ 3,339            $ 130,848      $               -          $ 134,187
                                                   ==================     ================     ==================  =================
</TABLE>
     The  schedule of  maturities  of  available  for sale and held to maturity
securities at September 30, 1999 are as follows:

         Available for Sale Securities:     Amortized              Fair
                                              Costs                Value
                                       ----------------------------------------
         Due in one year or less             $         -           $         -
         Due from one to five years            1,999,479             1,959,500
         Due from five to ten years            5,000,000             4,834,500
         Due after ten years                   1,881,283             1,738,006
                                       ------------------     -----------------
                                             $ 8,880,762           $ 8,532,006
                                       ==================     =================

             Held to Maturity Securities:     Amortized             Fair
                                                Costs              Value
                                            ---------------------------------
             Due in one year or less         $         -         $         -
             Due from one to five years        1,248,708           1,228,863
             Due from five to ten years          919,236             841,549
             Due after ten years                  99,272             106,979
                                             -----------         -----------
                                             $ 2,267,216         $ 2,177,391
                                             ===========         ===========

                                       19
<PAGE>

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

      Investments in mortgage-backed securities are stated at cost, adjusted for
      amortization of premiums and accretion of fees and discounts. The carrying
      values and fair  values of  mortgage-backed  and  related  securities  are
      summarized as follows:
<TABLE>
<CAPTION>
                                                                                          1999
                                                      -----------------------------------------------------------------------------
                                                          Principal         Unamortized            Unearned         Carrying
                                                           Balance           Premiums             Discounts          Value
                                                      ------------------- ----------------     -----------------  -----------------
<S>                                                        <C>                <C>                       <C>          <C>
             GNMA Certificates                               $   586,416         $  8,697               $     -        $   595,113
             FHLMC and FNMA Certificates                       1,161,508            3,563                 5,074          1,159,997
                                                      ------------------- ----------------     -----------------  -----------------
                                                             $ 1,747,924         $ 12,260               $ 5,074        $ 1,755,110
                                                      =================== ================     =================  =================
</TABLE>
<TABLE>
<CAPTION>
                                                                                          1999
                                                      -----------------------------------------------------------------------------
                                                           Carrying                 Gross      Unrealized             Fair
                                                                          --------------------------------------
                                                            Value              Gains                Losses           Value
                                                      ------------------- ----------------     -----------------  -----------------
<S>                                                          <C>                  <C>                  <C>             <C>
             GNMA Certificates                               $   595,113          $ 2,240              $  1,756        $   595,597
             FHLMC and FNMA Certificates                       1,159,997                -                27,528          1,132,469
                                                      ------------------- ----------------     -----------------  -----------------
                                                             $ 1,755,110          $ 2,240              $ 29,284        $ 1,728,066
                                                      =================== ================     =================  =================
</TABLE>
<TABLE>
<CAPTION>
                                                                                          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
                                                      =================== ================     =================  =================
</TABLE>

<TABLE>
<CAPTION>

                                                                                           1998
                                                      ------------------------------------------------------------------------------
                                                           Carrying                  Gross      Unrealized             Fair
                                                                           --------------------------------------
                                                            Value               Gains                Losses           Value
                                                      -------------------  ----------------     -----------------  -----------------
<S>                                                         <C>                  <C>                    <C>            <C>
             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
                                                      ===================  ================     =================  =================
</TABLE>

      Mortgage-backed  securities  with a  carrying  value  and  fair  value  of
      $412,303 and  $419,064 at September  30, 1999 and $548,540 and $419,064 at
      September  30, 1998 are pledged as security for  deposits of  governmental
      entities under the provisions of Governmental Unit Deposit  Protection Act
      (GUDPA).

                                       20
<PAGE>

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

      Loans receivable at September 30, are summarized as follows:
<TABLE>
<CAPTION>
                                                                             1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                        <C>                          <C>
             First mortgage loans
               Principal balance:
                 Secured by one to four family residence                     $ 27,443,330                 $ 24,736,226
                 Construction loans                                             1,885,900                    2,434,619
                 Commercial real estate                                         3,742,753                    1,019,284
                                                                     ---------------------        ---------------------
                                                                               33,071,983                   28,190,129
                                                                     ---------------------        ---------------------
               Less:
                 Loans in process - real estate                                  (829,891)                    (500,262)
                 Unearned discounts                                               (12,466)                     (12,466)
                 Deferred loan origination fees net of
                   costs of $104,234 and $80,387, respectivley                   (180,497)                    (187,000)
                                                                     ---------------------        ---------------------
             Total first mortgage loans                                        32,049,129                   27,490,401
                                                                     ---------------------        ---------------------
             Consumer and other loans
               Principal balances:
                 Home equity                                                    6,261,368                    3,196,534
                 Personal loans                                                   255,224                      151,720
                 Loans secured by savings                                         171,908                      157,248
                 Commercial business loans                                        270,512                      180,649
                                                                     ---------------------        ---------------------
             Total consumer and other loans                                     6,959,012                    3,686,151
                                                                     ---------------------        ---------------------
             Total loans                                                       39,008,141                   31,176,552

             Less allowance for loan losses                                      (176,000)                    (135,000)
                                                                     ---------------------        ---------------------
                                                                             $ 38,832,141                 $ 31,041,552
                                                                     =====================        =====================
</TABLE>
      At September 30, 1999 and 1998,  nonaccrual  loans for which  interest had
      been discontinued  totaled $404,916 and $290,714,  respectively.  Interest
      income foregone on these loans is summarized as follows:
<TABLE>
<CAPTION>
                                                                             1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                             <C>                          <C>
             Interest income that would have
               been recorded                                                     $ 46,127                     $ 27,162
             Interest income recognized                                             1,099                       10,065
                                                                     ---------------------        ---------------------
             Interest income foregone                                            $ 45,028                     $ 17,097
                                                                     =====================        =====================
</TABLE>

      An analysis of the change in the allowance for loan losses:
<TABLE>
<CAPTION>
                                                                             1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                            <C>                          <C>
             Allowance for loan losses:
               General valuation allowance:
                   Beginning of year                                            $ 135,000                     $ 66,000
                   Additional provisions                                           45,579                       72,000
                   Charge offs                                                     (4,579)                      (3,000)
                                                                     ---------------------        ---------------------
             End of year                                                        $ 176,000                    $ 135,000
                                                                     =====================        =====================
</TABLE>
                                       21
<PAGE>

      The activity with respect to loans to directors,  officers and  associates
of such persons, is summarized as follows:
<TABLE>
<CAPTION>
                                                                            1999                              1998
                                                                     ----------------                  ----------------

<S>                                                                      <C>                               <C>
             Beginning of period                                          $  217,274                        $  291,218
             Loans originated
                                                                             402,682                                 -
             Collection of principal
                                                                            (16,025)                          (73,944)
                                                                     ----------------                  ----------------
             End of period                                                $  603,931                        $  217,274
                                                                     ================                  ================
</TABLE>


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

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

          Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
                                                                               1999                         1998
                                                                     ---------------------        ---------------------

<S>                                                                           <C>                          <C>
             Loans receivable                                                   $ 242,138                    $ 196,729
             Mortgage backed securities                                             9,330                        9,467
             Other Securities                                                     172,238                       21,122
                                                                     ---------------------        ---------------------
                                                                                $ 423,706                    $ 227,318
                                                                     =====================        =====================
</TABLE>
7.    Premises and Equipment:
      ----------------------

      Premises and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
                                                                                       September 30,
                                                                     --------------------------------------------------
                                                                               1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                          <C>                          <C>
             Land                                                               $ 126,435                    $ 126,435
             Land improvements                                                     14,017                       13,608
             Office building and improvements (Bordentown)                      1,352,051                    1,350,262
             Office building and improvements (Florence)                           39,015                       38,299
             Furniture, fixtures and equipment                                    438,288                      331,532
             Future branch                                                         15,060                            -
                                                                     ---------------------        ---------------------
                                                                                1,984,866                    1,860,136
             Less accumulated depreciation                                        468,614                      391,290
                                                                     ---------------------        ---------------------
                                                                              $ 1,516,252                  $ 1,468,846
                                                                     =====================        =====================
</TABLE>

     Depreciation  charged to  operations  was $77,324 and $55,717 for the years
     ended 1999 and 1998, respectively.  Useful lives used in the calculation of
     depreciation are as follows:

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


                                       22
<PAGE>
8.    Deposits:
      --------

      Deposits as of September 30, are summarized as follows:
<TABLE>
<CAPTION>
                                                                                 1999                         1998
                                                                          ---------------------        ---------------------

<S>                                                                         <C>                          <C>
             Now accounts                                                     $ 5,192,051                  $ 4,230,556
             Money market accounts                                              3,045,330                    2,206,431
             Passbook and club accounts                                         7,481,882                    6,631,263
             Non interest bearing                                               3,989,352                    2,813,028
                                                                     ---------------------        ---------------------
             Subtotal                                                          19,708,615                   15,881,278
                                                                     ---------------------        ---------------------
             Certificates of deposit:
               3.01% to 4.0%                                                    1,016,360                      485,579
               4.01% to 5.0%                                                   11,198,720                    3,287,304
               5.01% to 6.0%                                                    9,919,282                   15,360,755
               6.01% to 7.0%                                                      647,185                      762,939
                                                                     ---------------------        ---------------------
             Subtotal                                                          22,781,547                   19,896,577
                                                                     ---------------------        ---------------------
                                                                            $ 42,490,162                 $ 35,777,855
                                                                     =====================        =====================
</TABLE>

      Deposits of officers and directors totaled $249,488 in 1999. The aggregate
      amount of jumbo  certificates  of deposit with a minimum  denomination  of
      $100,000 was approximately $1,562,000 and $1,499,000 at September 30, 1999
      and 1998. 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, 1999 and 1998, scheduled maturities of certificates of
      deposit (rounded to the nearest $1,000) are summarized as follows:
<TABLE>
<CAPTION>
                                                                                 1999                         1998
                                                                         ---------------------        ---------------------
<S>                                                                         <C>                          <C>
             3 months or less                                                 $ 4,444,000                  $ 3,874,000
             from 3 months to 1 year                                           11,812,000                   10,341,000
             from 1 year to 3 years                                             5,748,000                    3,726,000
             from 3 years to 5 years                                              778,000                    1,956,000
                                                                     ---------------------        ---------------------
                                                                             $ 22,782,000                 $ 19,897,000
                                                                     =====================        =====================
</TABLE>

      Interest  expense on deposits for the years ended  September  30, 1999 and
      1998 is summarized as follows:
<TABLE>
<CAPTION>
                                                                                 1999                         1998
                                                                         ---------------------        ---------------------
<S>                                                                          <C>                          <C>
             NOW accounts                                                     $    98,793                  $   101,832
             Money market accounts                                                 69,057                       65,745
             Passbook and club accounts                                           178,418                      170,102
             Certificates of deposit                                            1,095,678                    1,042,433
                                                                     ---------------------        ---------------------
                                                                              $ 1,441,946                  $ 1,380,112
                                                                     =====================        =====================
</TABLE>

                                       23
<PAGE>

9.    Other Borrowed Funds:
      --------------------

      This debt consists of various advances from FHLB which bear fixed interest
      rates ranging from 5.1% to 5.9%. These advances are collateralized by FHLB
      stock,  investment  securities  and  mortgages.  The Bank  has  $9,404,651
      available for borrowing as of September 30, 1999.


                            Principal payments are as follows:

                                   2000                      $  6,368,000
                                   2001                           123,000
                                   2002                           130,000
                                   2003                           138,000
                                   2004                           146,000
                                Thereafter                        807,940
                                                          ----------------

                                              Total           $ 7,712,940
                                                          ================

10.   Gains on Sale of Interest Earning Assets:
      ----------------------------------------

      Realized gain on sales of  available-for-sale securities  was $ 3,359  and
      $933 for the years ended September 30, 1999 and 1998, respectively.


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

The  provision  for federal and state income taxes differs from that computed at
the statutory graduated rates as follows:
<TABLE>
<CAPTION>
                                                                             1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                            <C>                           <C>
             Federal statutory tax rates                                               34%                          34%
             Tax at statutory rates                                             $ 113,179                     $ 97,670
             New Jersey savings institution tax                                     3,395                        5,688
             Decrease in tax:
               Low tax bracket savings                                                  -                       (2,390)
               Tax exempt income                                                   (2,000)                      (2,000)
               Miscellaneous                                                       (5,885)                      (9,891)
                                                                     ---------------------        ---------------------

                                                                                $ 108,689                     $ 89,077
                                                                     =====================        =====================

             Effective tax rate                                                        30%                          31%
                                                                     =====================        =====================
</TABLE>

      The tax provision is summarized as follows:
<TABLE>
<CAPTION>
                                                                             1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                            <C>                          <C>
             Current federal                                                    $ 128,567                    $ 120,145
             Deferred federal                                                     (31,927)                     (38,478)
             Current state                                                         15,000                       10,800
             Deferred state                                                        (2,951)                      (3,390)
                                                                     ---------------------        ---------------------
                                                                                $ 108,689                     $ 89,077
                                                                     =====================        =====================
</TABLE>
                                       24
<PAGE>

      The following  temporary  differences gave rise to deferred tax assets and
      liabilities:
<TABLE>
<CAPTION>
                                                                             1999                         1998
                                                                     ---------------------        ---------------------
<S>                                                                            <C>                          <C>
             Deferred tax assets:
             Allowance for loan losses                                           $ 67,640                     $ 47,490
             Deferred loan origination fees, net                                   17,580                       22,010
             Accrued compensation                                                  18,426                       10,150
             Unrecorded depreciation on investments                                76,093                            -
                                                                     ---------------------        ---------------------
             Total deferred tax assets                                            179,739                       79,650
                                                                     ---------------------        ---------------------
             Deferred tax liabilities:
               Premises and equipment                                              27,930                       23,050
               Unrecorded appreciation on investments                                   -                       47,070
               Tax reserve for loan losses                                         52,450                       68,212
                                                                     ---------------------        ---------------------
             Total deferred tax liabilities                                        80,380                      138,332
                                                                     ---------------------        ---------------------
             Net deferred tax asset (liability)                                  $ 99,359                    $ (58,682)
                                                                     =====================        =====================
</TABLE>

      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 8% of
      taxable income.  Retained earnings at September 30, 1999 and 1998 included
      untaxed earnings of approximately $381,491 and $407,133, representing such
      bad debt deductions.

      Retained  earnings at September 30, 1999 and 1998  includes  approximately
      $278,925  of tax bad debt  deductions  which are  considered  a  permanent
      difference between the book and income tax basis of loans receivable,  and
      for which income taxes have not been provided.  If such amount is used for
      purposes  other  than  bad  debt  losses,   including   distributions   in
      liquidation, it will be subject to income tax at the then current rate.

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

      At September 30, 1999 the Bank had the following commitments  outstanding.
      Mortgage  commitments are for 45 days. Home equity  commitments are for 60
      days. The commitments are summarized as follows:
<TABLE>
<CAPTION>
                                                              Amounts                  Rate                    Term
                                                         -------------------    --------------------    --------------------
<S>                                                              <C>           <C>                          <C>
             Mortgages (fixed rate)                               $ 877,600     7.00% to 8.125%              15 to 30 years
                                                                                  0 to 3 points
             Home Equity loans                                      447,300     6.825% to 8.75%               3 to 15 years
                                                         -------------------      0 points

                                                                $ 1,324,900
                                                         ===================
</TABLE>
      There are two 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 the two letters  totals
      $25,000.  The Bank also has  lines of  credit  with  undrawn  balances  of
      $230,948.

      Subsequent to September 30, 1999, the Bank entered into a lease  agreement
      for a new branch.  The term of the  agreement is for 10 years with monthly
      payments  ranging  from $4,500 to $5,871.  This  project is expected to be
      funded through normal operations with approximately $100,000 of cost to be
      incurred.

                                       25
<PAGE>
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  approximate  their fair
      value.

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

      Fair values for securities, excluding FHLB securities, are based on quoted
      market prices.  The carrying  values of FHLB securities  approximate  fair
      values.

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

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

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

         The carrying amounts of accrued interest approximate their fair values.

         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.

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

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

          Off-Balance-Sheet Instruments and credit risk
          ---------------------------------------------

          The Bank is a party to financial  instruments  with  off-balance-sheet
          risk in the normal  course of business to meet the  financing  need of
          its customers.  These financial  instruments consist of commitments to
          extend credit.  Commitments to extend credit are agreements to lend to
          a  customer  as  long  as  there  is no  violation  of  any  condition
          established in the loan agreement.  These commitments are comprised of
          the  undisbursed  portion of loans and  letters of credit.  The Bank's
          exposure to credit loss from  nonperformance by the other party to the
          financial  instruments for commitments to extend credit is represented
          by the contractual amount of those instruments. The Bank uses the same
          credit policies in making commitments as it does for  on-balance-sheet
          instruments.  Generally,  collateral,  usually  in the  form  of  real
          estate, is required to support financial instruments with credit risk.
          Commitments generally have fixed expiration dates or other termination
          clauses  and  may  require  payment  of  a  fee.  Since  many  of  the
          commitments  are  expected  to  expire  without  being  drawn  upon by
          customers,  the total commitment amounts do not necessarily  represent
          future cash  requirements.  The Bank evaluates each customer's  credit
          worthiness on a case-by-case basis. The amount of collateral obtained,
          if it is deemed  necessary by the Bank upon  extension  of credit,  is
          based on management's credit evaluation of the counter party. The fair
          value of commitments is not considered significant.

                                       26
<PAGE>


          The estimated fair values of the Bank's financial  instruments were as
          follows at: (000's omitted)
<TABLE>
<CAPTION>
                                                          September 30,  1999                    September 30, 1998
                                                      ---------------------------------    --------------------------------------
                                                        Carrying             Fair             Carrying               Fair
             Financial Assets                            Amount              Value             Amount                Value
             ------------------------------------     --------------     --------------    ----------------    ------------------

<S>         <C>                                           <C>                <C>                 <C>                   <C>
             Cash and due from banks                        $ 1,883            $ 1,883             $ 3,928               $ 3,928
             Securities held to maturity                      4,022              3,905               4,652                 4,808
             Securities available for sale                    8,673              8,673                 134                   134
             FHLB stock                                         419                419                 261                   261
             Loans receivable                                38,832             38,116              31,042                31,293
             Accrued interest receivable                        424                424                 227                   227

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

             Deposit liabilities                             42,491             42,323              35,778                35,981
             FHLB advances                                    7,713              7,583
             Accrued interest payable                            97                 97                  39                    39
</TABLE>

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

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

      Employer contributions under a salary  reduction  thrift plan were $12,882
      and $6,767 for 1999 and 1998, respectively.

      ESOP
      ----

     Effective  upon  conversion,  an ESOP  was  established  for  all  eligible
     employees.  The ESOP used  $303,880 of  proceeds  from a term loan from the
     Company to purchase  30,388  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  rate at  September  30,  1999 was  8.25%.  The  Bank  intends  to make
     contributions to the ESOP which will be equal to the principal and interest
     payment required from the ESOP on the term loan.  Shares purchased with the
     loan proceeds are pledged as collateral for the term loan and are held in a
     suspense account for future allocation among participants. Contributions to
     the ESOP and shares  released  from the suspense  account will be allocated
     among the  participants on the basis of  compensation,  as described by the
     plan in the year of  allocation.  ESOP  shares  pledged as  collateral  are
     reported as common stock acquired by ESOP in the consolidated statements of
     financial   condition.   As  shares  are  committed  to  be  released  from
     collateral,  the Company reports compensation and interest 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. ESOP shares are as follows:
<TABLE>
<CAPTION>
                                                                            1999                             1998
                                                                     --------------------             --------------------
<S>                                                                          <C>                              <C>
             Allocated shares, released                                            3,038                                -
                                                                     ====================             ====================
             Unallocated shares, unreleased                                       27,350                           30,388
                                                                     ====================             ====================
             Fair Value of unreleased shares                                   $ 276,915                        $ 303,880
                                                                     ====================             ====================
             Compensation cost                                                  $ 30,388
                                                                     ====================
</TABLE>
                                       27
<PAGE>
      Restricted Stock Plan (RSP)
      ---------------------------

      On April  16,  1999 the  Company  established  a RSP to  provide  both key
      employees and outside directors with a proprietary interest in the Company
      in a manner  designed to encourage  such person to remain with the Bank. A
      total of 15,194  restricted shares were purchased by the RSP at an average
      market value of $10.48.  Initially the total market value of the shares is
      treated as  unearned  compensation  and is  charged  to  expense  over the
      vesting  period.  A total of  10,631  shares  were  issued to the board of
      directors and two executive  officers.  Unearned  compensation  from these
      shares will be charged to expense over the five year vesting period.

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

15.   Net Income per Common Share:
      ----------------------------

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

      Per  share amounts  for  the years ended September 1999 and 1998 have been
      calculated  based on the net  income  for the  entire  year and assume the
      common stock issued has been outstanding since October 1, 1997.

<TABLE>
<CAPTION>
                                                                1999                                           1998
                                      -------------------------------------------------  -------------------------------------------
                                                             Weighted         Per-                          Weighted          Per-
                                                             Average         Share                          Average          Share
                                                 Income       Shares         Amount          Income          Shares          Amount
                                      -------------------------------------------------  -------------------------------------------
<S>                                          <C>             <C>           <C>           <C>              <C>              <C>
           Net income available to
           Common Shareholders                 $ 224,191       379,858                     $ 198,187        379,858

           ESOP shares                                         (27,350)                                     (30,388)
           RSP shares                                          (15,194)
                                               ------------------------------------        -----------------------------------------
                                               $ 224,191       337,314       $ 0.66        $ 198,187        349,470          $ 0.57
                                               ------------------------------------        -----------------------------------------

</TABLE>
      There were no diluted effects as of September 30, 1999 or 1998.

16.    Comprehensive Income:
       --------------------

      On June 1997, the Financial  Accounting  Standards  Board ("FASB")  issued
      Statement   of  Financial   Accounting   Standards   No.  130,   Reporting
      Comprehensive Income and its components in financial statements. Statement
      130 states that  comprehensive  income  includes  reported net income of a
      company,  adjusted for items that are  currently  accounted  for as direct
      entries to equity,  such as the net unrealized  gain or loss on securities
      available for sale,  foreign currency items, and minimum pension liability
      adjustments.  This  statement  is  effective  for both  interim and annual
      periods  beginning  after  December  15, 1997.  As  required,  the Company
      adopted  Statement  130 in the first  quarter of fiscal 1999,  and reports
      comprehensive income in accordance with the new statement.

                                       28
<PAGE>

17.   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  the Bank to maintain  total
      capital equal to at least 8.0% of its risk-weighted assets.

      The Bank at  September  30,  1999 and 1998  meets  the  regulatory    core
      capital,  tangible  capital,  and   risk  based  capital  requirements  as
      summarized:
<TABLE>
<CAPTION>
                                                                                                         To Be Well
                                                                                                        Capitalized Under
                                                                                  For Capital           Prompt Corrective
                                                Actual                       Adequacy Purposes          Action Provisions
                                           --------------------------    -----------------------   --------------------------
                                             Amount         Ratio         Amount        Ratio        Amount         Ratio
                                           ------------   -----------    ----------   ----------   ------------  ------------
                                                                      (000's omitted for amounts)
<S>                                           <C>             <C>          <C>            <C>         <C>             <C>
             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

             As of September 30, 1999:
               Risk-based capital                4,571         16.84         2,255         8.00          2,819         10.00
               Tier 1 capital                    4,571         16.22           N/A          N/A          1,691          6.00
               Core capital                      4,571          8.22         2,226         4.00          2,783          5.00
               Tangible capital                  4,571          8.22           835         1.50            N/A           N/A

</TABLE>

      The  Federal  Deposit  Insurance  Corporation   Improvement  Act  of  1991
      ("FDICIA")  imposes increased  requirements on the operations of financial
      institutions  and  mandated the  development  of  regulations  designed to
      empower  regulators  to take  prompt  corrective  action  with  respect to
      institutions that fall below certain capital standards.  FDICIA stipulates
      that an  institution  with  less  than 4% core  capital  is  deemed  to be
      undercapitalized.  Quantitative  measures  established by FDICIA to ensure
      capital  adequacy  require the Bank to maintain minimum amounts and ratios
      of  total  and  Tier  I  capital  (as  defined  in  the   regulations)  to
      risk-weighted assets (as defined), and of Tier I capital to average assets
      (as defined). Management believes, as of September 30, 1999, that the Bank
      meets all capital adequacy requirements to which it is subject.

      As of March 1999, the most recent  notification from the OTS, the Bank was
      categorized as well capitalized under the regulatory  framework for prompt
      corrective  action. To be categorized as well  capitalized,  the Bank must
      maintain minimum total, risk-based, and Tier I leverage ratios of 10%, 6%,
      and 5%,  respectively.  There are no  conditions  existing or events which
      have occurred since notification that management believes have changed the
      Bank's category.

                                       29
<PAGE>
      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.

18.   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 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 totaled $191,615.

      Beginning on January 1, 1997, the FDIC has estimated  that, in addition to
      normal deposit insurance premiums,

      BIF  members  will pay a portion  of the FICO  payment  equal to 1.3 basis
      points  on  BIF-insured  deposits  compared  to 6.4  basis  points by SAIF
      members on SAIF-insured  deposits.  All  institutions  will pay a pro-rata
      share of the FICO  payment  on the  earlier of January 1, 2000 or the date
      upon which the last savings  association  ceases to exist. The legislation
      also  requires BIF and SAIF to be merged by January 1, 1999  provided that
      legislation is adopted to eliminate the 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 FICO
      payments  described above.  Management cannot predict the precise level of
      FDIC insurance assessments on an ongoing basis or whether the BIF and SAIF
      will eventually be merged.

19.   Parent Only Financial Information:
      ---------------------------------

      Farnsworth operates one wholly owned subsidiary, the Bank. The earnings of
      the  Bank  are  recognized  by  Farnsworth  using  the  equity  method  of
      accounting.  Accordingly,  the  earnings  of  the  Bank  are  recorded  as
      increases in Farnsworth's investment in the subsidiary.  The following are
      the condensed financial statements for Farnsworth (parent company only) as
      of September 30, 1999 and 1998 and for the year ended  September 30, 1999.
      Farnsworth had no operations prior to the Bank's  conversion to stock form
      on September 29, 1998.

<TABLE>
<CAPTION>
                  Statement of Financial Condition                                    1999                         1998
                                                                                ------------------           ------------------
<S>                                                                                <C>                         <C>
                  Assets

                  Cash                                                                   $ 70,679                    $ 638,692
                  Securities available for sale                                           480,938                            -
                  ESOP loan receivable                                                    281,089                      303,880
                  Investment in subsidiary                                              2,807,322                    2,548,435
                  Other assets                                                             20,521                            -
                                                                                ------------------           ------------------
                  Total assets                                                         $3,660,549                   $3,491,007
                                                                                ==================           ==================
                  Liabilities                                                           $ 173,678                     $ 56,760

                  Stockholder's equity                                                  3,486,891                    3,434,247
                                                                                ------------------           ------------------
                  Liabilities and stockholder's equity                                 $3,660,569                   $3,491,007
                                                                                ==================           ==================
</TABLE>

                                       30
<PAGE>
      Statement of Income

                                                       For the year
                                                          ended
                                                      September 30,
                                                          1999
                                                    ------------------
                  Income from subsidiary                    $ 258,887
                  Interest Income                              56,311
                                                    ------------------
                  Total Income                                315,198
                                                    ------------------
                  Meeting expenses                             21,939
                  Stock transfer fees                           2,206
                  Professional Fees                            66,522
                  Other Expenses                                  340
                                                    ------------------
                  Total Expenses                               91,007
                                                    ------------------
                  Net Income                                $ 224,191
                                                    ==================
<TABLE>
<CAPTION>
                                                                                                Year Ended
                                                                                -----------------------------------------------
                                                                                  September 30,                September 30,
                  Statement of Cash Flows                                             1999                         1998
                                                                                ------------------           ------------------
<S>                                                                                  <C>                          <C>
                  Cash flows from operations activities:
                    Net Income                                                       $    224,191                 $          -
                                                                                ------------------           ------------------
                    Adjustments to reconcile net income
                      provided by operations:
                      Increase(decrease)in accrued expenses                               (42,446)                      56,760
                      Equity in undistributed earnings of
                        subsidiary                                                       (258,887)
                      Increase in other assets                                            (13,662)                           -
                                                                                ------------------           ------------------
                                 Net cash provided by (used in) operating
                                   activities                                             (90,804)                      56,760
                                                                                ------------------           ------------------
                  Cash flows from investing activities:
                    Investment in Bank                                                          -                   (2,548,435)
                    Purchase of investment                                               (500,000)                           -
                    Repayment of ESOP loan                                                 22,791                            -
                                                                                ------------------           ------------------
                                 Net cash used in
                                   investing activities                                  (477,209)                  (2,548,435)
                                                                                ------------------           ------------------
                  Cash flows from financing activities:
                    Net proceeds from issuance of common
                      stock                                                                     -                    3,130,367
                                                                                ------------------           ------------------
                                 Net cash provided by financing
                                   activities                                                   -                    3,130,367
                                                                                ------------------           ------------------
                  Net increase in cash and cash equivalents                              (568,013)                     638,692
                  Cash and cash equivalents - beginning                                   638,692                            -
                                                                                ------------------           ------------------
                  Cash and cash equivalents - ending                                     $ 70,679                   $  638,692
                                                                                ==================           ==================
                  Supplement disclosure:
                  Non cash items:
                     Unrealized loss on securities available for
                        sale, net of deferred income taxes                              $ (12,203)                         $ -
                                                                                ==================           ==================
                  Loan to ESOP                                                          $       -             $         303,880
                                                                                ==================           ==================
                  Loan to RSP                                                           $ 159,364             $               -
                                                                                ==================           ==================
</TABLE>
                                       31
<PAGE>
                            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

<TABLE>
<CAPTION>
                                BOARD OF DIRECTORS
<S>                                       <C>
             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. AARONSTON, JR.                       EDGAR N. PEPPLER
           Realtor - Falconer & Bell               President - Peppler Funeral Home

                CHARLES E. ADAMS                           GARY N. PELEHATY
   Retired - Florence Township Administrator   President and Chief Executive Officer
</TABLE>
                           WILLIAM H. WAINWRIGHT, JR.
                             Retired - Loan Officer

                               EXECUTIVE OFFICERS
         GARY N. PELEHATY                            CHARLES ALESSI
President and Chief Executive Officer        Vice President, Chief Financial
                                             Officer, Secretary and Treasurer

                                    OFFICER
                              ELAINE C. DENELSBECK
                              Assistant Secretary

--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>                                              <C>

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 & Fisch, PC                            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
</TABLE>
                           --------------------------

The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 1999 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 January 25,
2000 at 10:00  a.m.  at the Days Inn,  1073 Route  206,  Bordentown,  New Jersey
08505.