FARNSWORTH BANCORP, INC.
                       2001 ANNUAL REPORT TO STOCKHOLDERS



<PAGE>



                            FARNSWORTH BANCORP, INC.
                               2001 ANNUAL REPORT



                                TABLE OF CONTENTS

                                                                            Page

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

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

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

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

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

Independent Auditors' Report ..............................................  F-1

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

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

Corporate Information .....................................................   12




<PAGE>


                            FARNSWORTH BANCORP, INC.

To Our Stockholders:

         On behalf of our Board of Directors  and  employees,  we are pleased to
present our 2001 Annual  Report to  Stockholders.  As you will see in the Annual
Report,  our net income  decreased  during  fiscal 2001 due,  in large part,  to
increased  compensation  and benefits expense we incurred in connection with the
increase in personnel required to support our expansion and growth.

         For the fiscal  year ended  September  30,  2001,  the  Company  earned
$10,099 or $.03 per share,  as  compared  to net income of  $124,051 or $.36 per
share,  for the fiscal year ended September 30, 2000. At September 30, 2001, the
Company's  assets  totaled  $67.5  million,  as  compared  to $58.1  million  at
September 30, 2000. Stockholders' equity was $5.7 million or $15.70 per share at
September  30,  2001,  as compared to  stockholders'  equity of $5.4  million or
$14.17 per share,  at September  30, 2000.  The increase in assets was primarily
due to an increase in loans receivable, net.

         In October 2001, Mr. Herman Gutstein, a director of the Bank since 1965
and most recently the Chairman of the Board of the Company and the Bank, retired
as a director and Chairman of the  Company's and the Bank's Boards of Directors.
Mr.  Gutstein was  appointed by the Board as a Director  Emeritus to the Company
and the Bank.  We wish to thank Mr.  Gutstein for his over 35 years of dedicated
service to the Bank and are  grateful  to have him remain  with the Company as a
Director  Emeritus.  Mr.  Joseph H.  Kelly was  appointed  to the  Boards of the
Company and the Bank in place of Mr. Gutstein.

         During this past year, we established a commercial real estate division
within the Bank. We hired an Assistant  Vice  President to run this new division
and we are very  pleased  with the  results  thus  far.  We expect to open a new
branch office in the fall of 2002 in Marlton, New Jersey. We have signed a lease
for approximately 2,200 square feet of space in a very desirable  location.  The
lease is conditioned  on the receipt of all required  regulatory  approvals.  In
addition,  we expect to have  interactive  Internet  banking for Peoples Savings
Bank on line in early 2002.

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

                                           Sincerely,


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


                                       1
<PAGE>

Corporate Profile

Farnsworth  Bancorp,  Inc.  (the  "Company")  is the parent  company for Peoples
Savings Bank (the "Bank"). The Company was formed as a New Jersey corporation in
May 1998 at the direction of the Bank in connection  with the Bank's  conversion
from a mutual  to stock  form of  ownership.  The  Company  acquired  all of the
capital stock issued by the Bank upon its conversion. On September 29, 1998, the
Bank completed its conversion in connection  with a $3.8 million  initial public
offering of the Company's common stock.  The Company is a grandfathered  unitary
savings and loan holding  company which,  under existing laws,  generally is not
restricted in the types of business  activities in which it may engage  provided
that the Bank  retains  a  specified  amount of its  assets  in  housing-related
investments.  At the present time, the Company conducts no significant  business
or operations of its own other than holding all of the outstanding  stock of the
Bank and  investing the  Company's  portion of the net proceeds  obtained in the
mutual-to-stock conversion.

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

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

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

Stock Price Information

The Company's common stock has been traded on the OTC-Electronic  Bulletin Board
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 24,
2001,  was  approximately  394.  This does not  reflect the number of persons or
entities who held stock in nominee or "street"  name through  various  brokerage
firms. At December 24, 2001, there were 360,866 shares  outstanding.  There were
no  dividends  paid by the Company  during the fiscal year ended  September  30,
2001.  The  Company's  ability  to pay  dividends  to  stockholders  is  largely
dependent upon the dividends it receives from the Bank. The Bank may not declare
or pay a cash dividend on any of its stock if the effect thereof would cause the
Bank's  regulatory  capital to be reduced below (1) the amount  required for the
liquidation  account  established in connection with the Conversion,  or (2) the
regulatory requirements imposed by the OTS.


                                       2
<PAGE>

                    Selected Financial Ratios and Other Data

<TABLE>
<CAPTION>
                                                          At or For the Years Ended
                                                                 September 30,
                                                               -----------------
                                                               2001        2000
                                                               ----        ----
<S>                                                          <C>         <C>
Return on average assets ...............................       0.02%       0.22%
Return on average equity ...............................       0.18        2.31
Average equity to average assets ratio .................       9.02        9.39
Equity to assets at period end .........................       8.39        9.26
Net interest rate spread ...............................       2.60        2.80
Net yield on average interest-earning assets ...........       3.08        3.29
Non-performing loans to total assets ...................       0.03        0.38
Allowance for loan loss to total loans .................       0.46        0.46

</TABLE>

                                       3
<PAGE>

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

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

General

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

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

Market Risk Analysis

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

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

                                       4
<PAGE>

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, 2001, as calculated by
the OTS, based on quarterly information voluntarily provided to the OTS.

        Changes                 Net Portfolio Value
       In Market        ----------------------------------
    Interest Rates      $ Amount    $ Change     % Change   NPV Ratio(1)
    --------------      --------    ---------    ---------  -----------
   (basis points)(2)    (Dollars in thousands)
         +300            $4,589      $(4,075)       (47)%       6.90%
         +200             5,969       (2,694)       (31)%       8.76%
         +100             7,381       (1,282)       (15)%      10.57%
            0             8,663           --         --%       12.12%
         -100             9,394          731          8%       12.95%
         -200             9,805        1,142         13%       13.36%

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

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

         The Bank's  Board of Directors  review the Bank's  asset and  liability
policies on an annual basis.  The Board meets  quarterly to review interest rate
risk and  trends,  as well as  liquidity  and capital  ratios and  requirements.
Management administers the policies and determinations of the board of directors
with respect to the Bank's asset and liability  goals and  strategies.  The Bank

                                       5
<PAGE>

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  $9.4  million  or 16.2% to $67.5  million  at
September 30, 2001 from $58.1  million at September  30, 2000.  The increase was
primarily   attributable  to  a  $5.1  million  increase  in  the  Bank's  loans
receivable,  net, a $100,000  increase in available for sale securities,  a $6.1
million  increase in cash and due from banks,  partially offset by a decrease of
$1.7 million in held-to-maturity  investment  securities and a $100,000 decrease
in equipment.  The Bank's total  liabilities  increased $9.1 million or 17.3% to
$61.8  million at September  30, 2001 from $52.7  million at September 30, 2000.
The increase was primarily attributable to a $13.4 million increase in deposits,
offset by a $4.4 million decrease in FHLB advances. Deposits increased primarily
due to stock market  conditions  and the  resulting  shift of  investments  into
certificates of deposit and savings  accounts.  The increase in loans receivable
was due to greater  marketing and increased  demand in the Bank's primary market
area. The Bank is  aggressively  seeking to grow its commercial real estate loan
portfolio  and has hired an  experienced  commercial  real  estate  lender.  The
decrease in mortgage-backed securities was a result of maturing instruments.

         Retained  earnings was 3.8% of total assets at September  30, 2001,  as
compared to 4.4% of total  assets at  September  30,  2000.  The decrease in the
percentage was due to total assets  increasing while retained  earnings remained
constant with the prior year.

                                       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,
                                                    ---------------------------------------------------------------
                                                               2001                             2000
                                                    -----------------------------    ------------------------------
                                                                         Average                            Average
                                                    Average               Yield/     Average                 Yield/
                                                    Balance   Interest     Cost      Balance   Interest       Cost
                                                    -------   --------     ----      -------   --------       ----
                                                                       (Dollars in thousands)
<S>                                               <C>         <C>         <C>       <C>         <C>         <C>
Interest-earning assets:
    Loans receivable(1)                             $42,202     $3,238       7.67%   $39,951     $3,046        7.62%
    Investment securities(2)                         16,157        872       5.40     14,464        835        5.77
                                                    -------     ------     ------    -------     ------      ------
        Total interest-earning assets                58,359      4,110       7.04     54,415      3,881        7.13
Noninterest-earning assets                            2,630         --                 2,739         --
                                                    -------     ------               -------     ------
        Total assets                                $60,988     $4,110               $57,154     $3,881
                                                    =======     ======               =======     ======
Interest-bearing liabilities:
    NOW accounts                                     $7,365       $100       1.36    $ 6,245       $109        1.75
    Savings accounts                                  8,119        192       2.36      7,760        187        2.40
    Money market accounts                             2,451         63       2.57      3,063         82        2.67
    Certificates of deposit                          29,424      1,647       5.60     23,059      1,209        5.25
    FHLB - Advances                                   4,677        311       6.65      8,184        505        6.17
                                                    -------     ------     ------    -------     ------      ------
        Total interest-bearing liabilities           52,036      2,313       4.44     48,311      2,092        4.33
                                                                           ------
Non interest-bearing liabilities                      3,448                            3,476
                                                    -------                          -------
        Total liabilities                            55,484                           51,787
                                                    -------                          -------
Stockholders' equity                                  5,504                            5,367
                                                    -------                          -------
        Total liabilities and retained earnings     $60,988     $2,313               $57,154     $2,092
                                                    =======     ======               =======     ======
Net interest income                                             $1,797                           $1,789
                                                                ======                           ======
Interest rate spread(3)                                                      2.60%                             2.80%
                                                                           ======                            ======
Net yield on interest-earning assets(4)                                      3.08%                             3.29%
                                                                           ======                            ======
Ratio of average interest-earning assets
    to average interest-bearing liabilities                                112.22%                           112.63%
                                                                           ======                            ======
</TABLE>

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

                                       7
<PAGE>

Rate/Volume Analysis

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

                                                Year Ended September 30,
                                                       2001 vs 2000
                                           -------------------------------------
                                                    Increase (Decrease)
                                                          Due to
                                           -------------------------------------
                                                               Rate/
                                           Volume      Rate    Volume      Net
                                           ------      ----    ------      ---
                                                      (In thousands)
Interest income:
    Loans receivable ...................    $ 172     $  19     $   1     $ 192
    Investment securities ..............       97       (54)       (6)       37
                                            -----     -----     -----     -----
        Total interest income ..........    $ 269     $ (35)    $  (5)    $ 229
                                            =====     =====     =====     =====

Interest expense:
    NOW accounts .......................    $  18     $ (24)    $  (4)    $ (10)
    Savings account ....................        9        (3)     --           6
    Money market accounts ..............      (16)       (3)        1       (18)
    Certificates of deposits ...........      334        81        22       437
    FHLB advances ......................     (216)       39       (17)     (194)
                                            -----     -----     -----     -----
        Total interest expense .........    $ 129     $  90     $   2     $ 221
                                            =====     =====     =====     =====

Change in net interest income ..........    $ 140     $(125)    $  (7)    $   8
                                            =====     =====     =====     =====

                                       8
<PAGE>

Results of Operations

         Net Income. The Bank's net income decreased $114,000 for the year ended
September 30, 2001,  to $10,000 from  $124,000 for the year ended  September 30,
2000.  This  decrease  was  primarily  attributable  to a $209,000  increase  in
noninterest expense and a decrease in net interest income of $23,000,  partially
offset by an increase in non-interest income of $60,000 and a decrease in income
taxes of $58,000.

         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 and borrowings. Net
interest  income  depends on the volume of and rates earned on  interest-earning
assets and the volume of and rates paid on interest-bearing liabilities.

         Net interest income after provision for loan losses  decreased  $23,000
or 1.3%, to $1,756,000 for the year ended  September 30, 2001. This decrease was
primarily due to the increase in the provision for loan losses,  which increased
by  approximately  $31,000 from $10,000 for the fiscal year ended  September 30,
2000, to $41,369 for the fiscal year ended September 30, 2001.

         The increase in the average balance of interest-earning  assets of $4.0
million primarily reflects increases of approximately $2.3 million in the Bank's
average balance of loans and $2.6 million in other assets, partially offset by a
decrease of $1.0 million in the average balance of securities.

         The increase in average  interest-bearing  liabilities  of $3.7 million
reflects   increases  of  $1.1  million  in  the  Bank's   average   balance  of
interest-bearing  NOW  accounts  and $6.1  million  in the  average  balance  of
savings,  money  market  and  certificates  of  deposit,  partially  offset by a
decrease of $3.5 million in the average balance of FHLB borrowings.

         Provision  for Loan Losses.  Provision  for loan losses was $41,000 for
the year ended  September  30,  2001,  as compared to $10,000 for the year ended
September 30, 2000.  The provision is  established  to adjust the balance of the
allowance for loan losses to a level management feels is sufficient based on the
risk characteristics of the loan portfolio.

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

         Noninterest Income.  Noninterest income increased $61,000 or 23.9% from
$255,000  for the year ended  September  30,  2000 to  $316,000  for 2001.  This
increase  in the  Bank's  noninterest  income  was due to a gain on the  sale of
securities  of  $78,000,  an  increase  of $18,000  in fees and other  services,
partially offset by a decrease in gain on the sale of REO of $36,000.

                                        9
<PAGE>

         Noninterest  Expense.  Noninterest  expense increased $209,000 or 11.3%
from $1.9 million for the year ended  September  30,  2000,  to $2.1 million for
2001.  The  increase  in the  Bank's  noninterest  expense  was due to a $71,000
increase in the Bank's  occupancy and equipment  expense,  a $9,000  increase in
other noninterest expense and an increase of $133,000 in the Bank's compensation
and  benefits,  partially  offset by a decrease of $4,000 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 $96,000 for bank processing
fees.  The  increase in  compensation  and  benefits  expense was due in part to
additional personnel required to support the Bank's growth.

         Income Tax Expense.  Income tax expense  decreased $58,000 from $62,000
for the year ended  September  30,  2000 to $4,000 for 2001.  This  decrease  in
income  tax  expense  is due to the  decrease  in the  Bank's  pretax  income of
$172,000  from $186,000 for 2000 to $14,000 for 2001.  The Bank's  effective tax
rate was  28.5%  and 33% for the  years  ended  September  30,  2001  and  2000,
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 Bank's  primary  sources of funds are deposits,  repayment of loans
and  mortgage-backed   securities,   maturities  of  investment  securities  and
interest-bearing  deposits with other banks, advances from the FHLB of New York,
and funds  provided from  operations.  While  scheduled  repayments of loans and
mortgage-backed   securities  and   maturities  of  investment   securities  are
predictable  sources of funds,  deposit flows,  and loan prepayments are greatly
influenced  by the general  level of interest  rates,  economic  conditions  and
competition.  The Bank uses its liquidity resources principally to fund existing
and future loan commitments, maturing certificates of deposit and demand deposit
withdrawals,  to invest in other interest-earning assets, to maintain liquidity,
and meet operating expenses.

         Net cash provided by the Bank's operating  activities (the cash effects
of  transactions  that enter into the Bank's  determination  of net income e.g.,
non-cash items,  amortization and  depreciation,  provision for loan losses) for
the year ended September 30, 2001 totaled  $254,000,  an increase of $113,000 as
compared to 2000.

         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,  2001,  totaled  $3.2  million,  an  increase of $2.4
million.  The increase in cash used was  primarily  attributable  to funding net
loan growth of $5.3  million in 2001 as compared to $1.2 million in 2000 as well
as net purchases of held-to-maturity  investment securities in 2001 of $590,000.
The increase in cash was partially offset by

                                       10
<PAGE>

paydowns,  maturities and sales, net of purchases,  of investment  securities of
$2.2 million in 2001 and  redemption  of Federal Home Loan Bank stock of $85,000
in 2001.

         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,
2001, totaled $9.1 million,  an increase of $7.1 million as compared to the year
ended  September 30, 2000.  This increase in cash was primarily  attributable to
increased deposits of $13.5 million offset by repayment of FHLB advances of $4.4
million, net of advances.

         Approximately  $29.4 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.

                                       11

<PAGE>

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

   Certified Public Accountants



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


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


We have audited the accompanying  consolidated statements of financial condition
of Farnsworth Bancorp,  Inc. and Subsidiaries as of September 30, 2001 and 2000,
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 auditing standards generally accepted
in the  United  States of  America.  Those  standards  require  that we plan and
perform the audit to obtain reasonable  assurance about whether the consolidated
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  consolidated  financial  statements.  An audit also includes  assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall  consolidated  financial  statement  presentation.  We
believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly, in all material respects,  the financial position of Farnsworth Bancorp,
Inc. and  Subsidiaries  at September 30, 2001 and 2000, and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.


November 27, 2001

                                                /s/Kronick Kalada Berdy & Co.




190 Lathrop Street-Kingston, PA 18704 - (570) 283-2727 - (570) 283-1670 Telefax
--------------------------------------------------------------------------------

301 Market Street       101 West Broad Street           24 N. Seventh Street
Berwick, PA 18603        Hazleton, PA 18201             Stroudsburg, PA 18360
 (570) 759-8625            (570) 459-1373                  (570) 420-9500


                                      F-1
<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                          September 30, 2001 and 2000

<TABLE>
<CAPTION>
                                               ASSETS                                 2001           2000
                                               ------                            ------------    ------------

<S>                                                                            <C>             <C>
Cash and due from banks                                                          $  9,282,084    $  3,163,345
Securities available for sale                                                       8,824,145       8,760,132
Securities held to maturity (fair value approximates $2,105,955 and $3,572,703
  at September 30, 2001 and 2000, respectively)                                     2,058,245       3,741,506
Loans receivable, net                                                              44,987,076      39,850,070
Accrued interest receivable                                                           318,685         419,459
Federal Home Loan Bank of New York stock at
  cost, substantially restricted                                                      372,600         457,800
Premises and equipment                                                              1,481,675       1,575,974
Deferred income taxes                                                                       -          66,611
Prepaid income taxes                                                                   15,292               -
Real estate owned                                                                     130,292               -
Other assets                                                                           58,642          60,594
                                                                                 ------------    ------------
        Total assets                                                             $ 67,528,736    $ 58,095,491
                                                                                 ============    ============

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

Deposits:
   Non interest bearing                                                          $  2,752,941    $  2,336,530
   Interest bearing                                                                55,403,494      42,398,105
Federal Home Loan Bank advances                                                     3,224,606       7,597,286
Advances by borrowers for taxes and insurance                                         240,168         212,302
Accrued income taxes                                                                        -             469
Deferred income taxes                                                                  80,781               -
Accrued interest payable                                                               61,009          72,492
Accounts payable and other accrued expenses                                           100,297          97,298
                                                                                 ------------    ------------
        Total liabilities                                                          61,863,296      52,714,482
                                                                                 ------------    ------------
Preferred stock $.10 par value, 1,000,000 shares
  authorized;  none issued and outstanding
Common stock $.10 par value, 5,000,000 shares
  authorized;  379,858 shares issued; shares
  outstanding 360,866                                                                  37,985          37,985
Additional paid in capital                                                          3,396,262       3,396,262
Treasury stock at cost, 18,992 shares                                                (185,172)       (185,172)
Retained earnings substantially restricted                                          2,585,704       2,575,605
Common stock acquired by employee stock
  ownership plan (ESOP)                                                              (204,774)       (235,154)
Common stock acquired by restricted stock plan (RSP)                                 (105,444)       (127,764)
Accumulated other comprehensive income, unrealized
  appreciation (depreciation) on available for sale securities,
  net of income taxes                                                                 140,879         (80,753)
                                                                                 ------------    ------------
        Total stockholders' equity                                                  5,665,440       5,381,009
                                                                                 ------------    ------------
        Total liabilities and stockholders' equity                               $ 67,528,736    $ 58,095,491
                                                                                 ============    ============
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                      F-2
<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                          September 30, 2001 and 2000

<TABLE>
<CAPTION>
                                                                       2001           2000
                                                                   -----------    -----------
<S>                                                                <C>            <C>
Interest income:
  Loans receivable                                                   $ 3,238,476    $ 3,046,255
  Investments                                                            871,699        834,707
                                                                     -----------    -----------
      Total interest income                                            4,110,175      3,880,962
                                                                     -----------    -----------
Interest expense:
  Deposits                                                             2,002,141      1,586,914
  Federal Home Loan Bank advances                                        310,773        505,024
                                                                     -----------    -----------
      Total interest expense                                           2,312,914      2,091,938
                                                                     -----------    -----------
      Net interest income                                              1,797,261      1,789,024
Provision for loan losses                                                 41,369         10,000
                                                                     -----------    -----------
      Net interest income after provision
        for loan losses                                                1,755,892      1,779,024
                                                                     -----------    -----------
Noninterest income:
  Fees and other service charges                                         237,743        219,635
  Gain on sale of real estate owned                                            -         35,664
  Net realized gains on sale of available for sale
    securities                                                            77,920              -
                                                                     -----------    -----------
      Total noninterest income                                           315,663        255,299
                                                                     -----------    -----------
Noninterest expense:
  Compensation and benefits                                            1,002,433        869,584
  Occupancy and equipment                                                482,569        411,782
  Federal insurance premiums and assessments                               8,833         12,682
  Other                                                                  563,308        554,356
                                                                     -----------    -----------
      Total noninterest expense                                        2,057,143      1,848,404
                                                                     -----------    -----------
Income before provision for income taxes                                  14,412        185,919

Provision for income taxes                                                 4,313         61,868
                                                                     -----------    -----------
      Net income                                                          10,099        124,051

Other comprehensive income
  Unrealized gain on securities available for sale, arising during
    the period, net of taxes of  $124,668, 2001; $30,736, 2000           273,552         54,641
  Reclassification adjustment, net of taxes of $26,000                   (51,920)             -
                                                                     -----------    -----------
      Comprehensive income                                           $   231,731    $   178,692
                                                                     ===========    ===========

Net income per common shares: Basic and Diluted                      $      0.03    $       .36
                                                                     ===========    ===========
Weighted average number of shares outstanding during the year
   Basic                                                                 327,578        337,336
                                                                     ===========    ===========
   Diluted                                                               327,960        337,336
                                                                     ===========    ===========
</TABLE>

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

                                       F-3
<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 For the Years Ended September 30, 2001 and 2000

<TABLE>
<CAPTION>

                                                                                                        Appreciation
                                                              Retained         Common       Common     (Depreciation)      Total
                                Additional                    Earnings         Stock        Stock      on Securities       Stock-
                       Common     Paid in      Treasury     Substantially     Acquired     Acquired    Available for       holders'
                       Stock      Capital       Stock         Restricted       By ESOP      By RSP    Sale, Net of Tax     Equity
                      --------- -----------   -----------  ---------------   ----------- -----------  ----------------   -----------
<S>                 <C>       <C>           <C>             <C>            <C>         <C>               <C>           <C>
Balance at
  September 30, 1999  $ 37,985  $3,396,262    $        -      $ 2,451,554    $ (303,880) $ (159,364)       $ (135,394)   $5,287,163

Net income for the
  year ended
  September 30, 2000         -           -                        124,051             -                             -       124,051

Acquisition of
  treasury stock             -           -      (185,172)               -             -                             -      (185,172)
RSP shares allocated         -           -                              -             -      31,600                 -        31,600
Unrealized
  appreciation on
  securities
  available for sale,
  net of tax                 -           -                              -             -           -            54,641        54,641
ESOP shares allocated                                                            68,726           -                 -        68,726
                      --------- -----------   -----------  ---------------   ----------- -----------  ----------------   -----------
Balance at
  September 30, 2000    37,985   3,396,262      (185,172)       2,575,605      (235,154)   (127,764)          (80,753)    5,381,009

Net income for the
  year ended
  September 30, 2001         -           -                         10,099             -                             -        10,099

RSP shares allocated         -           -                              -             -      22,320                 -        22,320
ESOP shares allocated        -           -             -                -        30,380           -                 -        30,380
Unrealized
  appreciation
  on securities
  available for sale,
  net of tax                 -           -                              -             -           -           221,632       221,632
                      --------- -----------   -----------  ---------------   ----------- -----------  ----------------   -----------
Balance at
  September 30, 2001  $ 37,985  $3,396,262    $ (185,172)     $ 2,585,704    $ (204,774) $ (105,444)        $ 140,879    $5,665,440
                      ========= ===========   ===========  ===============   =========== ===========  ================   ===========
</TABLE>

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

                                       F-4
<PAGE>
                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                          September 30, 2001 and 2000

<TABLE>
<CAPTION>

                                                             2001             2000
                                                       -------------    -------------
<S>                                                  <C>              <C>
Cash flows from operating activities:
  Net income                                            $      10,099    $     124,051
                                                        -------------    -------------
Adjustments to reconcile net income to net cash
  provided by operating activities:
    Depreciation                                               98,916           82,651
    Provision for loan losses                                  41,369           10,000
    Net gain on sale of investments and assets                (77,920)         (35,664)
    Stock compensation                                         52,700          100,326
    Decrease in accrued interest receivable                   100,774            4,247
    Decrease in prepaid expenses and other assets               1,952            9,248
    (Decrease) increase in advances by borrowers               27,866           (1,351)
    Increase (decrease) in income taxes                         7,187          (75,671)
    Decrease in accrued interest payable                      (11,483)         (24,627)
    Increase (decrease) in accounts payable
      and other accrued liabilities                             2,999          (51,956)
                                                        -------------    -------------
        Total adjustments                                     244,360           17,203
                                                        -------------    -------------
        Net cash provided by operations                       254,459          141,254
                                                        -------------    -------------
Cash flows from investing activities:
  Net increase in loans receivable                         (5,308,667)      (1,234,804)
  Redemption and principal payments of
    held to maturity securities                               552,833          287,148
  Purchase of held to maturity securities                  (1,143,538)               -
  Purchase of available for sale securities               (30,338,035)               -
  Proceeds from sale of available for sale securities      32,971,984                -
  Proceeds from sale of real estate owned                           -          330,000
  Purchase of Federal Home Loan Bank stock                          -          (39,100)
  Redemption of Federal Home Loan Bank stock                   85,200                -
  Purchase of premises and equipment                           (4,617)        (147,904)
                                                        -------------    -------------
        Net cash used in investing activities              (3,184,840)        (804,660)
                                                        -------------    -------------
Cash flows from financing activities:
  Increase in savings accounts and demand deposits         13,421,800        2,244,473
  Federal Home Loan Bank advances                          36,501,488      102,299,893
  Federal Home Loan Bank advances, repayments             (40,874,168)    (102,415,547)
  Purchase of treasury stock                                        -         (185,172)
                                                        -------------    -------------
        Net cash provided by financing activities           9,049,120        1,943,647
                                                        -------------    -------------
  Net increase in cash and due from banks                   6,118,739        1,280,241

  Cash and due from banks at beginning of year              3,163,345        1,883,104
                                                        -------------    -------------
  Cash and due from banks at end of year                $   9,282,084    $   3,163,345
                                                        =============    =============
  Supplement disclosure:
    Cash paid during the period for:
    Interest                                            $   2,324,397    $   2,116,565
                                                        =============    =============
    Income taxes                                        $       1,013    $     138,092
                                                        =============    =============
  Non cash items:
    Unrealized gain on securities available for
      sale, net of deferred income taxes                $     221,632    $      54,641
                                                        =============    =============
    Acquisition of real estate in settlement of loans   $     130,292    $     195,625
                                                        =============    =============
    Transfer of held-to-maturity securities to
      available-for-sale portfolio                      $   2,273,966
                                                        =============
</TABLE>
                  The accompanying notes are an integral part
                  of these consolidated financial statements.

                                       F-5
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

        Farnsworth  Bancorp,  Inc. and  Subsidiaries  (together  the  "Company")
        operate three 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
        businesses and middle-income individuals.  In 2000, the Company formed a
        new subsidiary,  Peoples  Financial  Services,  Inc.  Peoples  Financial
        Services,  Inc. was  organized  for the purpose of providing  securities
        brokerage and investment  advisory services and products to customers of
        the Bank.

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

        The  consolidated  financial  statements,  which have been  prepared  in
        conformity with accounting  principles  generally accepted in the United
        States of America,  include  the  accounts of the Company and its wholly
        owned  subsidiaries,  Peoples  Savings  Bank (the  "Bank")  and  Peoples
        Financial  Services,  Inc.  All  significant  intercompany  accounts and
        transactions  have been  eliminated in  consolidation.  In preparing the
        financial  statements,  management  is  required to make  estimates  and
        assumptions  that affect the reported  amounts of assets and liabilities
        and  disclosure of contingent  assets and  liabilities as of the date of
        the  statements  of  financial  condition  and the  reported  amounts of
        revenues and expenses for the reporting  periods.  Actual  results could
        differ  significantly from those estimates.  Material estimates that are
        particularly  susceptible to significant changes in the near term relate
        to the determination of the allowance for loan losses,  the valuation of
        foreclosed  real  estate  (real  estate  owned)  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 and real estate  activity  is  concentrated  in real
        estate  and loans  secured  by real  estate  located in the State of New
        Jersey.  The Bank's loan  portfolio is  predominantly  made up of 1 to 4
        family unit first mortgage loans in Burlington  County.  These loans are
        typically  secured by first lien positions on the respective real estate
        properties and are subject to the Bank's loan underwriting  policies. In
        general,  the Bank's loan  portfolio  performance  is dependent upon the
        local economic conditions.

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

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

                                       F-6
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        Cash Flow Reporting
        -------------------

        For  the  purpose of presentation  in the statements of cash flows,  due
        from bank is considered to be a cash equivalent.

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

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

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

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

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

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

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

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

        Loans  receivable  that  management  has the intent and  ability to hold
        until  maturity or pay-off are reported at their  outstanding  principal
        adjusted for 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.

        Loans classified as impaired,  if any, are measured based on the present
        value of expected future cash flows  discounted at the loan's  effective
        interest  rate, or as a practical  expedient,  at the loan's  observable
        market  price  or the  fair  value  of the  collateral  if the  loan  is
        collateral  dependent.  A loan  evaluated for impairment is deemed to be
        impaired when based on current  information  and events,  it is probable
        that the Bank will be unable to collect all amounts due according to the
        contractual  terms  of the  loan  agreement.  All  loans  identified  as
        impaired  are  evaluated  independently.  The  accrual  of  interest  on
        impaired  loans is  discontinued  when,  in  management's  opinion,  the
        borrower  may be  unable  to meet  payments  as they  become  due.  When
        interest  accrual  is  discontinued,  all  unpaid  accrued  interest  is
        reversed.  Interest income is subsequently recognized only to the extent
        cash payments are received.  No loans were  identified as impaired as of
        September 30, 2001 and 2000, respectively.

                                       F-7
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        Loans Receivable (continued)
        ----------------

        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.

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

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

        Real Estate Owned
        -----------------

        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.  Management periodically performs valuations, and an allowance
        for losses is  established  by a charge to  operations  if the  carrying
        value of a property exceeds its fair value less estimated  selling cost.
        Gains and losses from sale of these  properties  are  recognized as they
        occur.

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

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

        Reclassifications
        -----------------

        Certain amounts in the 2000 financial  statements have been reclassified
        to conform to the 2001 presentation.

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

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

        At the time of the  conversion,  the Bank, in order to grant priority to
        eligible  depositors in the event of future  liquidation,  established a
        liquidation  account  of  $2,225,315,  an amount  equal to its total net
        worth as of June 30, 1998, the date of the latest statement of financial
        condition  appearing in the final  prospectus.  The liquidation  account
        will be  maintained  for the  benefit of  eligible  account  holders who
        continue to maintain  their  accounts at the bank after the  conversion.
        The  liquidation  account  will be reduced  annually  to the extent that
        eligible  account  holders  have  reduced  their  qualifying   deposits.
        Subsequent increases in the deposit account will not restore an eligible
        account holder's  interest in the liquidation  account.  In the unlikely
        event of a complete  liquidation,  each eligible  account holder will be
        entitled to receive a distribution  from the  liquidation  account in an
        amount proportionate to the account holder's current adjusted qualifying
        balances.  The balance of the liquidation  account on September 30, 2001
        and 2000 has not been determined.

                                       F-8
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        The ability of Farnsworth Bancorp, Inc. 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").

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

        The carrying  amounts and fair values of these  investments at September
        30, 2001 and 2000 are summarized as follows:

<TABLE>
<CAPTION>
                                                                        September 30, 2001
                                                     -----------------------------------------------------------------
                                                        Carrying             Gross     Unrealized           Fair
                                                                     ---------------------------------
                                                         Value           Gains             Losses           Value
                                                     --------------- --------------    ---------------  --------------
<S>                                                    <C>             <C>             <C>              <C>
        Held to maturity:
          Mortgage backed securities                     $2,058,245      $  47,848       $        138      $2,105,955
                                                     =============== ==============    ===============  ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                         September 30, 2000
                                                      ---------------------------------------------------------------
                                                        Carrying         Gross          Unrealized         Fair
                                                                     --------------------------------
                                                          Value          Gains            Losses           Value
                                                      -------------- --------------    --------------  --------------
<S>                                                   <C>              <C>               <C>            <C>
         Held to maturity:
           U.S. Government and agency securities        $ 2,173,738      $       -         $ 152,388      $2,021,350
           Municipal securities                              99,330          8,970                 -         108,300
           Mortgage backed securities                     1,468,438          1,240            26,625       1,443,053
                                                      -------------- --------------    --------------  --------------
                                                        $ 3,741,506      $  10,210         $ 179,013      $3,572,703
                                                      ============== ==============    ==============  ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                         September 30, 2001
                                                      ---------------------------------------------------------------
                                                        Amortized        Gross          Unrealized         Fair
                                                                     --------------------------------
                                                          Cost           Gains            Losses           Value
                                                      -------------- --------------    --------------  --------------
<S>                                                   <C>              <C>                <C>           <C>
         Available for sale:
           U.S. Government and agency securities        $ 1,749,754      $  41,871          $  1,250      $1,790,375
           Municipal securities                              99,387         16,113                 -         115,500
           Corporate bonds                                1,413,310              -             7,498       1,405,812
           Mortgage backed securities                     5,340,327        107,131                 -       5,447,458
           Equity securities                                  1,243         63,757                 -          65,000
                                                      -------------- --------------    --------------  --------------
                                                        $ 8,604,021      $ 228,872          $  8,748      $8,824,145
                                                      ============== ==============    ==============  ==============
</TABLE>
<TABLE>
<CAPTION>
                                                                         September 30, 2000
                                                    -----------------------------------------------------------------
                                                       Amortized         Gross           Unrealized        Fair
                                                                     ---------------------------------
                                                         Cost            Gains             Losses          Value
                                                    ---------------- --------------    --------------- --------------
<S>                                                    <C>               <C>              <C>           <C>
          Available for sale securities:
            U.S. Government and agency securities        $8,462,833        $     -          $ 234,447     $8,228,386
            Corporate bonds                                 419,525              -             33,965        385,560
            Equity securities                                 3,339        142,847                  -        146,186
                                                    ---------------- --------------    --------------- --------------
                                                         $8,885,697      $ 142,847          $ 268,412     $8,760,132
                                                    ================ ==============    =============== ==============
</TABLE>
                                       F-9
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        The schedule of maturities of available for sale securities at September
        30, 2001 is as follows:

                                                     Amortized         Fair
                                                        Cost           Value
                                                    ------------   ------------
           Due in one year or less                  $   749,754     $  791,625
           Due after one to five years                        -              -
           Due after five to ten years                1,000,000        998,750
           Due after ten years                        1,512,697      1,521,312
                                                    ------------   ------------
                                                      3,262,451      3,311,687
                  Mortgage backed securities          5,340,327      5,447,458
                                                    ------------   ------------
                                                    $ 8,602,778    $ 8,759,145
                                                    ============   ============


      There is no schedule of maturities for mortgage backed securities  because
      these investments are subject to prepayment.  On October 1, 2001, the Bank
      adopted Statement of Financial Accounting Standard No. 133 "Accounting for
      Derivative  Instruments  and Hedging  Activities." In accordance with FASB
      133, the Bank transferred $2,273,966 of its held-to-maturity  portfolio to
      available  sale.  The unrealized  loss of $80,332 on the  held-to-maturity
      securities  that were  transferred to  available-for-sale  was reported in
      accumulated other comprehensive income.

      Mortgage-backed  securities  with a  carrying  value  and  fair  value  of
      $261,423 and  $263,033 at September  30, 2001 and $365,500 and $361,483 at
      September  30, 2000 are pledged as security for  deposits of  governmental
      entities under the provisions of Governmental Unit Deposit Protection Act.

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

      Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                                                             2001           2000
                                                         ------------   ------------
<S>                                                    <C>            <C>
           First mortgage loans
               Secured by one to four family residence   $27,680,636    $26,507,971
               Construction loans                            826,697        861,398
               Commercial real estate                      6,952,000      4,801,539
                                                         ------------   ------------
                                                          35,459,333     32,170,908
                                                         ------------   ------------
             Less:
               Loans in process - real estate               (102,833)      (377,442)
               Deferred loan origination fees net of
                 Costs of $105,499 and $106,313             (248,199)      (196,243)
                                                         ------------   ------------
           Total first mortgage loans                     35,108,301     31,597,223
                                                         ------------   ------------

           Consumer and other loans:
               Home equity                                 9,416,542      7,897,375
               Personal loans                                286,844        253,542
               Loans secured by savings                      172,404        161,113
               Commercial business loans                     151,855         70,672
               Automobile                                     58,130         56,145
                                                         ------------   ------------
           Total consumer and other loans                 10,085,775      8,438,847
                                                         ------------   ------------
           Total loans                                    45,194,076     40,036,070
           Less allowance for loan losses                   (207,000)      (186,000)
                                                         ------------   ------------
                                                         $44,987,076    $39,850,070
                                                         ============   ============
</TABLE>
                                       F-10
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


4.    Loans Receivable (continued)
      ----------------------------

      At September 30, 2001 and 2000,  nonaccrual  loans for which  interest had
      been discontinued totaled  approximately $000 and $125,000,  respectively.
      Interest income actually recognized is summarized as follows:

                                                             2001       2000
                                                          --------    -------
           Interest income that would have
             been recognized                              $  8,039    $10,097

           Income recognized                                (7,687)         -
                                                          --------    -------
           Interest income foregone                       $    352    $10,097
                                                          ========    =======



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

                                                            2001        2000
                                                          --------    --------
             Allowance for loan losses:
                   Beginning of year                      $186,000    $176,000

                   Additional provisions                    41,369      10,000

                   Charge offs                             (20,369)          -
                                                          --------    --------
                   End of year                            $207,000    $186,000
                                                          ========    ========

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

                                                            2001       2000
                                                          ---------   --------

              Beginning of year                           $ 634,071   $603,931

              Loans originated                               89,739    117,850

              Collection of principal                      (123,241)   (87,710)
                                                          ---------   --------
              End of year                                 $ 600,569   $634,071
                                                          =========   ========

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

5.      Accrued Interest Receivable
        ---------------------------

        Accrued interest receivable is summarized as follows:

                                                             2001        2000
                                                          ---------   ---------

              Loans receivable                            $ 259,136   $ 239,367

              Mortgage backed securities                     38,922       7,854

              Other securities                               20,627     172,238
                                                          ---------   ---------
                                                          $ 318,685   $ 419,459
                                                          =========   =========

                                       F-11
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


6.      Premises and Equipment
        ----------------------

        Premises  and  equipment  are  summarized  by  major  classification  as
        follows:

<TABLE>
<CAPTION>
                                                     2001           2000            Useful lives
                                                  -----------  ------------    -----------------
<S>                                             <C>           <C>             <C>
             Land                                 $  125,553    $  125,553
             Office building (Bordentown)          1,355,912     1,355,912       25 to 40 years
             Office building (Florence)               53,032        53,032       25 to 40 years
             Office building (Mount Laurel)           36,376        36,376       25 to 40 years
             Furniture, fixtures and equipment       566,514       561,897        5 to 7 years
                                                  ----------   -----------
                                                   2,137,387     2,132,770
             Less accumulated depreciation           655,712       556,796
                                                  ----------    ----------
                                                  $1,481,675    $1,575,974
                                                  ==========    ==========
</TABLE>

        Depreciation  charged to  operations  was $98,916 and  $88,182  for  the
        years ended 2001 and 2000, respectively.

7.      Deposits
        --------

        Deposits as of September 30 are summarized as follows:

                                                2001                 2000
                                            ------------       -------------
          NOW accounts                      $11,633,929        $  7,884,822
          Money market accounts               2,669,202           3,079,901
          Passbook and club accounts          6,530,036           7,505,056
          Non interest bearing                2,752,941           2,336,530
                                            ------------       -------------
          Subtotal                           23,586,108          20,806,309
                                            ------------       -------------
          Certificates of deposit:
            2.01% to 3.0%                        82,713                   -
            3.01% to 4.0%                     6,572,234             300,148
            4.01% to 5.0%                     8,177,818           2,246,837
            5.01% to 6.0%                    12,672,686          11,362,374
            6.01% to 7.0%                     7,064,876          10,018,967
                                            ------------       -------------
          Subtotal                           34,570,327          23,928,326
                                            ------------       -------------
                                            $58,156,435        $ 44,734,635
                                            ============       =============

        Deposits  of  officers  and  directors  totaled  $345,700  in 2001.  The
        aggregate  amount  of  jumbo  certificates  of  deposit  with a  minimum
        denomination of $100,000 was approximately  $2,269,000 and $3,740,000 at
        September  30,  2001 and 2000.  These  certificates  of  deposit  do not
        receive  preferential rates of interest.  Deposits in excess of $100,000
        are not federally insured.

                                       F-12
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

7.     Deposits (Continued)
       ---------

        As of September 30, 2001 and 2000,  scheduled maturities of certificates
        of deposit (rounded to the nearest $1,000) are summarized as follows:

                                                  2001                2000
                                              ------------        ------------

           Due in 3 months or less            $ 6,904,000         $ 5,074,000
           Due after 3 months to 1 year        22,493,000          14,060,000
           Due after 1 year to 3 years          4,774,000           4,462,000
           Due after 3 years to 5 years           399,000             332,000
                                              ------------        ------------
                                              $34,570,000         $23,928,000
                                              ============        ============

        Interest  expense on deposits for the years ended September 30, 2001 and
        2000 is summarized as follows:

                                                 2001              2000
                                              ----------        ----------

         NOW accounts                         $   99,715        $  109,252
         Money market accounts                    62,676            81,659
         Passbook and club accounts              192,630           186,535
         Certificates of deposit               1,647,120         1,209,468
                                              ----------        ----------
                                              $2,002,141        $1,586,914
                                              ==========        ==========

8.      Federal Home Loan Bank Advances
        -------------------------------

        These advances bear fixed interest rates ranging from 5.9% to 6.8%. They
        are collateralized by FHLB stock and investment securities. The Bank has
        approximately  $13,573,000  available  for borrowing as of September 30,
        2001.

                  Principal payments are as follows:

                           2002                                      $2,123,000
                           2003                                         130,000
                           2004                                         138,000
                           2005                                         146,000
                           2006                                         155,000
                        Thereafter                                      532,606
                                                                     ----------
                                                      Total          $3,224,606
                                                                     ==========

9.     Net Gain on Sale of Interest Earning Assets
       -------------------------------------------

        Gross  realized   gains  and  losses  on  sales  of   available-for-sale
        securities  were $172,405 and $(94,485) for the year ended September 30,
        2001. There was no sale of available-for-sale securities in 2000.

                                       F-13
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

10.    Income Taxes
       ------------

        The Bank has qualified as a Savings  Institution under provisions of the
        Internal  Revenue Code.  Prior to January 1, 1996 the Bank was permitted
        to deduct  from  taxable  income an  allowance  for bad debts based on a
        percentage-of  taxable  income.  Such  percentage  was  8%  before  such
        deduction.  Retained  earnings at September  30, 2001 and 2000  included
        untaxed  earnings of approximately  $330,100 and $355,800,  representing
        such bad debt deductions.

        Retained earnings at September 30, 2001 and 2000 includes  approximately
        $153,850 of tax bad debt  deductions  which are  considered  a permanent
        difference  between  the book and income tax basis of loans  receivable,
        and for which  income  taxes have not been  provided.  If such amount is
        used for purposes other than bad debt losses, including distributions in
        liquidation, it will be subject to income tax at the then current rate.

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

                                                          2001         2000
                                                        ----------  ----------
          Statutory tax rates                               34%          34%
          Tax at statutory rates                        $   4,900   $   63,212
          New Jersey Savings Institution Tax                  400        6,200
          Low tax bracket savings                          (2,738)      (7,454)
          Tax exempt income                                (2,000)      (2,000)
          Miscellaneous                                     3,751        1,910
                                                        ---------   ----------
                                                        $   4,313   $   61,868
                                                        =========   ==========

        The tax provision is summarized as follows:

                                                           2001       2000
                                                        ----------  ---------
         Current federal                                $ (17,623)   $ 55,500
         Deferred federal                                  21,696         168
         Current state                                     (1,037)     5,050
         Deferred state                                     1,277      1,150
                                                        ----------  ---------
                                                        $   4,313   $ 61,868
                                                        ==========  =========

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

                                                           2001      2000
                                                        ----------  --------
         Deferred tax assets:
           Allowance for loan losses                    $  74,520   $ 66,923
           Deferred loan origination fees, net             10,684     13,429
           Accrued compensation                            15,251     24,444
           Unrealized depreciation on investments               -     45,178
                                                        ----------  --------
           Total deferred tax assets                      100,455    149,974
                                                        ----------  --------
         Deferred tax liabilities:
           Unrealized appreciation on investments          79,241
           Premises and equipment                          46,992     37,215
           Tax reserve for loan losses                     55,003     46,148
                                                        ----------  --------
           Total deferred tax liabilities                 181,236     83,363
                                                        ----------  --------
         Net deferred tax asset (liability)             $ (80,781)  $ 66,611
                                                        ==========  ========

                                       F-14
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

11.     Commitments
        ------------

        At  September   30,  2001  the  Bank  had  the   following   commitments
        outstanding.   Mortgage   commitments  are  for  45  days.  Home  equity
        commitments are for 60 days. Commitments on other loans are for 90 days.
        The commitments are summarized as follows:

<TABLE>
<CAPTION>
                                                   Amounts         Rate                    Term
                                              --------------   ----------------        --------------
<S>                                           <C>            <C>                   <C>
           Mortgages (fixed rate)               $ 1,672,000    6.4% to 8.0%            15 to 30 years
                                                                 0 to 3 points
           Home equity loans                        224,000    6.0% to 8.25%            5 to 15 years
                                                                 0 points
           Other loans                            2,062,000    7.75% to 13.25%          1 to 20 years
                                                -----------
                                                $ 3,958,000    0 to 1 points
                                                ===========
</TABLE>

        There are two letters of credit  outstanding  at September  30, 2001. An
        annual  fee of 1/2 to 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 amount of both letters  totals  $32,000.  The Bank also has consumer
        lines of credit with undrawn  balances of $934,000 and commercial  lines
        of credit of $1,088,000.

        The Bank has available two lines of credit through the Federal Home Loan
        Bank.  An  overnight  line of  credit  is  available  in the  amount  of
        $2,859,350. Additionally, a one month overnight repricing line of credit
        is available in the amount of $2,859,350.

        Future minimum lease payments under a noncancellable operating lease for
        one branch building are as follows:

                           2002                            $  59,000
                           2003                               60,000
                           2004                               62,000
                           2005                               64,000
                           2006                               66,000
                        Thereafter                           150,000
                                                            ---------

                                           Total            $461,000
                                                            =========

12.     Financial Instruments
        ---------------------

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

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

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

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

        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.

                                       F-15
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

12.     Financial Instruments (Continued)
        ---------------------

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

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

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

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

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

        The carrying amounts of accrued interest approximate their fair values.

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

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

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

        The carrying amounts of these liabilities approximate their fair values.

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

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

                                       F-16
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

12.     Financial Instruments (Continued)
        ---------------------

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

<TABLE>
<CAPTION>
                                                              2001            2001              2000            2000
                                                            Carrying          Fair            Carrying          Fair
             Financial Assets (000's omitted)                Amount           Value            Amount           Value
             ----------------------------------------     -------------    ------------     -------------    ------------
<S>                                                         <C>              <C>              <C>              <C>
             Cash and due from banks                          $  9,282         $ 9,282          $  3,163         $ 3,163
             Securities held to maturity                         2,058           2,106             3,741           3,573
             Securities available for sale                       8,824           8,824             8,760           8,760
             FHLB stock                                            373             373               458             458
             Loans receivable                                   44,987          46,218            39,850          40,771
             Accrued interest receivable                           319             319               419             419

             Financial Liabilities (000's omitted)
             ----------------------------------------
             Deposit liabilities                                58,156          58,829            44,735          44,680
             FHLB advances                                       3,225           3,353             7,597           7,774
             Accrued interest payable                               61              61                72              72
             Other liabilities                                     340             340               310             310
</TABLE>

13.     Benefit Plans
        -------------

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

        Employer  contributions  were  $17,734  and  $15,118  for 2001 and 2000,
        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 in equal monthly  installments through March 2008.
        The interest  rate is 8.50% fixed for the term of the loan.  The Bank is
        making  contributions  to the ESOP which are equal to the  principal and
        interest  payment  required from the ESOP on the term loan.  Unallocated
        shares  purchased  with the loan proceeds are pledged as collateral  for
        the term loan and are held in a suspense  account for future  allocation
        among  participants.  Shares  released  from the  suspense  account  are
        allocated  among the  participants  on the basis of  compensation.  ESOP
        shares  pledged as collateral  are reported as common stock  acquired by
        ESOP in the consolidated  statements of financial  condition.  As shares
        are  committed  to be released  from  collateral,  the  Company  reports
        compensation  expense  equal to the current  market price of the shares,
        and the shares become  outstanding for basic net income per common share
        computations.  Dividends  on  allocated  ESOP  shares are  recorded as a
        reduction of retained earnings.

                                                    2001               2000
                                                 ----------         ----------

        Allocated shares                              9,114              6,076
        Unallocated shares                           21,274             24,312
                                                 ----------         ----------

        Total ESOP shares all unreleased             30,388             30,388
                                                 ==========         ==========
        Fair value of unreleased shares          $  334,268         $  234,030
                                                 ==========         ==========

                                       F-17
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

13.     Benefit Plans (Continued)
        -------------

        Restricted Stock Plan (RSP)
        ---------------------------

        On April  16,  2000  the  Bank  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 at an average
        market value of $10.48.  Rights to a total of 10,631  shares were issued
        to the board of directors and two executive officers.  The fair value of
        these  shares  will be charged to  expense  over the five years  vesting
        period.  During  each of the years  ended  September  30, 2001 and 2000,
        2,120 shares vested.

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

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

        The Company has a stock  option plan that  provides  for the granting of
        non-qualified  stock  options.  In April 1999, the Company issued 26,587
        options at an exercise  price of $10.63 per share to key Bank  employees
        and  non-employee  members of its Board of  Directors.  The options vest
        ratably on the anniversary  date over five years. The options expire ten
        years after the  initial  grant date.  At  September  30, 2001 and 2000,
        10,635 and 7,976 options vested, respectively, and none were exercised.

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

                                                    2001           2000
                                                 -----------    ----------

          Net income:
            As reported                          $   10,099     $  124,051
            Proforma                                    891        114,843
          Earnings per common share
            As reported                          $      .03     $      .36
             Proforma                                   .00            .34

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

14.     Net Income Per Common Share
        ---------------------------

        Basic net income per common share is  calculated  by dividing net income
        by the number of shares of common  stock  outstanding,  less shares that
        have not been committed to be released.  Diluted net income per share is
        calculated by adjusting the number of shares of common stock outstanding
        to include the effect of stock options,  stock-based compensation grants
        and other  securities,  if dilutive,  generally using the treasury stock
        method. The Company had no potentially dilutive securities for 2000.

                                       F-18
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



14.     Net Income Per Common Share (continued)
        ---------------------------------------

<TABLE>
<CAPTION>
                                                        2001                                       2000
                                     ------------------------------------------- ----------------------------------------
                                                      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            $ 10,099        360,866                   $ 124,051        375,782
          ESOP shares, not
          committed to be released                       (21,274)                                   (24,312)
          RSP shares                                     (12,014)                                   (14,134)
                                     -------------  ------------- -------------- ------------  ------------- ------------
            Basic earnings per share       10,099        327,578     $    .03        124,051        337,336  $      .36
            Common stock
              equivalents                                    382
                                     -------------  ------------- -------------- ------------  ------------- ------------
            Diluted earnings
              Per share                  $ 10,099        327,960     $    .03      $ 124,051        337,336  $      .36
                                     =============  ============= ============== ============  ============= ============
</TABLE>


15.     Regulatory Capital Requirement
        ------------------------------

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

        The  Office  of  Thrift  Supervision   ("OTS")  has  prescribed  capital
        requirements  which  include  three  separate  measurements  of  capital
        adequacy: a leverage-ratio capital standard ("core"), a tangible capital
        standard and a risk-based  capital standard  (collectively  known as the
        "Capital Rule").  The Capital Rule requires each savings  institution to
        maintain  tangible  capital equal to at least 1.5% of its adjusted total
        assets and core  capital  equal to at least 4.0% of its  adjusted  total
        assets.  The Capital Rule further  requires each savings  institution to
        maintain  risk-based capital equal to at least 8.0% of its risk-weighted
        assets.

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        The Bank at September 30, 2001 and 2000 meets the regulatory  risk based
        capital,  Tier 1 capital, core capital and tangible capital requirements
        as summarized below:

<TABLE>
<CAPTION>
                                                                                             To Be    Well
                                                                                        Capitalized   Under
                                                                     For    Capital         Prompt    Corrective
                                        Actual                  Adequacy    Purposes        Action    Provisions
                                     -----------------------   ----------------------   -------------------------
                                      Amount       Ratio        Amount       Ratio        Amount        Ratio
                                     ----------  -----------   ----------   ---------   -----------   -----------
<S>                                  <C>            <C>        <C>            <C>        <C>             <C>
          As of September 30, 2001:
            Risk-based capital         $ 5,125        15.56      $ 2,635        8.00       $ 3,294         10.00
            Tier 1 capital               4,918        14.93          N/A         N/A         1,976          6.00
            Core capital                 4,918         7.34        2,680        4.00         3,350          5.00
            Tangible capital             4,918         7.34        1,005        1.50           N/A           N/A

          As of September 30, 2000:
            Risk-based capital           4,805        16.71        2,300        8.00         2,875         10.00
            Tier 1 capital               4,805        16.71          N/A         N/A         1,725          6.00
            Core capital                 4,805         8.31        2,312        4.00         2,890          5.00
            Tangible capital             4,805         8.31          867        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, 2001, that
        the Bank meets all capital adequacy requirements to which it is subject.

        As of September 2001, the date of the most recent  notification from the
        OTS, the Bank was categorized as well  capitalized  under the regulatory
        framework  for  prompt  corrective  action.  To be  categorized  as well
        capitalized,  the Bank must maintain risk based capital,  Tier I capital
        and core capital ratios of 10%, 6%, and 5%,  respectively.  There are no
        conditions  existing or events which have  occurred  since  notification
        that management believes have changed the Bank's category.

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

                                       F-20
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


16.     Parent Only Financial Information
        ---------------------------------

        The earnings of the  subsidiaries are recognized by Farnsworth using the
        equity  method  of   accounting.   Accordingly,   the  earnings  of  the
        subsidiaries  are recorded as increases in  Farnsworth's  investment  in
        subsidiaries.  The following are the condensed financial  statements for
        Farnsworth  (parent  company only) as of September 30, 2001 and 2000 and
        for the year then ended.

        Statement of Financial Condition               2001           2000
                                                  -------------   ------------
        Assets

        Cash                                      $    388,956    $    81,255
        Securities available for sale                                 481,500
        ESOP loan receivable                           212,716        243,104
        Investment in subsidiaries                   2,980,006      2,941,477
        Accrued interest receivable                                     7,784
        Other assets                                    33,608         19,155
                                                  -------------   ------------
        Total assets                              $  3,615,286    $ 3,774,275
                                                  =============   ============

        Liabilities

        Accrued expenses                          $     20,080    $    18,543
        Loan payable to the bank                                      170,625
                                                  -------------   ------------
        Total liabilities                               20,080        189,168

        Stockholders' equity                         3,595,206      3,585,107
                                                  -------------   ------------

        Total liabilities and                     $  3,615,286    $ 3,774,275
            stockholders' equity
                                                  =============   ============

                                                      2001         2000
                                                  -------------   ------------

         Income from subsidiaries                    $  38,529    $   134,155
         Interest income                                42,934         54,813
                                                  -------------   ------------
         Total income                                   81,463        188,968
                                                  -------------   ------------
         Meeting expenses                               14,857         17,682
         Stock transfer fees                             1,952          2,570
         Professional fees                              69,657         53,337
         Other expenses                                  8,184          4,193
                                                  -------------   ------------
         Total expenses                                 94,650         77,782
                                                  -------------   ------------

         (Loss) income before income taxes             (13,187)       111,186
         Income tax benefit                             23,286         12,865
                                                  -------------   ------------
         Net income                                  $  10,099    $   124,051
                                                  =============   ============

                                       F-21
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

<TABLE>
<CAPTION>
                                                                              2001                2000
                                                                         ---------------     ----------------
<S>                                                                        <C>                  <C>
          Statement of Cash Flows

          Cash flows from operations activities:
            Net income                                                       $   10,099           $  124,051
            Adjustments to reconcile net income to net cash
               Used in operating activities:
             Increase in accrued expenses                                         1,537                4,229
             Equity in undistributed earnings of subsidiaries                   (38,529)            (134,155)
             Decrease in accrued interest receivable                              7,784                5,878
             Increase in other assets                                           (14,453)             (12,865)
                                                                         ---------------     ----------------
                         Net cash used in operating activities                  (33,562)             (12,862)
                                                                         ---------------     ----------------
          Cash flows from investing activities:
            Sale of investment                                                  481,500                    -
            Repayment of ESOP loan                                               30,388               37,985
                                                                         ---------------     ----------------
                          Net cash provided by investing activities             511,888               37,985
                                                                         ---------------     ----------------
          Cash flows from financing activities:
            Purchase of treasury stock                                                -             (185,172)
            Proceeds from (repayment of) loan from the Bank                    (170,625)             170,625
                                                                         ---------------     ----------------
                         Net cash used in financing activities                 (170,625)             (14,547)
                                                                         ---------------     ----------------
          Net increase in cash                                                  307,701               10,576
          Cash - beginning                                                       81,255               70,679
                                                                         ---------------     ----------------
          Cash - ending                                                       $ 388,956            $  81,255
                                                                         ===============     ================
          Supplement disclosure:
          Non cash item:
             Unrealized gain on securities available for
                Sale, net of deferred income taxes                            $      -             $     371
                                                                         ===============     ================
</TABLE>

                                      F-22
<PAGE>

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

                              PEOPLES SAVINGS BANK
<TABLE>
<CAPTION>
<S>                     <C>                            <C>

      Main Office               Florence Office             Mt. Laurel Office
 789 Farnsworth Avenue           4 Broad Street             101 Gaither Drive
Bordentown, New Jersey        Florence, New Jersey        Mt. Laurel, New Jersey

                               Board of Directors

          George G. Aaronson, Jr.                       G. Edward Koenig, Jr.
         Realtor - Falconer & Bell             President - E.J.Koenig, Inc. (petroleum
                                                 products/heating & air-conditioning)

              Charles E. Adams                             Edgar N. Peppler
 Retired - Florence Township Administrator         President - Peppler Funeral Home
              Joseph H. Kelly                         William H. Wainwright, Jr.
President - Kelly Enterprises (Investments)             Retired - Loan Officer

                                Gary N. Pelehaty
                      President and Chief Executive Officer

                                Director Emeritus
                                 Herman Gutstein

                               Executive Officers

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

                                    Officers
            Elaine C. Denelsbeck                              Christopher Nunn
            Assistant Secretary                               Assistant Treasurer
                            ------------------------

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

      Special Counsel                             Transfer Agent and Registrar
      Malizia Spidi & Fisch, PC                   Computer Share Investor Services
      1100 New York Avenue, N.W.                  1825 Lawrence Street, Suite 444
      Suite 340 West                              Denver, Colorado 80201
      Washington, D.C. 20005
</TABLE>

------------------------
The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 2001 is available  without  charge upon written  request.  For a copy of the
Form 10-KSB,  please write or call Mr.  Charles  Alessi,  Vice  President at the
Company's  Office.  The Annual Meeting of Stockholders  will be held on February
19, 2002 at 10:00 a.m. at the Days Inn, 1073 Route 206, Bordentown, New Jersey.


                                       12