FARNSWORTH BANCORP, INC.
                       2002 ANNUAL REPORT TO STOCKHOLDERS



                                     <PAGE>



                            FARNSWORTH BANCORP, INC.
                               2002 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 2002 Annual  Report to  Stockholders.  As you will see in the Annual
Report, our net income increased  significantly during fiscal 2002 due, in large
part, to increased net interest income from core operations.  As a result of our
improved  earnings and our continuing  commitment to enhancing your value in our
Company, the Board of Directors declared its first dividend of $.05 per share in
October 2002.  This was a big step in our  evolution as a public  company and we
were very pleased to return some of our earnings to our stockholders  this year.
We expect to pay cash dividends on a semi-annual basis.

         For the fiscal  year ended  September  30,  2002,  the  Company  earned
$395,000  or $1.18 per share,  as  compared to $10,099 or $.03 per share for the
fiscal year ended  September  30, 2001.  At September  30, 2002,  the  Company's
assets  totaled  $83.2  million,  as compared to $67.5  million at September 30,
2001. Stockholders' equity was $6.2 million or $17.15 per share at September 30,
2002,  compared to $5.7 million or $15.70 per share at September  30, 2001.  The
increase in assets was primarily due to an increase in loans receivable, net.

         We expect to open our new Marlton  branch office in early 2003, as well
as adding interactive Internet banking.

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

                                        2
<PAGE>

         Quarter Ended                    High              Low
         -------------                    ----              ---

         December 31, 2000               $10.125           $9.125
         March 31, 2001                  $11.25            $9.50
         June 30, 2001                   $12.60            $10.56
         September 30, 2001              $12.25            $11.00

         December 31, 2001               $12.30            $10.65
         March 31, 2002                  $13.00            $11.75
         June 30, 2002                   $15.30            $12.95
         September 30, 2002              $15.40            $13.65

The number of  shareholders  of record of common  stock as of December 10, 2002,
was  approximately  388. This does not reflect the number of persons or entities
who held stock in nominee or "street" name through various  brokerage  firms. At
December  10,  2002,  there  were  360,866  shares  outstanding.  There  were no
dividends paid by the Company  during the fiscal year ended  September 30, 2002.
However,  the Board of Directors  did declare a cash  dividend of $.05 per share
subsequent to September 30, 2002,  payable on November 14, 2002, to stockholders
of  record on  November  4,  2002.  The total  amount of the  dividend  paid was
approximately  $18,000.  The  Company  anticipates  paying a cash  dividend on a
semi-annual basis.

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

                    Selected Financial Ratios and Other Data


                                                      At or For the Years Ended
                                                            September 30,
                                                      --------------------------
                                                        2002               2001
                                                       ------             -----
Return on average assets............................    5.25%              0.02%
Return on average equity............................    6.84               0.18
Average equity to average assets ratio..............    7.68               9.02
Equity to assets at period end......................    7.44               8.39
Net interest rate spread............................    3.59               2.60
Net yield on average interest-earning assets........    3.86               3.08
Non-performing loans to total assets................    0.17               0.03
Allowance for loan loss to total loans..............    0.48               0.46

                                        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, 2002, as calculated by
the OTS, based on quarterly information voluntarily provided to the OTS.


        Changes
       In Market          Net Portfolio Value
       ---------          --------------------
    Interest Rates        $ Amount    $ Change   % Change         NPV Ratio(1)
    --------------        --------    --------   ---------       -------------
   (basis points)(2)     (Dollars in thousands)
         +300              5,163       -5,472       -51%             6.29%
         +200              7,153       -3,482       -33%             8.47%
         +100              9,109       -1,526       -14%            10.50%
            0             10,635            -         -             12.00%
         -100             11,459          824        +8%            12.75%

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

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

         The Bank's  Board of Directors  review the Bank's  asset and  liability
policies on a quarterly basis. The Board meets quarterly to review interest rate
risk and  trends,  as well as  liquidity  and capital  ratios and  requirements.
Management administers the policies and determinations of the Board of Directors
with respect to the Bank's asset and liability  goals and  strategies.  The Bank
expects that its asset and liability  policies and  strategies  will continue as
described so long as

                                        5
<PAGE>

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  $15.7  million  or 23.3% to $83.2  million at
September 30, 2002 from $67.5  million at September  30, 2001.  The increase was
primarily  attributable  to  a  $13.0  million  increase  in  the  Bank's  loans
receivable,  net, a $2.9 million increase in available for sale securities and a
$600,000 increase in equipment,  partially offset by a $100,000 decrease in cash
and due from banks and a decrease of $1.0 million in held-to-maturity investment
securities.  The Bank's total  liabilities  increased  $15.1 million or 24.4% to
$77.0  million at September  30, 2002 from $61.9  million at September 30, 2001.
The increase was primarily attributable to a $17.1 million increase in deposits,
offset by a $2.1 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 has increased its commercial real estate loan portfolio in recent
periods.

         Stockholders'  equity  was  $6.2  million  or 7.4% of total  assets  at
September  30,  2002,  as  compared to $5.7  million or 8.4% of total  assets at
September 30, 2001. The increase was due primarily to increased net income.

                                        6
<PAGE>

Average Balance Sheet

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

<TABLE>
<CAPTION>
                                                                               Year Ended September 30,
                                                      -------------------------------------------------------------------------
                                                                  2002                                    2001
                                                      ----------------------------------      ---------------------------------
                                                                                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).........................      $53,258       $3,976         7.46%      $42,202      $3,238          7.67%
    Investment securities(2)....................       18,778          865         4.61        16,157         872          5.40
                                                      -------       ------         ----       -------      ------          ----
        Total interest-earning assets...........       72,036        4,841         6.72        58,359       4,110          7.04
Noninterest-earning assets......................        3,134           --                      2,629          --
                                                      -------       ------                    -------      ------
        Total assets............................      $75,170       $4,841                    $60,988      $4,110
                                                      =======       ======                    =======      ======
Interest-bearing liabilities:
    NOW accounts................................      $ 9,457        $  96         1.01      $  7,365       $ 100          1.36
    Savings accounts............................       13,191          288         2.18         8,119         192          2.36
    Money market accounts.......................        2,451           55         2.24         2,451          63          2.57
    Certificates of deposit.....................       39,013        1,508         3.87        29,424       1,647          5.60
    FHLB - Advances.............................        1,780          114         6.40         4,677         311          6.65
                                                      -------       ------         ----       -------      ------          ----
        Total interest-bearing liabilities......       65,892        2,061         3.13        52,036       2,313          4.44
                                                                                   ----                                    ----
Noninterest-bearing liabilities.................        3,506                                   3,448
                                                       ------                                  ------
        Total liabilities.......................       69,398                                  55,484
                                                      -------                                  ------
Stockholders' equity............................        5,772                                   5,504
                                                       ------                                  ------
        Total liabilities and
        stockholders' equity....................      $75,170       $2,061                    $60,988      $2,313
                                                      =======       ======                    =======      ======
Net interest income.............................                    $2,780                                 $1,797
                                                                    ======                                 ======
Interest rate spread(3).........................                                   3.59%                                   2.60%
                                                                                   ====                                    ====
Net yield on interest-earning assets(4).........                                   3.86%                                   3.08%
                                                                                   ====                                    ====
Ratio of average interest-earning assets
    to average interest-bearing liabilities.....                                 109.54%                                 112.22%
                                                                                 ======                                  ======
</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,
                                                        2002 vs 2001
                                           -----------------------------------
                                                     Increase (Decrease)
                                                          Due to
                                                               Rate/
                                           -----------------------------------
                                           Volume      Rate    Volume      Net
                                           ------      ----    ------      ---
                                                     (In thousands)
Interest income:
    Loans receivable ...................    $ 848     $ (87)    $ (23)    $ 738
    Investment securities ..............       97       (57)      (47)       (7)
                                            -----     -----     -----     -----
        Total interest income ..........    $ 945     $(144)    $ (70)    $ 731
                                            =====     =====     =====     =====

Interest expense:
    NOW accounts .......................    $  27     $ (27)    $  (4)    $  (4)
    Savings account ....................      120       (14)      (10)       96
    Money market accounts ..............       --        (8)       --        (8)
    Certificates of deposits ...........      537      (674)       (2)     (139)
    FHLB advances ......................     (193)      (11)        7      (197)
                                            -----     -----     -----     -----
        Total interest expense .........    $ 491     $(734)    $  (9)    $(252)
                                            =====     =====     =====     =====

Change in net interest income ..........    $ 454     $ 590     $ (61)    $ 983
                                            =====     =====     =====     =====

                                        8

<PAGE>

Results of Operations

         Net Income. The Bank's net income increased $385,000 for the year ended
September 30, 2002,  to $395,000  from $10,000 for the year ended  September 30,
2001. This increase was primarily  attributable to increased net interest income
of $983,000 and an increase in noninterest  income of $28,000,  partially offset
by an increase  in  noninterest  expense of  $339,000  and an increase in income
taxes of $214,000.

         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 increased  $908,000
or 51.7%,  to $2.7 million for the year ended  September 30, 2002. This increase
was primarily due to an increase in interest on loans of $737,000 coupled with a
decrease  in  interest on deposits of $55,000 and a decrease in interest on FHLB
advances of $197,000,  partially offset by an increase in the provision for loan
losses of $75,000 and a decrease in interest on investments of $6,000.

         The increase in the average balance of interest-earning assets of $13.6
million  primarily  reflects  increases of  approximately  $11.1  million in the
Bank's  average  balance  of loans and $2.6  million in the  average  balance of
securities.

         The increase in average  interest-bearing  liabilities of $13.8 million
reflects   increases  of  $2.0  million  in  the  Bank's   average   balance  of
interest-bearing  NOW  accounts  and $14.7  million  in the  average  balance of
savings,  money  market  and  certificates  of  deposit,  partially  offset by a
decrease of $2.9 million in the average balance of FHLB borrowings.

         Provision  for Loan Losses.  Provision for loan losses was $116,000 for
the year ended  September  30,  2002,  as compared to $41,000 for the year ended
September 30, 2001.  The provision is  established  to adjust the balance of the
allowance for loan losses to a level  management  feels is appropriate  based on
the risk characteristics of the loan portfolio.

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

         Noninterest  Income.  Noninterest income increased $28,000 or 8.9% from
$316,000  for the year ended  September  30,  2001 to  $344,000  for 2002.  This
increase  in the Bank's  noninterest  income was due to an  increase in fees and
other service  charges of $47,000 offset by a decrease in the net realized gains
on the sale of available for sale securities of $19,000.

                                        9
<PAGE>

         Noninterest  Expense.  Noninterest  expense increased $339,000 or 16.1%
from $2.1 million for the year ended  September  30,  2001,  to $2.4 million for
2002.  The  increase  in the  Bank's  noninterest  expense  was due to a  $4,000
increase in the Bank's  occupancy and equipment  expense,  a $56,000 increase in
other noninterest  expense,  an increase of $277,000 in the Bank's  compensation
and benefits and an increase of $2,000 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 $95,000 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 increased  $214,000 from $4,000
for the year ended  September  30, 2001 to $218,000 for 2002.  This  increase in
income tax expense is due to the  increase in net taxable  earnings of the Bank.
The Bank's  effective tax rate was 35.6% and 28.5% for the years ended September
30, 2002 and 2001, respectively.

Liquidity and Capital Resources

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

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

         Net cash provided by the Bank's operating  activities (the cash effects
of  transactions  that enter into the Bank's  determination  of net income e.g.,
non-cash items,  amortization and  depreciation,  provision for loan losses) for
the year ended September 30, 2002 totaled  $611,000,  an increase of $385,000 as
compared to 2001.

         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, 2002,  totaled  $15.7  million,  an increase of $12.5
million.  The increase in cash used was  primarily  attributable  to funding net
loan growth of $13.1 million in 2002 as compared to $5.3 million in 2001 as well
as net  purchases of available  for sale  investment  securities in 2002 of $2.8
million.  Additionally  uses of cash were to purchase  premises and equipment of
$751,000 and  purchase of Federal  Home Loan Bank stock of $127,000.  The use of
cash was  partially  offset  by  paydowns  and  maturities  of  held-to-maturity
investment securities of $900,000 in 2002.

                                       10
<PAGE>

         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,
2002 totaled $15.0 million,  an increase of $6.0 million as compared to the year
ended  September 30, 2001.  This increase in cash was primarily  attributable to
increased deposits of $17.1 million offset by repayment of FHLB advances of $2.1
million, net of advances.

         Approximately  $34.9 million of the Bank's time deposits  mature within
the next 12  months.  The Bank  expects  such  deposits  to be renewed at market
rates.  In  addition to this source of  continuing  funding,  the Bank has total
borrowing capacity of 25% of total assets through the FHLB of New York.

                                       11
<PAGE>

[LOGO]                                                 Officers/Shareholders
KKB     Kronick
        Kalada                                         Donald M. Kronick, CPA
        Berdy & Co.                                    Joseph J. Kalada, CPA
        A Professional Corporation                     Paul Berdy, CPA
                                                       William R. Lazor, CPA/PFS
Certified Public Accountants                           Deborah A. Eastwood, CPA
                                                       Kevin R. Foley, CPA
                                                       William Fromel, CPA
                                                       Mario Ercolani, CPA



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





To the Board of Directors
Farnsworth Bancorp, Inc.

We have audited the accompanying  consolidated statements of financial condition
of Farnsworth Bancorp,  Inc. and Subsidiaries as of September 30, 2002 and 2001,
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, 2002 and 2001, 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.



Kronick Kalada Berdy & Co.


Kingston, Pennsylvania
October 28, 2002

<TABLE>
<CAPTION>
<S>      <C>
REPLY TO:  190 Lathrop Street - Kingston, PA 18704 - (570) 283-2727 - (570) 283-1670 Telefax
--------------------------------------------------------------------------------------------

                101 West Broad Street                   24 N. Seventh Street
                 Hazleton, PA 18201                     Stroudsburg, PA 18360
                  (570) 459-1373                           (570) 420-9500
</TABLE>
                                      F-1
<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                          September 30, 2002 and 2001
<TABLE>
<CAPTION>

                           ASSETS                                        2002            2001
                           ------                                   ------------    ------------
<S>                                                               <C>             <C>
Cash and due from banks                                             $  9,161,801    $  9,282,084
Securities available for sale                                         11,710,884       8,824,145
Securities held to maturity (fair value $1,186,158 and $2,105,955
  at September 30, 2002 and 2001, respectively)                        1,147,300       2,058,245

Loans receivable                                                      58,306,218      45,194,076
     less allowance for loan losses                                      280,000         207,000
                                                                    ------------    ------------
                                                                      58,026,218      44,987,076

Accrued interest receivable                                              390,459         318,685
Federal Home Loan Bank of New York stock at
  cost, substantially restricted                                         499,800         372,600
Premises and equipment                                                 2,117,790       1,481,675
Prepaid income taxes                                                          --          15,292
Real estate owned                                                             --         130,292
Other assets                                                              99,447          58,642
                                                                    ------------    ------------

Total assets                                                        $ 83,153,699    $ 67,528,736
                                                                    ============    ============

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

Deposits:
   Noninterest bearing                                              $  2,702,286    $  2,752,941
   Interest bearing                                                   72,586,701      55,403,494
Federal Home Loan Bank advances                                        1,094,474       3,224,606
Advances by borrowers for taxes and insurance                            255,953         240,168
Accrued income taxes                                                      87,911              --
Deferred income taxes                                                     71,002          80,781
Accrued interest payable                                                  35,984          61,009
Accounts payable and other accrued expenses                              132,228         100,297
                                                                    ------------    ------------

Total liabilities                                                     76,966,539      61,863,296
                                                                    ------------    ------------

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                             2,980,935       2,585,704
Common stock acquired by employee stock
  ownership plan (ESOP)                                                 (174,414)       (204,774)
Common stock acquired by restricted stock
  plans (RSPs)                                                           (54,765)       (105,444)
Accumulated other comprehensive income, unrealized
  appreciation on available for sale securities,
  net of income taxes                                                    186,329         140,879
                                                                    ------------    ------------

Total stockholders' equity                                             6,187,160       5,665,440
                                                                    ------------    ------------

Total liabilities and stockholders' equity                          $ 83,153,699    $ 67,528,736
                                                                    ============    ============
</TABLE>

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

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

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                 For the Years Ended September 30, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                    2002           2001
                                                                                -----------    -----------
<S>                                                                           <C>            <C>
Interest income:
  Loans receivable                                                              $ 3,975,688    $ 3,238,476
  Investments                                                                       865,143        871,699
                                                                                -----------    -----------

      Total interest income                                                       4,840,831      4,110,175
                                                                                -----------    -----------

Interest expense:
  Deposits                                                                        1,946,940      2,002,141
  Federal Home Loan Bank advances                                                   113,651        310,773
                                                                                -----------    -----------

      Total interest expense                                                      2,060,591      2,312,914
                                                                                -----------    -----------

      Net interest income                                                         2,780,240      1,797,261
Provision for loan losses                                                           115,849         41,369
                                                                                -----------    -----------

      Net interest income after provision
        for loan losses                                                           2,664,391      1,755,892
                                                                                -----------    -----------

Noninterest income:
  Fees and other service charges                                                    285,567        237,743
  Net realized gains on sale of available for sale
    securities                                                                       58,836         77,920
                                                                                -----------    -----------

      Total noninterest income                                                      344,403        315,663
                                                                                -----------    -----------
Noninterest expense:
  Compensation and benefits                                                       1,279,154      1,002,433
  Occupancy and equipment                                                           486,831        482,569
  Federal insurance premiums and assessments                                         10,605          8,833
  Other                                                                             619,129        563,308
                                                                                -----------    -----------

      Total noninterest expense                                                   2,395,719      2,057,143
                                                                                -----------    -----------

Income before provision for income taxes                                            613,075         14,412

Provision for income taxes                                                          217,844          4,313
                                                                                -----------    -----------

      Net income                                                                    395,231         10,099

Other comprehensive income
  Unrealized gain on securities available for sale, arising during
     the period, net of taxes of  $53,185, 2002; $124,668, 2001                      84,286        273,552
  Reclassification adjustment , net of taxes of $20,000, 2002; $26,000, 2001        (38,836)       (51,920)
                                                                                -----------    -----------
      Comprehensive income                                                      $   440,681    $   231,731
                                                                                ===========    ===========
Net income per common shares:
   Basic                                                                        $      1.18    $      0.03
                                                                                ===========    ===========
   Diluted                                                                      $      1.16    $      0.03
                                                                                ===========    ===========

Weighted average number of shares outstanding during the year
   Basic                                                                            335,450        327,578
                                                                                ===========    ===========
   Diluted                                                                          340,539        327,960
                                                                                ===========    ===========
</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, 2002 and 2001

<TABLE>
<CAPTION>
                                                               Retained      Common       Common     Appreciation          Total
                                       Additional              Earnings      Stock        Stock    (Depreciation) on       Stock-
                              Common     Paid in    Treasury Substantially  Acquired     Acquired  Securities Available    holders'
                               Stock     Capital     Stock    Restricted    By ESOP      By RSPs   for Sale, Net of Tax    Equity
                             --------- ----------- ---------- -----------  -----------  ---------- ---------------------------------
<S>                        <C>       <C>         <C>        <C>          <C>          <C>             <C>             <C>
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

Net income for the year
  ended September 30, 2002          -           -                395,231            -                           -           395,231

RSP shares allocated                -           -                      -            -      50,679               -            50,679
ESOP shares allocated               -           -          -           -       30,360           -               -            30,360
Unrealized appreciation
  on securities available
  for sale, net of tax              -           -                      -            -           -          45,450            45,450
                             --------- ----------- ---------- -----------  -----------  ---------- ---------------   ---------------

Balance at
  September 30, 2002         $ 37,985  $3,396,262  $(185,172) $2,980,935   $ (174,414)  $ (54,765)      $ 186,329       $ 6,187,160
                             ========= =========== ========== ===========  ===========  ========== ===============   ===============
</TABLE>
                  The accompanying notes are an integral part
                   of these consolidated financial statements.

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

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 For the Years Ended September 30, 2002 and 2001

<TABLE>
<CAPTION>

                                                                    2002            2001
                                                                ------------    ------------
<S>                                                           <C>             <C>
Cash flows from operating activities:
  Net income                                                    $    395,231    $     10,099
                                                                ------------    ------------

Adjustments to reconcile net income to net cash
  provided  by  operating activities:
    Depreciation                                                     114,625          98,916
    Provision for loan losses                                        115,849          41,369
    Net gain on sale of investments and assets                       (57,195)        (77,920)
    Stock compensation                                                81,039          52,700
    (Increase) decrease in accrued interest receivable               (71,774)        100,774
    (Increase) decrease in other assets                              (40,805)          1,952
    Increase in income taxes                                          67,517           7,187
    Decrease in accrued interest payable                             (25,025)        (11,483)
    Increase in accounts payable
      and other accrued liabilities                                   31,931           2,999
                                                                ------------    ------------
          Total adjustments                                          216,162         216,494
                                                                ------------    ------------
          Net cash provided by operations                            611,393         226,593
                                                                ------------    ------------
Cash flows from investing activities:
  Net increase in loans receivable                              (13,083,288)     (5,308,667)
  Redemption and principal payments of
     held to maturity securities                                    910,945         552,833
  Purchase of held to maturity securities                                --      (1,143,538)
  Purchase of available for sale securities                     (14,505,217)    (30,338,035)
  Proceeds from sale of available for sale securities            11,748,671      32,971,984
  Proceeds from sale of real estate owned                            56,948              --
  Purchase of Federal Home Loan Bank stock                         (127,200)             --
  Redemption of Federal Home Loan Bank stock                             --          85,200
  Purchase of premises and equipment                               (750,740)         (4,617)
                                                                ------------    ------------

          Net cash used in investing activities                 (15,749,881)     (3,184,840)
                                                                ------------    ------------

Cash flows from financing activities:
  Increase in deposits                                            17,132,552      13,421,800
  Federal Home Loan Bank advances                                         --      36,501,488
  Federal Home Loan Bank advances, repayments                     (2,130,132)    (40,874,168)
  Increase in advances by borrowers                                   15,785          27,866
                                                                ------------    ------------

          Net cash provided by financing activities               15,018,205       9,076,986
                                                                ------------    ------------

Net increase (decrease) in cash and due from banks                  (120,283)      6,118,739

Cash and due from banks at beginning of year                       9,282,084       3,163,345
                                                                ------------    ------------
Cash and due from banks at end of year                          $  9,161,801    $  9,282,084
                                                                ============    ============
Supplement disclosure:
  Cash paid during the period for:
    Interest                                                    $  2,085,616    $  2,324,397
                                                                ============    ============
    Income taxes                                                $    150,000    $      1,013
                                                                ============    ============
Non cash items:
   Unrealized gain on securities available for
      sale, net of deferred income taxes                        $     45,450    $    221,632
                                                                ============    ============
   Acquisition of real estate in settlement of loans            $     41,797    $    130,292
                                                                ============    ============
   Issuance of loans in settlement of real estate owned         $    113,500    $         --
                                                                ============    ============
   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
       ---------------------------------------------------------

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

        The  consolidated  financial  statements,  which have been  prepared  in
        conformity with accounting  principles  generally accepted in the United
        States of America,  include the accounts of Farnsworth Bancorp, Inc. and
        its wholly  owned  subsidiaries,  Peoples  Savings Bank (the "Bank") and
        Peoples Financial Services,  Inc. ("PFS"). 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.

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

        The Bank,  which  operates three  branches  in  Burlington  County,  New
        Jersey,  offers  customary  banking  services,  including  accepting  of
        checking, savings and time deposits  and  the making of commercial, real
        estate and consumer  loans, to  customers  who are  predominantly  small
        and middle-market  businesses  and middle-income  individuals.  The Bank
        is expecting  to open  a  fourth  branch in January  2003.  PFS provides
        securities  brokerage  and  investment advisory services and products to
        customers of the Bank. Farnsworth is a non- operating holding company.

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

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

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

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

                                      F-6
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

        Unrealized holding gains and losses, net of tax, on securities available
        for sale are excluded from earnings and reported as other  comprehensive
        income.

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

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

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

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

        Loans classified as impaired,  if any, are measured based on the present
        value of expected future cash flows  discounted at the loan's  effective
        interest  rate, or as a practical  expedient,  at the loan's  observable
        market  price  or the  fair  value  of the  collateral  if the  loan  is
        collateral  dependent.  A loan  evaluated for impairment is deemed to be
        impaired when based on current  information  and events,  it is probable
        that the Bank will be unable to collect all amounts due according to the
        contractual  terms  of the  loan  agreement.  All  loans  identified  as
        impaired  are  evaluated  independently.  The  accrual  of  interest  on
        impaired  loans is  discontinued  when,  in  management's  opinion,  the
        borrower  may be  unable  to meet  payments  as they  become  due.  When
        interest  accrual  is  discontinued,  all  unpaid  accrued  interest  is
        reversed.  Interest income is subsequently recognized only to the extent
        cash payments are received.  No loans were  identified as impaired as of
        September 30, 2002 and 2001, respectively, or for the years then ended.

                                       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.
        Depreciation  is computed 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 2001 financial  statements have been reclassified
        to conform to the 2002 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  reduces 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, 2002 and 2001 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 dividends  from the Bank. The Bank may
        not  declare or pay any  dividend  on or  repurchase  any of its capital
        stock if the  effect  thereof  would  cause its net worth to be  reduced
        below: (1) the amount required for the liquidation  account,  or (2) the
        net worth requirements  contained in section 563.13 (b) of the rules and
        regulation of the Office of Thrift Supervision (the "OTS").

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

        The carrying  amounts and fair values of these  investments at September
        30, 2002 and 2001 are summarized as follows:

<TABLE>
<CAPTION>
                                                               September 30, 2002
                                              --------------------------------------------- ---------------
                                                                  Gross        Unrealized
                                                 Carrying      ----------------------------     Fair
Held to maturity:                                 Value           Gains          Losses         Value
                                              ---------------  ------------   ------------- ---------------
<S>                                             <C>             <C>                 <C>      <C>
    Mortgage backed securities                    $1,147,300      $ 38,928            $ 70     $ 1,186,158
                                              ===============  ============   ============= ===============
</TABLE>

<TABLE>
<CAPTION>

                                                               September 30, 2001
                                              --------------------------------------------- ---------------
                                                                  Gross        Unrealized
                                                 Carrying      ----------------------------     Fair
Held to maturity:                                 Value           Gains          Losses         Value
                                              ---------------  ------------   ------------- ---------------
<S>                                             <C>             <C>                <C>       <C>
    Mortgage backed securities                    $2,058,245      $ 47,848           $ 138     $ 2,105,955
                                              ===============  ============   ============= ===============
</TABLE>


<TABLE>
<CAPTION>
                                                               September 30, 2002
                                              --------------------------------------------- ---------------
                                                                  Gross        Unrealized
                                                 Carrying      ----------------------------     Fair
                                                  Value           Gains          Losses         Value
                                              ---------------  ------------   ------------- ---------------
<S>                                             <C>             <C>                 <C>      <C>
Available for sale securities:
  U.S. Government and agency securities           $3,500,000      $ 13,924        $ 16,880     $ 3,497,044
  Corporate bonds                                  1,917,358        67,912          28,235       1,957,035
  Mortgage backed securities                       6,000,195       200,710               -       6,200,905
                                              ---------------  ------------   ------------- ---------------
     Total debt securities                        11,417,553       282,546          45,115      11,654,984
  Equity securities                                    1,243        54,657               -          55,900
                                              ---------------  ------------   ------------- ---------------

                                                 $11,418,796     $ 337,203        $ 45,115    $ 11,710,884
                                              ===============  ============   ============= ===============
</TABLE>

<TABLE>
<CAPTION>
                                                               September 30, 2001
                                              --------------------------------------------- ---------------
                                                                  Gross        Unrealized
                                                 Carrying      ----------------------------     Fair
                                                  Value           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
                                              ---------------  ------------   ------------- ---------------
     Total debt securities                         8,602,778       165,115           8,748       8,759,145
  Equity securities                                    1,243        63,757               -          65,000
                                              ---------------  ------------   ------------- ---------------

                                                  $8,604,021     $ 228,872         $ 8,748      $8,824,145
                                              ===============  ============   ============= ===============
</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,  debt
securities at September 30, 2002 is as follows:

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

             Due in one year or less            $          -      $         -
             Due after one to five years             500,000          506,735
             Due after five to ten years                   -                -
             Due after ten years                   4,917,358        4,947,344
                                                -------------     ------------
                                                   5,417,358        5,454,079
             Mortgage backed securities            6,000,195        6,200,905
                                                -------------     ------------
                                                $ 11,417,553      $11,654,984
                                                =============     ============


      There is no schedule of maturities for mortgage backed securities  because
      these investments are subject to prepayment.  On October 1, 2000, 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
      $2,314,133  and $2,385,919 at September 30, 2002 and $261,423 and $263,033
      at September 30, 2001 are pledged as security for deposits of governmental
      entities under the provisions of the Governmental Unit Deposit  Protection
      Act.

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

      Loans receivable are summarized as follows:

                                                       2002            2001
                                                   ------------    ------------
     First mortgage loans
         Secured by one to four family residence   $ 34,184,915    $ 27,680,636
         Construction loans                           1,233,301         826,697
         Commercial real estate                      12,364,600       6,952,000
                                                   ------------    ------------
                                                     47,782,816      35,459,333
                                                   ------------    ------------
       Less:
         Loans in process - real estate                (473,057)       (102,833)
         Deferred loan origination fees net of
           Costs of $120,268 and $105,499              (338,803)       (248,199)
                                                   ------------    ------------
     Total first mortgage loans                      46,970,956      35,108,301
                                                   ------------    ------------

     Consumer and other loans:
         Home equity                                 10,004,090       9,416,542
         Personal loans                                 268,729         286,844
         Loans secured by savings                       119,961         172,404
         Commercial business loans                       99,695         151,855
         Automobile                                     842,787          58,130
                                                   ------------    ------------
     Total consumer and other loans                  11,335,262      10,085,775
                                                   ------------    ------------
     Total loans                                     58,306,218      45,194,076
     Less allowance for loan losses                    (280,000)       (207,000)
                                                   ------------    ------------
                                                   $ 58,026,218    $ 44,987,076
                                                   ============    ============

                                      F-10
<PAGE>

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

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

      At September 30, 2002 and 2001,  nonaccrual  loans for which  interest had
      been discontinued totaled  approximately $-0- and $125,000,  respectively.
      Interest income actually recognized is summarized as follows:

                                                      2002             2001
                                                   ----------      ----------
            Interest income that would have
              been recognized                      $        -      $    8,039
            Income recognized                               -          (7,687)
                                                   ----------      ----------

            Interest income foregone               $        -      $      352
                                                   ==========      ==========


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

                                                      2002            2001
                                                    ---------       ---------
Allowance for loan losses:
      Beginning of year                             $ 207,000       $ 186,000
      Additional provisions                           115,849          41,369
      Charge offs                                     (42,849)        (20,369)
                                                   ----------       ---------

                                                    $ 280,000       $ 207,000
                                                    =========       =========

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

Beginning of year                                   $ 600,569      $ 634,071
Loans originated                                      261,576         89,739
Collection of principal                              (287,414)      (123,241)
                                                    ----------     ----------

End of year                                         $ 574,731      $ 600,569
                                                    ==========     ==========


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

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

        Loans  serviced  for  others  are  not  included  in  the   accompanying
        consolidated  balance sheets.  The unpaid principal balances of mortgage
        and  other  loans  serviced  for  others  were  $2,526,254  and  $-0- at
        September 30, 2002 and 2001, respectively.

                                      F-11
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        Accrued interest receivable is summarized as follows:

                                                          2002         2001
                                                        ---------    ---------

        Loans receivable                                $ 321,810    $ 259,136
        Mortgage backed securities                         35,198       38,922
        Other securities                                   33,451       20,627
                                                        ---------    ---------
                                                        $ 390,459    $ 318,685
                                                        =========    =========
7.      Premises and Equipment
        ----------------------

        Premises  and  equipment  are  summarized  by  major  classification  as
        follows:

<TABLE>
<CAPTION>
                                                  2002             2001       Useful lives
                                               -----------      ----------- ---------------

<S>                                          <C>              <C>          <C>
         Land                                  $  125,553       $  125,553
         Office building (Bordentown)           1,358,175        1,355,912   25 to 40 years
         Office building (Florence)                53,032           53,032   25 to 40 years
         Office building (Mount Laurel))          671,296           36,376   25 to 40 years
         Furniture, fixtures and equipment        633,246          566,514    5 to 7 years
         Construction in progress (Marlton)        48,501
                                               -----------      -----------
                                                2,889,803        2,137,387
         Less accumulated depreciation            772,013          655,712
                                               -----------      -----------
                                               $2,117,790       $1,481,675
                                               ===========      ===========
</TABLE>

        Depreciation  charged to  operations  was  $114,625  and $98,916 for the
        years ended 2002 and 2001, respectively.  The Bank leases a building and
        is  currently  renovating  the  leased  space  as  a  branch,  which  it
        anticipates  to open in the second  quarter of fiscal  year 2003.  Total
        renovation costs are estimated to approximate $200,000, of which $48,501
        has been  incurred as of September  30, 2002.  This lease is included in
        footnote 12.

8.      Deposits
        --------

        Deposits as of September 30 are summarized as follows:


                                            2002                 2001
                                          -------------     ------------

             NOW accounts                  $ 9,172,687      $11,633,929
             Money market accounts           3,343,808        2,669,202
             Passbook and club accounts     17,133,253        6,530,036
             Non interest bearing            2,702,286        2,752,941
                                          -------------     ------------

             Subtotal                       32,352,034       23,586,108
                                          -------------     ------------

             Certificates of deposit:
               1.01% to 2.00%                  376,387                -
               2.01% to 3.0%                26,130,176           82,713
               3.01% to 4.0%                 9,407,919        6,572,234
               4.01% to 5.0%                 3,166,692        8,177,818
               5.01% to 6.0%                 3,645,697       12,672,686
               6.01% to 7.0%                   210,082        7,064,876
                                          -------------     ------------

             Subtotal                       42,936,953       34,570,327
                                          -------------     ------------

                                          $ 75,288,987      $58,156,435
                                          =============     ============

                                      F-12
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        Deposits  of  officers  and  directors  totaled  $312,856  in 2002.  The
        aggregate  amount  of  jumbo  certificates  of  deposit  with a  minimum
        denomination of $100,000 was approximately $16,588,000 and $2,269,000 at
        September  30,  2002 and 2001.  These  certificates  of  deposit  do not
        receive  preferential rates of interest.  Deposits in excess of $100,000
        are not federally insured.

        As of September 30, 2002 and 2001,  scheduled maturities of certificates
        of deposit (rounded to the nearest $1,000) are summarized as follows:

                                                2002             2001
                                              -------------     ------------

             Due in 3 months or less          $ 14,563,000      $ 6,904,000
             Due after 3 months to 1 year       20,350,000       22,493,000
             Due after 1 year to 3 years         5,579,000        4,774,000
             Due after 3 years to 5 years        2,445,000          399,000
                                              -------------     ------------

                                              $ 42,937,000      $34,570,000
                                              =============     ============


        Interest  expense on deposits for the years ended September 30, 2002 and
        2001 is summarized as follows:

             NOW accounts                   $    96,012     $    99,715
             Money market accounts               55,148          62,676
             Passbook and club accounts         287,882         192,630
             Certificates of deposit          1,507,898       1,647,120
                                            ------------    ------------

                                            $ 1,946,940     $ 2,002,141
                                            ============    ============

9.      Federal Home Loan Bank Advances
        -------------------------------

        This  advance  bears  interest at 5.9% and matures in April 2009.  It is
        collateralized  by FHLB stock and  investment  securities.  The Bank has
        approximately  $19,694,000  available  for borrowing as of September 30,
        2002.

                  2003                                       $   138,038
                  2004                                           146,423
                  2005                                           155,318
                  2006                                           164,754
                  2007                                           174,762
               Thereafter                                        315,179
                                                             ------------

                 Total                                       $ 1,094,474
                                                             ============

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

        For the years ended September 31, 2002 and 2001,  proceeds from sales of
        securities  available for sale amounted to $11,748,671 and  $32,971,984,
        respectively.  Gross  realized  gains  amounted to $58,836 and $172,405,
        respectively.  Gross  realized  losses  amounted  to $-0-  and  $94,485,
        respectively.

                                      F-13
<PAGE>

                   FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        The Bank has qualified as a Savings  Institution under provisions of the
        Internal  Revenue Code.  Prior to January 1, 1996 the Bank was permitted
        to deduct  from  taxable  income an  allowance  for bad debts based on a
        percentage-of  taxable  income.  Such  percentage  was  8%  before  such
        deduction.  Retained  earnings at September  30, 2002 and 2001  included
        untaxed  earnings of approximately  $304,400 and $330,100,  representing
        such bad debt deductions.

        Retained earnings at September 30, 2002 and 2001 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 federal rate as follows:


                                                          2002          2001
                                                        -----------   --------
             Statutory tax rates                               34%        34%
             Tax at statutory rates                      $ 208,400    $ 4,900
             New Jersey Savings Institution Tax and
                Corporation Income Tax                      12,184        400
             Low tax bracket savings                             -     (2,738)
             Tax exempt income                                   -     (2,000)
             Miscellaneous                                  (2,740)     3,751
                                                         ----------   --------
                                                         $ 217,844    $ 4,313
                                                         ==========   ========


        The tax provision is summarized as follows:

                                                             2002        2001
                                                          ----------   ---------
             Current federal                              $ 233,035    $(17,623)
             Deferred federal                               (33,938)     21,696
             Current state                                   20,495      (1,037)
             Deferred state                                  (1,748)      1,277
                                                          ----------   --------
                                                          $ 217,844    $  4,313
                                                          ==========   ========

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

                                                            2002         2001
                                                         ----------   ----------
             Deferred tax assets:
               Allowance for loan losses                 $ 100,801    $  74,520
               Deferred loan origination fees, net          15,266       10,684
               Accrued compensation                         17,962       15,251
                                                         ----------   ----------
               Total deferred tax assets                   134,029      100,455
                                                         ----------   ----------

             Deferred tax liabilities:
               Unrealized appreciation on investments      105,148       79,241
               Premises and equipment                       45,643       46,992
               Tax reserve for loan losses                  54,240       55,003
                                                         ----------   ----------
               Total deferred tax liabilities              205,031      181,236
                                                         ----------   ----------
               Net deferred tax asset (liability)        $ (71,002)   $ (80,781)
                                                         ==========   ==========

                                      F-14
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

        At  September   30,  2002  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)              $ 546,300     5.75% to 6.375%        15 to 30 years
                                                                 0 to 3 points
             Home equity loans                     426,000     4.75% to 7.25%         3 to 15 years
                                                                 0 points
             Other loans                         1,985,010     5.75% to 13.25%        2 to 20 years
                                                -----------
                                                $2,957,310     0 to 1 points
                                                ===========
</TABLE>

        There are two letters of credit  outstanding  at September  30, 2002. 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  $205,875.  The Bank also has undrawn
        balances on consumer and  commercial  lines of credit of $1,939,749  and
        $104,638, respectively.

        The Bank has available two lines of credit through the Federal Home Loan
        Bank.  An  overnight  line of  credit  is  available  in the  amount  of
        $3,157,600. Additionally, a one month overnight repricing line of credit
        is available in the amount of $3,157,600.

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

                  2003                 $    41,927
                  2004                      47,030
                  2005                      49,387
                  2006                      44,123
                  2007                      46,772
               Thereafter                  850,015
                                       ------------

                 Total                 $ 1,079,254
                                       ============


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

        Fair Values of Financial Instruments

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

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

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

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

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

                                      F-15
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

13.     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,  excluding  commercial  loans,  and  other
        consumer  loans are based on quoted  market prices of similar loans sold
        in   conjunction   with   securitization   transactions,   adjusted  for
        differences  in  loan  characteristics.   Fair  values  for  fixed  rate
        commercial  mortgage  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  some  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)

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

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

<TABLE>
<CAPTION>
                                                                        Estimated                    Estimated
                                                           Carrying        Fair         Carrying        Fair
                                                            Amount         Value         Amount         Value
                                                           --------     ----------      ---------    ----------
<S>                                                     <C>            <C>            <C>           <C>
             Financial Assets (000's omitted)
             ---------------------------------------
             Cash and due from banks                       $ 9,162        $ 9,162        $ 9,282       $ 9,282
             Securities held to maturity                     1,147          1,186          2,058         2,106
             Securities available for sale                  11,711         11,711          8,824         8,824
             FHLB stock                                        500            500            373           373
             Loans receivable                               58,026         60,573         44,987        46,218
             Accrued interest receivable                       390            390            319           319

             Financial Liabilities (000's omitted)
             ---------------------------------------
             Deposit liabilities                            75,289         75,987         58,156        58,829
             FHLB advances                                   1,094          1,262          3,225         3,353
             Accrued interest payable                           36             36             61            61
             Other liabilities                                 476            476            340           340
</TABLE>


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

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

        A 401  (k)  Plan  covers  substantially  all  employees.  Employees  may
        contribute  up to 15  percent of their  compensation  subject to certain
        limits  based on federal tax laws.  Matching  contributions  equal to 50
        percent  of the  first  6  percent  of an  employee's  compensation  are
        contributed to the Plan.  Matching  contributions vest immediately.  For
        the years ended September 30, 2002 and 2001, expense attributable to the
        Plan amounted to $19,313 and $17,734, respectively.

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

        Effective  upon  conversion,  an ESOP was  established  for all eligible
        employees.  The ESOP used  $303,880  of  proceeds  from a term loan from
        Farnsworth  to purchase  30,388  shares of Company  common  stock in the
        initial  offering.  The term loan of $182,238  at  September  30,  2002,
        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,
        compensation  expense is reported  equal to the current  market price of
        the shares,  and the shares become outstanding for net income per common
        share computations. Dividends on allocated ESOP shares are recorded as a
        reduction of retained earnings.

                                                    2002          2001
                                                  ---------    ---------

             Allocated shares                     $ 12,152     $   9,114
             Unallocated shares                     18,236        21,274
                                                  ---------    ----------

             Total ESOP shares all unreleased     $ 30,388     $  30,388
                                                  =========    ==========

             Fair value of unallocated shares     $273,540     $ 234,294
                                                  =========    ==========

                                      F-17
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

15.      Benefit Plans (Continued)
         -------------

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

        On April 16,  2000  Farnsworth  established  a RSP to  provide  both key
        employees and outside  directors with a proprietary  interest in it in a
        manner  designed to  encourage  such  person to remain with the Bank.  A
        total of 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 in 2000. 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, 2002 and 2001,
        2,128 and 2,127 shares vested, respectively.

        On September 5, 2002 Farnsworth established an additional RSP to provide
        both key employees and outside directors with a proprietary  interest in
        it in a manner  designed  to  encourage  such  person to remain with the
        Bank. A total of 4,563  restricted  shares were transferred from the RSP
        Plan  established on April 16, 2000. An additional  6,263 shares will be
        purchased  as vesting  requirements  need to be  satisfied.  Rights to a
        total of  10,826  shares  were  issued to the  board of  directors,  two
        executive  officers and three employees.  The fair value of these shares
        will be charged to expense over the four year vesting period. During the
        year ended September 30, 2002, 2,706 shares vested.

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

        Stock option plans
        ------------------

        Farnsworth  has a stock  option plan that  provides  for the granting of
        non-qualified  stock options. In April 1999, it 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, 2002 and 2001, 15,952 and
        10,635  options were vested,  respectively,  and none were  exercised or
        forfeited.

        In September 2002, Farnsworth issued 21,652 options at an exercise price
        of $14.50 per share to key and non-key Bank  employees and  non-employee
        members  of  its  Board  Directors.  The  options  vest  ratably  on the
        anniversary  date over three years.  The options  expire ten years after
        the initial grant date. At September 30, 2002, 7,217 options vested, and
        none were exercised or forfeited.

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

                                                     2002               2001
                                                  ----------          ---------
Net income:
   As reported                                    $ 395,231           $ 10,099
   Proforma                                         376,128                891
Earnings per common share
   As reported                                         1.18                .03
         Basic                                         1.16                .03
         Diluted
   Proforma
         Basic                                         1.12               0.00
         Diluted                                       1.10               0.00


                                      F-18
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

15.      Benefit Plans (Continued)
         -------------

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

16.     Net Income Per Common Share
        ---------------------------

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

<TABLE>
<CAPTION>
                                                        2002                                2001
                                        ----------------------------------- -----------------------------------
                                                      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               $ 395,231     360,866               $ 10,099      360,866
        ESOP shares, not
        committed to be released                        (18,236)                            (21,274)
        RSP shares                                       (7,180)                            (12,014)
                                        ------------ ----------- ---------- -----------  ----------- ----------
         Basic earnings per share           395,231     335,450     $ 1.18      10,099      327,578     $ 0.03
         Common stock
           equivalents                                    5,089                                 382
                                        ------------ ----------- ---------- -----------  ----------- ----------
         Diluted earnings
           Per  share                     $ 395,231     340,539     $ 1.16    $ 10,099      327,960     $ 0.03
                                        ============ =========== ========== ===========  =========== ==========
</TABLE>

17.     Regulatory Capital Requirement
        ------------------------------

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

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

17      Regulatory Capital Requirement  (Continued) (000's omitted)
        -----------------------------------------------------------

        The Bank at September 30, 2002 and 2001 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, 2002:
            Risk-based capital         $ 5,903       12.86%      $ 3,673       8.00%       $ 4,591        10.00%
            Tier 1 capital               5,430       11.83%          N/A        N/A          2,754         6.00%
            Core capital                 5,430        6.58%        3,304       4.00%         4,125         5.00%
            Tangible capital             5,430        6.58%        1,237       1.50%           N/A          N/A

          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
</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, 2002, that
        the Bank meets all capital adequacy requirements to which it is subject.

        As of September 2002, 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)


18.     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, 2002 and 2001 and
        for the year then ended.


             Statement of Financial Condition       2002            2001
                                                ------------    ------------

             Assets
             Cash                                 $ 366,720       $ 388,956
             ESOP loan receivable                   182,328         212,716
             Investment in subsidiaries           3,416,380       2,980,006
             Other assets                            48,163          33,608
                                                ------------    ------------

             Total assets                       $ 4,013,591     $ 3,615,286
                                                ============    ============

             Liabilities
             Accrued expenses                   $    23,154     $    20,080
                                                ------------    ------------
             Total liabilities                       23,154          20,080

             Stockholders' equity                 3,990,437       3,595,206
                                                ------------    ------------

             Total liabilities and
                 stockholders' equity           $ 4,013,591     $ 3,615,286
                                                ============    ============

                                                    2002            2001
                                                ------------    ------------

             Income from subsidiaries           $   436,374     $    38,529
             Interest income                         22,794          42,934
                                                ------------    ------------
             Total income                           459,168          81,463

             Meeting expenses                        12,690          14,857
             Professional fees                       68,460          71,609
             Other expenses                               -           8,184
                                                ------------    ------------
             Total expenses                          81,150          94,650

             (Loss) income before income taxes      378,018         (13,187)
             Income tax benefit                      17,213          23,286
                                                ------------    ------------
             Net income                         $   395,231     $    10,099
                                                ============    ============

                                      F-21

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

<TABLE>
<CAPTION>

             Statement of Cash Flows                                         2002          2001
                                                                           ---------     ---------
<S>                                                                      <C>           <C>
             Cash flows from operating activities:
               Net income                                                  $395,231      $ 10,099
               Adjustments to reconcile net income to net cash
                  Used in operating activities:
                Increase in accrued expenses                                  3,074         1,537
                Equity in undistributed earnings of subsidiaries           (436,374)      (38,529)
                Decrease in accrued interest receivable                           -         7,784
                Increase in other assets                                    (14,555)      (14,453)
                                                                           ---------     ---------

                            Net cash used in operating activities           (52,624)      (33,562)
                                                                           ---------     ---------

             Cash flows from investing activities:
               Sale of investment                                                 -       481,500
               Repayment of ESOP loan                                        30,388        30,388
                                                                           ---------     ---------

                             Net cash provided by investing activities       30,388       511,888
                                                                           ---------     ---------

             Cash flows from financing activities:
               Proceeds from (repayment of ) loan from the Bank                   -      (170,625)
                                                                           ---------     ---------
                            Net cash used in financing activities                 -      (170,625)
                                                                           ---------     ---------

             Net increase (decrease) in cash                                (22,236)      307,701
             Cash - beginning                                               388,956        81,255
                                                                           ---------     ---------

             Cash - ending                                                 $366,720      $388,956
                                                                           =========     =========
</TABLE>

                                      F-22
<PAGE>
<TABLE>
<CAPTION>
<S>                                 <C>                                         <C>
Corporate Information
                                                       FARNSWORTH BANCORP, INC.
                                                         789 Farnsworth Avenue
                                                     Bordentown, New Jersey 08505
                                                            (609) 298-0723

                                                         PEOPLES SAVINGS BANK

              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                         Retired - President - E.J.Koenig, Inc.
                                                                (petroleum products/heating & air-conditioning)

                        Charles E. Adams                                        Edgar N. Peppler
           Retired - Florence Township Administrator               Retired - 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

                                         PEOPLES FINANCIAL SERVICES, INC.
                                                BOARD OF DIRECTORS
                                Gary N. Pelehaty                      Charles Alessi
                                   President                       Secretary/Treasurer
            Joseph H. Kelly                      R. Theodore Hinderer                      Jonas Singer
               President                              President                              Attorney
           Kelly Enterprises                 Credit Lenders Title Agency          Wells, Singer, Rubin & Musulin

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

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

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

                                                ------------------------
</TABLE>

The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 2002 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
18, 2003 at 10:00 a.m. at the Days Inn, 1073 Route 206, Bordentown, New Jersey.

                                       12