UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)
[X]  Annual report  pursuant to section 13 or 15 (d) of the Securities  Exchange
     Act of 1934

     For the fiscal year ended September 30, 2006

[ ]  Transition  report  pursuant  to  section  13 or  15(d)  of the  Securities
     Exchange Act of 1934

     For the transition period from              to
                                    ------------    ------------

                         Commission File Number 0-24621

                            Farnsworth Bancorp, Inc.
                            ------------------------
                 (Name of Small Business Issuer in Its Charter)

                 New Jersey                                    22-3591051
       -------------------------------                      ----------------
       (State or Other Jurisdiction of                      (I.R.S. Employer
       Incorporation or Organization)                      Identification No.)

789 Farnsworth Avenue, Bordentown, New Jersey                     08505
---------------------------------------------                     -----
(Address of Principal Executive Offices)                       (Zip Code)

Issuer's Telephone Number, Including Area Code:   (609) 298-0723
                                                  --------------

Securities registered under Section 12(b) of the Exchange Act:    None

Securities registered under Section 12(g) of the Exchange Act:

                     Common Stock, par value $0.10 per share
                                (Title of Class)

Check whether the issuer is not required to file reports  pursuant to Section 13
or Section 15(d) of the Exchange Act. [ ]

Check whether the issuer:  (1) filed all reports required to be filed by Section
13 or 15(d) of the  Exchange  Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports),  and (2) has been
subject to such filing requirements for the past 90 days. YES [X] NO [ ]

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure  will be contained,  to
the  best  of  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [X]

Indicate by check mark whether the  registrant is a shell company (as defined by
Rule 12b-2 of the Exchange Act). YES [ ] NO [X]

The issuer's revenues for its most recent fiscal year were $6,283,889.

The aggregate  market value of the voting common equity held by  non-affiliates,
based on the average bid and asked  price of the common  equity on December  12,
2006, was $16.3 million.

As of December 12, 2006, there were issued and outstanding 650,530 shares of the
issuer's Common Stock.

Transitional Small Business Disclosure Format (check one):  YES [  ]   NO [X]

<PAGE>

                                     PART I

         Farnsworth Bancorp,  Inc. (the "Company" or "Registrant") may from time
to time make written or oral "forward-looking  statements," including statements
contained in the Company's  filings with the Securities and Exchange  Commission
("SEC")  (including this Annual Report on Form 10-KSB and the exhibits thereto),
in its reports to stockholders and in other communications by the Company, which
are made in good faith by the Company  pursuant to the "safe harbor"  provisions
of the Private Securities Litigation Reform Act of 1995.

         These forward-looking statements involve risks and uncertainties,  such
as statements of the Company's plans,  objectives,  expectations,  estimates and
intentions,  that are subject to change based on various important factors (some
of which are beyond the Company's control). The following factors, among others,
could cause the Company's  financial  performance to differ  materially from the
plans,  objectives,  expectations,  estimates and  intentions  expressed in such
forward-looking statements: the strength of the United States economy in general
and  the  strength  of  the  local  economies  in  which  the  Company  conducts
operations;  the effects of, and changes in, trade, monetary and fiscal policies
and laws,  including  interest  rate  policies of the board of  governors of the
federal  reserve  system,   inflation,   interest  rates,  market  and  monetary
fluctuations;  the timely  development  of and  acceptance  of new  products and
services of the Company and the perceived  overall  value of these  products and
services by users,  including  the  features,  pricing  and quality  compared to
competitors'  products and  services;  the  willingness  of users to  substitute
competitors' products and services for the Company's products and services;  the
success of the  Company in  gaining  regulatory  approval  of its  products  and
services,  when required;  the impact of changes in financial services' laws and
regulations   (including  laws  concerning   taxes,   banking,   securities  and
insurance);  technological changes,  acquisitions;  changes in consumer spending
and  saving  habits;  and the  success  of the  Company  at  managing  the risks
resulting from these factors.

         The Company  cautions that the listed  factors are not  exclusive.  The
Company does not  undertake  to update any  forward-looking  statement,  whether
written  or oral,  that may be made  from  time to time by or on  behalf  of the
Company.

Item 1.  Description of Business
--------------------------------

General

         The Company is a New Jersey  corporation  organized  in May 1998 at the
direction  of Peoples  Savings  Bank (the  "Bank") to acquire all of the capital
stock that the Bank  issued in its  conversion  from the mutual to stock form of
ownership  (the  "Conversion").  On September 29, 1998,  the Bank  completed the
Conversion and became a wholly-owned subsidiary of the Company. The Company is a
unitary savings and loan holding company which,  under existing laws,  generally
is not  restricted  in the types of business  activities  in which it may engage
provided   that  the  Bank   retains  a  specified   amount  of  its  assets  in
housing-related  investments.  The Company  conducts no significant  business or
operations  of its own other than  holding all of the  outstanding  stock of the
Bank and  investing the  Company's  portion of the net proceeds  obtained in the
Conversion.

         The Bank,  originally founded in 1880, 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
("OTS") and its deposits are  federally  insured by the Deposit  Insurance  Fund
("DIF") of the Federal Deposit Insurance Corporation ("FDIC").

                                       1

<PAGE>

         The Bank is a member of, and owns  capital  stock in, the Federal  Home
Loan Bank  ("FHLB") of New York,  which is one of the 12  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 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.

Recent Developments

         On June 23, 2006, the Company,  Sterling Banks, Inc. and Sterling Bank,
a New Jersey chartered  commercial bank ("Sterling"),  entered into an Agreement
and Plan of Merger (the  "Agreement").  Under the  Agreement,  the Company  will
merge with and into Sterling Banks,  Inc. (In  Organization),  the proposed bank
holding  company for Sterling  (the  "Merger"),  in exchange  for 2.3625  shares
(after  adjustment  for Sterling's  stock  dividend) of Sterling  Bank's,  Inc.,
common stock, or $27.50 in cash, or a combination of cash and stock,  and at the
election of the Company's Farnsworth stockholders,  subject to an overall mix of
50 percent  stock and 50  percent  cash.  The Merger is valued at  approximately
$19.1 million.  Sterling will be the surviving bank in the Merger. The Agreement
and the transactions  contemplated  thereby were approved by stockholders of the
Company  on  December  18,  1006 but are still  subject  to the  receipt  of all
required regulatory approvals, as well as other customary conditions. The Merger
is currently expected to be completed during the first quarter of 2007, although
no assurances can be given as to whether or when the Merger will be consummated.
For more information regarding the Agreement and the Merger, please refer to the
Company's Current Report on Form 8-K, dated June 23, 2006, as filed with the SEC
on June 26, 2006.

Competition

         The Bank is one of many financial  institutions serving its market area
of northern  Burlington County, New Jersey. The competition for deposit products
comes from other insured financial institutions such as commercial banks, thrift
institutions, credit unions, and multi-state regional banks in the Bank's market
area.  Deposit  competition also includes a number of insurance products sold by
local agents and investment  products such as mutual funds and other  securities
sold by local and regional  brokers.  Loan  competition  varies  depending  upon
market  conditions and comes from other insured  financial  institutions such as
commercial  banks,  thrift  institutions,  credit unions,  multi-state  regional
banks, and mortgage bankers.

                                       2

<PAGE>

Lending Activities

         Loan  Portfolio  Data. Set forth below is selected data relating to the
composition of the Bank's loan portfolio by type of loan on the dates indicated:

<TABLE>
<CAPTION>
                                                           At September 30,
                                             ---------------------------------------------
                                                    2006                     2005
                                             ------------------      ---------------------
                                                $         %             $            %
                                             -------    -----        -------       -----
                                                     (Dollars in thousands)
<S>                                        <C>         <C>         <C>            <C>
Type of Loans:
--------------
  Residential.........................       $38,472     49.3%       $36,296        47.0%
  Construction........................         3,465      4.4          7,556         9.8
  Commercial real estate..............        24,092     30.9         22,135        28.7
  Commercial business.................         1,501      1.9          1,310         1.7
  Consumer loans:
    Home equity.......................         4,632      5.9          3,434         4.4
    Savings account...................            94      0.1            238         0.3
    Automobile and mobile home .......         5,530      7.2          5,908         7.7
    Other.............................           260      0.3            307         0.4
                                             -------    -----        -------       -----
                                              78,046    100.0%        77,184       100.0%
                                             -------    =====        -------       =====
Less:
  Loans in process....................         3,554                   6,663
  Deferred loan origination fees
    and costs.........................           (44)                    (15)
  Allowance for loan losses...........           641                     531
                                             -------                 -------
Total loans, net......................       $73,895                 $70,005
                                             =======                 =======
</TABLE>

         Loan Maturity. The following table sets forth the estimated maturity of
the Bank's loan  portfolio  at September  30,  2006.  The table does not include
prepayments  or  scheduled  principal  repayments.   Prepayments  and  scheduled
principal repayments on loans totaled $15.3 million for the year ended September
30,  2006.  Adjustable-rate  mortgage  loans  are  shown  as  maturing  based on
contractual maturities.

<TABLE>
<CAPTION>
                                                     Due after
                                     Due within      1 through      Due after
                                       1 year         5 years        5 years          Total
                                     ----------       -------        -------          -----
                                       1 year
                                                        (In thousands)
<S>                                  <C>            <C>             <C>            <C>
Residential.................           $   482        $ 2,497         $35,493        $38,472
Construction................             3,049            416              --          3,465
Commercial real estate......             5,974          1,703          16,415         24,092
Commercial business.........               626            875              --          1,501
Consumer....................               155          7,604           2,757         10,516
                                       -------        -------         -------        -------
     Total..................           $10,286        $13,095         $54,665        $78,046
                                       =======        =======         =======        =======
</TABLE>

                                       3

<PAGE>

         The following table sets forth the dollar amount of all loans due after
September  30, 2007,  which have  pre-determined  interest  rates and which have
floating or adjustable interest rates.

                                             Floating or
                         Fixed Rates       Adjustable Rates       Total
                         -----------       ----------------       -----
                                          (In thousands)
Residential..........     $36,775               $ 1,215          $37,990
Commercial...........       4,655                14,754           19,409
Consumer.............      10,361                    --           10,361
                          -------               -------          -------
    Total............     $51,791               $15,969          $67,760
                          =======               =======          =======


Mortgage Loans:

         One- to  Four-Family  Residential  Loans.  The Bank's  primary  lending
activity  consists of  originating  one- to four-family  fixed-rate  residential
mortgage loans which are  owner-occupied  and secured by property located in the
Bank's market area. The Bank generally  originates  fixed-rate loans with terms,
conditions and  documentation  which would permit it to either sell the loans to
Federal  National  Mortgage  Association  ("FNMA" or Federal Home Loan  Mortgage
Corporation ("FHLMC")), in the secondary market or retain them in its portfolio,
depending on the yield on the loan and on the Bank's asset/liability  management
objectives.  While the Bank has in the past originated  adjustable-rate mortgage
("ARM") loans, this has not been a significant aspect of the Bank's business. At
September 30, 2006, the Bank had $1,215,000 in residential ARM loans.

         The Bank's  fixed-rate  loans  generally have terms from 10 to 30 years
with  principal  and  interest  payments   calculated  using  up  to  a  30-year
amortization period. Some of these fixed-rate loans are balloon loans with terms
of 5 or 7 years, with principal and interest  payments  calculated using up to a
30-year  amortization  period.  The maximum  loan-to-value  ratio on residential
mortgage loans is 95%. Loans originated with a loan-to-value  ratio in excess of
80% require private mortgage insurance.

         The Bank's mortgage loans generally include due-on-sale  clauses.  This
gives the Bank the right to deem the loan  immediately  due and  payable  in the
event the borrower  transfers  ownership  of the property  securing the mortgage
loan without the Bank's consent.

         Commercial Real Estate Loans.  The Bank's  commercial real estate loans
are secured by office  buildings,  retail  establishments  and other  commercial
properties.  These loans may be made in an amount up to the Bank's  maximum loan
to one borrower limit of approximately $1,258,000.  These loans generally do not
have  terms  greater  than 15  years.  If a  borrower  should  require  a longer
amortization  period,  the  loan  will be an  adjustable  or  balloon  mortgage,
adjusting or maturing in five years.

         Commercial real estate lending  entails  significant  additional  risks
compared to residential  property  lending.  These loans typically involve large
loan balances to single borrowers or groups of related borrowers.  The repayment
of these loans  typically is dependent on the  successful  operation of the real
estate project  securing the loan. For commercial real estate these risks can be
significantly  affected by supply and demand conditions in the market for office
retail space and may also be subject to adverse  conditions  in the economy.  To
minimize  these  risks,  the Bank  generally  limits this type of lending to its
market  area  and to  borrowers  who are  otherwise  well  known to the Bank and
generally limits the loan to value ratio to 75%.

                                       4

<PAGE>

         Construction   Loans.   The   Bank   makes   residential   construction
loans/permanent  loans  on  one-  to  four-family  residential  property  to the
individuals   who  will  be  the  owners  and  occupants   upon   completion  of
construction.  The  Bank  also  makes  commercial  construction  loans  to local
businesses.

         Interest  payments only are required during  construction and these are
paid from the borrower's own funds. These loans are made at 1% to 2% above prime
and have terms of up to 12 months. The maximum loan-to-value ratio is 75% of the
appraised value of the completed  project.  Upon completion of construction  the
loan converts to a permanent  loan and regular  principal and interest  payments
commence. The Bank does not finance any speculative projects.

         Construction lending is generally considered to involve a higher degree
of credit risk than long-term  financing of residential  properties.  The Bank's
risk of loss on a  construction  loan is dependent  largely upon the accuracy of
the initial  estimate of the property's  value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability  of the  property  upon  completion  of the  project  prove  to be
inaccurate,  the Bank may be compelled to advance  additional  funds to complete
the construction.  Furthermore,  if the final value of the completed property is
less  than  the  estimated  amount,  the  value  of the  property  might  not be
sufficient to assure the repayment of the loan.

         Commercial  Business  Loans.  The  Bank's  commercial  loans  generally
constitute  lines of  credit to local  businesses.  These  loans  are  primarily
secured by real estate and  generally  do not have terms  greater than one year.
The Bank offers  commercial  business  loans to benefit from the higher fees and
interest rates and the shorter terms to maturity.

         Unlike  residential  mortgage  loans,  which  generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable,  commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business  loans may be  substantially  dependent  on the success of the business
itself and the general economic environment.  Commercial loans, therefore,  have
greater credit risk than residential mortgage loans.

         Consumer Loans.  The Bank offers  non-collateralized  personal loans in
the  amounts of up to $10,000  in order to  provide a wider  range of  financial
services to its customers and because these loans provide higher  interest rates
and shorter terms (12 to 36 months) than many of its other loans.  The Bank also
offers loans with savings  pledged as additional  security.  The Bank's consumer
loans  consist of home  equity,  savings  account,  automobile,  mobile home and
personal loans.

         The home  equity  loans  the Bank  originates  are  secured  by one- to
four-family residences.  These loans have terms of 3 to 15 years, generally will
not exceed  $100,000 and have  loan-to-value  ratios of 80% or less. Home equity
lines of  credit  have  interest  rates set at prime  and are  subject  to a 75%
loan-to-value ratio, which includes a first mortgage balance.

         Consumer loans may entail greater risk than residential mortgage loans,
particularly  in the case of  consumer  loans that are  unsecured  or secured by
assets that depreciate rapidly.  Repossessed collateral for a defaulted consumer
loan may not be  sufficient  for  repayment  of the  outstanding  loan,  and the
remaining deficiency may not be collectible.

         Loan Approval  Authority and  Underwriting.  The Bank's loan committee,
which is comprised of President Pelehaty,  Vice President Alessi, and the Bank's
Senior Loan  Officer and the Bank's Loan

                                       5

<PAGE>

Servicing  Manager,  approves  one-  to  four-family  mortgage  loans  up to the
conforming loan limit and other loans up to $417,000.  Loan requests above these
amounts  must be  approved  by the full board of  directors,  which  meets twice
monthly, or by the Executive  Committee composed of four non-employee  directors
and President Pelehaty.

         Loan  Commitments.   At  September  30,  2006,   commitments  to  cover
originations of loans totaled $3.9 million. The Bank believes that virtually all
of its commitments will be funded.

         Loans to One Borrower.  The maximum  amount of loans which the Bank may
make to any one  borrower  may not  exceed  15% of its  unimpaired  capital  and
unimpaired  surplus.  The  Bank  may lend an  additional  10% of its  unimpaired
capital  and  unimpaired  surplus  if the  loan  is  fully  secured  by  readily
marketable  collateral.  The Bank's maximum limit for residential  single-family
construction and development loans to builders is 25% of unimpaired capital. The
Bank's  maximum  loan to one  borrower  limit was  approximately  $1,258,000  at
September  30, 2006. At September  30, 2006,  the aggregate  loans of the Bank's
five  largest  borrowers  had  outstanding  balances of between  $1,209,000  and
$651,000.

Non-performing and Problem Assets

         Loan  Delinquencies.  Loans are  reviewed  on a  monthly  basis and are
placed on a non-accrual  status when, in the Bank's  opinion,  the collection of
additional interest is doubtful.  Interest accrued and unpaid at the time a loan
is placed on nonaccrual  status is charged against interest  income.  Subsequent
interest  payments,  if any,  are either  applied to the  outstanding  principal
balance or recorded as  interest  income,  depending  on the  assessment  of the
ultimate collectibility of the loan.

         Non-performing  Assets.  The  following  table sets  forth  information
regarding  non-accrual  loans and real estate owned, as of the dates  indicated.
For the year ended  September  30,  2006,  interest  income that would have been
recorded on loans accounted for on a non-accrual  basis under the original terms
of such loans was $61,000.

                                       6

<PAGE>

<TABLE>
<CAPTION>
                                                                                At September 30,
                                                                              --------------------
                                                                               2006          2005
                                                                               ----          ----
                                                                             (Dollars in thousands)
<S>                                                                            <C>             <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
  Permanent loans secured by 1-4 family units.........................           $  161          $264
  Non-residential.....................................................              878           335
  Consumer............................................................                -             2
                                                                                 ------          ----
Total.................................................................            1,039           601
                                                                                 ------          ----

Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
  Permanent loans secured by 1-4 family units.........................               --            --
  Permanent loans secured by other real estate........................               --            --
Consumer..............................................................               --            --
                                                                                 ------          ----
Total.................................................................               --            --
                                                                                 ------          ----
Total non-accrual and accrual loans...................................            1,039           601
Real estate owned.....................................................               --            --
                                                                                 ------          ----
Total nonperforming assets............................................           $1,039          $601
                                                                                 ======          ====
Total non-accrual and accrual loans to net loans......................            1.41%         0.79%
Total non-accrual and accrual loans to total assets...................            0.97%         0.53%
Total non performing assets to total assets...........................            0.97%         0.53%
</TABLE>

         Classified Assets. OTS regulations provide for a classification  system
for problem  assets of savings  associations  which  covers all problem  assets.
Under this classification system, problem assets of savings institutions such as
the Bank are  classified as  "substandard,"  "doubtful,"  or "loss." An asset is
considered  substandard if it is inadequately protected by the current net worth
and paying  capacity  of the  borrower  or of the  collateral  pledged,  if any.
Substandard  assets include those  characterized  by the "distinct  possibility"
that the savings  institution  will sustain "some loss" if the  deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in  those  classified  substandard,  with  the  added  characteristic  that  the
weaknesses  present make  "collection  or  liquidation in full," on the basis of
currently  existing facts,  conditions,  and values,  "highly  questionable  and
improbable." Assets classified as loss are those considered  "uncollectible" and
of such little value that their  continuance as assets without the establishment
of a specific loss reserve is not warranted.  Assets may be designated  "special
mention"   because  of  potential   weakness  that  do  not  currently   warrant
classification in one of the aforementioned categories.

         When  a  savings  association   classifies  problem  assets  as  either
substandard or doubtful,  it may establish general allowances for loan losses in
an amount  deemed  prudent by  management.  General  allowances  represent  loss
allowances which have been established to recognize the inherent risk associated
with lending activities,  but which, unlike specific  allowances,  have not been
allocated to particular problem assets.  When a savings  association  classifies
problem assets as loss, it is required either to establish a specific  allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's  determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS,  which may order the  establishment  of additional  general or specific
loss  allowances.  A portion of general  loss  allowances  established  to cover
possible  losses related to assets  classified as substandard or doubtful may be
included in determining a savings  association's  regulatory  capital.  Specific
valuation  allowances  for loan losses

                                       7

<PAGE>

generally do not qualify as regulatory  capital. At September 30, 2006, the Bank
had $73,000 of loans  classified  as special  mention,  $974,000  classified  as
substandard, and $0 of loans classified as doubtful or loss.

         Allowances  for Loan Losses.  A provision for loan losses is charged to
operations  based on management's  evaluation of the losses that may be incurred
in the Bank's loan portfolio. The evaluation, including a review of all loans on
which full  collectibility  of  interest  and  principal  may not be  reasonably
assured,  considers:  (i) the Bank's past loan loss  experience,  (ii) known and
inherent risks in the Bank's portfolio, (iii) adverse situations that may affect
the  borrower's  ability to repay,  (iv) the estimated  value of any  underlying
collateral, and (v) current economic conditions.

         The Bank monitors its  allowance for loan losses and make  additions to
the allowance as economic  conditions  dictate.  Although the Bank maintains its
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in its loan portfolio, future losses could exceed estimated amounts
and additional  provisions for loan losses could be required.  In addition,  the
Bank's determination as to the amount of allowance for loan losses is subject to
review by the OTS,  as part of its  examination  process.  After a review of the
information available,  the OTS might require the establishment of an additional
allowance.

         The following  table  illustrates  the  allocation of the allowance for
loan losses for each category of loans.  The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the  allowance to absorb losses in other
loan categories.

                                               At September 30,
                                 -----------------------------------------------
                                       2006                        2005
                                 --------------------       --------------------
                                           Percent of                Percent of
                                           Loans in                   Loans in
                                             Each                       Each
                                           Category                   Category
                                           to Total                   to Total
                                 Amount     Loans           Amount      Loans
                                 ------     -----           ------      -----
                                          (Dollars in thousands)

Residential.................       $136      21.21%           $ 78      14.69%
Commercial real estate......        311      48.52             265      49.91
Commercial business.........         38       5.92              33       6.21
Consumer ...................        156      24.35             155      29.19
                                   ----     ------            ----     ------
    Total allowance for
      loan losses...........       $641     100.00%           $531     100.00%
                                   ====     ======            ====     ======


                                       8

<PAGE>

         The following table sets forth  information  with respect to the Bank's
allowance for loan losses at the dates and for the periods indicated:

                                                           At September 30,
                                                        ----------------------
                                                          2006           2005
                                                        -------        -------
                                                       (Dollars in thousands)

Total loans outstanding (1)...........................  $78,046        $77,184
                                                        =======        =======
Average loans outstanding(1)..........................  $73,187        $68,107
                                                        =======        =======

Allowance balances (at beginning of period)...........     $531           $451
Provision:
 Residential..........................................       58              2
 Commercial real estate...............................       46             (6)
 Commercial Business..................................        5             14
 Consumer.............................................       19             99
Net recoveries (charge offs)..........................      (18)           (29)
                                                           ----           ----
Allowance balance (at end of period)..................     $641           $531
                                                           ====           ====
Allowance for loan losses as a percent of
  total loans outstanding.............................     0.82%          0.69%
Net loans charged off as a percent of average
  loans outstanding...................................     0.02%          0.04%
_____________
(1)  Excludes  allowance for loan losses,  deferred loan origination fees, costs
     and loans in process.

Investment Activities

         Investment  Securities.  The Bank is required under federal regulations
to  maintain  liquid  assets  which  may be  invested  in  specified  short-term
securities  and certain other  investments.  The Bank  classifies its investment
securities as "available-for-sale" or "held-to-maturity" in accordance with SFAS
No. 115.

         The   Bank's    investment    securities    "available-for-sale"    and
"held-to-maturity"  portfolios at September 30, 2006 did not contain  securities
of any  issuer  with an  aggregate  book  value in excess  of 10% of the  Bank's
equity, excluding those issued by the United States government agencies.

         To supplement lending activities,  the Bank has invested in residential
mortgage-backed  securities.  Mortgage-backed securities can serve as collateral
for   borrowings   and,   through   repayments,   as  a  source  of   liquidity.
Mortgage-backed  securities  represent  a  participation  interest  in a pool of
single-family  or other type of mortgages.  Principal and interest  payments are
passed  from  the  mortgage  originators,   through  intermediaries   (generally
quasi-governmental agencies) that pool and repackage the participation interests
in the form of securities, to investors such as the Bank. The quasi-governmental
agencies  guarantee  the payment of  principal  and  interest to  investors  and
include the FHLMC, the Government  National  Mortgage  Association  ("GNMA") and
FNMA.  Expected  maturities  will  differ  from  contractual  maturities  due to
scheduled  repayments and because borrowers may have the right to call or prepay
obligations with or without prepayment penalties.

         Investment Portfolio. The following table sets forth the carrying value
of the Bank's investments.  See Note 3 to the Company's  consolidated  financial
statements for the fiscal year ended  September 30, 2006,  which follows Item 14
of this Form 10-KSB.

                                       9

<PAGE>

                                                               At September 30,
                                                               ----------------
                                                               2006         2005
                                                               ----         ----
                                                                (In thousands)

Investments securities held-to-maturity:
  State and local government...............................  $    --     $   755
  Mortgage-backed securities...............................      162         215
                                                             -------     -------
     Total investment securities held-to-maturity..........      162         970
                                                             =======     =======

Investment securities available-for-sale:
  Equities.................................................       66          56
  Mortgage-backed securities ..............................   12,606      12,009
  U.S. agency securities...................................    7,290       7,354
                                                             -------     -------
      Total investment securities available-for-sale.......   19,962      19,419
                                                             -------     -------

Interest-bearing deposits..................................    8,921       8,549
FHLB stock.................................................      205         520
                                                             -------     -------
Other investments..........................................    9,126       9,069
                                                             -------     -------
     Total investments.....................................  $29,250     $29,458
                                                             =======     =======


                                       10

<PAGE>

         The following table sets forth certain information  regarding scheduled
maturities,  carrying  values,  approximate  fair values,  and weighted  average
yields for the Bank's investments at September 30, 2006 by contractual maturity.
The following  table does not take into  consideration  the effects of scheduled
repayments or the effects of possible prepayments.

<TABLE>
<CAPTION>
                                                                                                                     Total
                                One Year or Less  One to Five Years  Five to Ten Years More than Ten Years Investment Securities
                                ----------------  -----------------  ----------------- ------------------- ---------------------
                                         Weighted          Weighted          Weighted          Weighted          Weighted
                                Carrying Average  Carrying Average  Carrying Average  Carrying Average  Carrying Average   Market
                                 Value    Yield     Value   Yield     Value   Yield     Value   Yield     Value   Yield     Value
                                 -----    -----     -----   -----     -----   -----     -----   -----     -----   -----     -----
                                                                  (Dollars in thousands)
<S>                             <C>       <C>     <C>       <C>     <C>       <C>    <C>        <C>    <C>        <C>    <C>
Available-for-Sale:
   U.S. agency securities...... $    --      --%   $1,580    3.10%   $3,823    4.36%  $ 1,887    4.59%  $ 7,290    4.26%  $ 7,290
   Mortgage-backed securities..      --               307    4.00%    2,709    3.63%    9,590    4.84%   12,606    4.56%   12,606
   FHLMC stock.................      66    1.14%       --      --        --      --        --      --        66    1.14%       66
   Interest-bearing deposits...   8,921    5.07%       --      --        --      --        --      --     8,921    5.07%    8,921
   FHLB stock..................     205    6.93%       --      --        --      --        --      --       205    6.93%      205
Held-to-Maturity:
  Mortgage-backed securities...      --      --        --      --        23    4.60%      139    5.93%      162    5.73%      163
                                 ------    ----    ------    ----    ------    ----   -------    ----   -------    ----   -------
  Total investments............  $9,192    4.97%   $1,887    3.25%   $6,555    4.06%  $11,616    4.83%  $29,250    4.62%  $29,252
                                 ======    ====    ======    ====    ======    ====   =======    ====   =======    ====   =======
</TABLE>


                                       11

<PAGE>

Sources of Funds

         General.  Deposits  are the Bank's major  external  source of funds for
lending and other investment  purposes.  Funds are also derived from the receipt
of  payments  on loans and  prepayment  of loans and  maturities  of  investment
securities and borrowings and  operations.  Scheduled loan principal  repayments
are a relatively stable source of funds,  while deposit inflows and outflows and
loan  prepayments  are  significantly  influenced by general  interest rates and
market conditions.

         Consumer and commercial deposits are attracted  principally from within
the Bank's  primary  market area  through the offering of a selection of deposit
instruments including checking accounts,  regular savings accounts, money market
accounts, and term certificate accounts. IRA accounts are also offered.

         Certificates  of Deposit.  The following  table indicates the amount of
the Bank's  certificates  of deposit of $100,000 or more by time remaining until
maturity as of September 30, 2006.

                                                       Certificates
            Maturity Period                             of Deposit
            ---------------                             ----------
                                                      (In thousands)

            Within three months............                $1,085
            Three through six months.......                   773
            Six through twelve months......                 2,597
            Over twelve months.............                 6,740
                                                          -------
                                                          $11,195
                                                          =======

         Borrowings.  Advances (borrowings) may be obtained from the FHLB of New
York to supplement the Bank's supply of lendable  funds.  Advances from the FHLB
of New York are typically secured by a pledge of the Bank's stock in the FHLB of
New York, a portion of the Bank's first mortgage loans, and other assets.

Subsidiary Activity

         In  addition  to the Bank,  the  Company  has one  subsidiary,  Peoples
Financial  Services,  Inc., a New Jersey  corporation  which was incorporated on
November 27, 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.

Personnel

         At  September  30,  2006,  the Bank had 30  full-time  employees  and 2
part-time  employees.  None  of  the  Bank's  employees  are  represented  by  a
collective bargaining group.

                                       12

<PAGE>

                           REGULATION AND SUPERVISION

         Set forth below is a brief  description of certain laws which relate to
the regulation of the Company and the Bank. The description  does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.

Holding Company Regulation

         General.  Farnsworth  Bancorp,  Inc.,  is a  savings  and loan  holding
company,  subject to regulation and supervision by the OTS. In addition, the OTS
has  enforcement  authority over  Farnsworth  Bancorp,  Inc. and any non-savings
institution  subsidiaries.   This  permits  the  OTS  to  restrict  or  prohibit
activities that it determines to be a serious risk to Peoples Savings Bank. This
regulation is intended  primarily for the  protection of the  depositors and not
for the benefit of stockholders of Farnsworth Bancorp, Inc.

         Activities  Restrictions.  As a grandfathered  unitary savings and loan
holding  company  under the GLB Act, the Company is generally not subject to any
restrictions on its business activities or those of its non-savings  institution
subsidiaries.  However, if the Company were to fail to meet the Qualified Thrift
Lender Test, then it would become subject to the activities  restrictions of the
Home Owners' Loan Act applicable to multiple holding companies.  See "Regulation
of the Bank -- Qualified Thrift Lender Test."

         If the Company were to acquire control of another savings  association,
it would  lose  its  grandfathered  status  under  the GLB Act and its  business
activities  would  be  restricted  to  certain   activities   specified  by  OTS
regulation,  which include performing  services and holding properties used by a
savings institution  subsidiary,  certain activities  authorized for savings and
loan  holding  companies  as  of  March  5,  1987,  and  nonbanking   activities
permissible for bank holding companies  pursuant to the Bank Holding Company Act
of 1956 (the "BHC Act") or authorized for financial holding  companies  pursuant
to the GLB Act.  Furthermore,  no company  may  acquire  control of the  Company
unless the acquiring  company was a unitary  savings and loan holding company on
May 4, 1999 (or became a unitary savings and loan holding company pursuant to an
application pending as of that date) or the acquiring company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the BHC Act as amended by the GLB Act.

         Mergers and Acquisitions. Farnsworth Bancorp, Inc. must obtain approval
from the OTS  before  acquiring  more  than 5% of the  voting  stock of  another
savings  institution  or savings and loan holding  company or acquiring  such an
institution  or holding  company by merger,  consolidation  or  purchase  of its
assets.  In evaluating an application  for Farnsworth  Bancorp,  Inc. to acquire
control of a savings  institution,  the OTS would  consider  the  financial  and
managerial  resources and future prospects of Farnsworth  Bancorp,  Inc. and the
target  institution,  the effect of the acquisition on the risk to the insurance
funds, the convenience and the needs of the community and competitive factors.

         The USA Patriot Act. In response to the events of  September  11, 2001,
the Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001, or the USA Patriot Act, was signed
into law on October 26, 2001.  The USA Patriot Act gives the federal  government
new powers to address  terrorist  threats  through  enhanced  domestic  security
measures,  expanded  surveillance  powers,  increased  information  sharing  and
broadened anti-money laundering  requirements.  By way of amendments to the Bank
Secrecy  Act,  Title III of the USA  Patriot  Act  takes  measures  intended  to
encourage information sharing among bank regulatory agencies and law enforcement
bodies. Further,  certain provisions of Title III impose affirmative obligations
on a broad range of financial institutions,  including banks, thrifts,  brokers,
dealers,  credit unions,  money transfer agents and parties registered under the
Commodity Exchange Act.

                                       13

<PAGE>

         Among other requirements,  Title III of the USA Patriot Act imposes the
following requirements with respect to financial institutions:

         o        Pursuant  to Section  352,  all  financial  institutions  must
                  establish  anti-money  laundering  programs that  include,  at
                  minimum: (i) internal policies, procedures, and controls; (ii)
                  specific  designation of an anti-money  laundering  compliance
                  officer; (iii) ongoing employee training programs; and (iv) an
                  independent  audit function to test the anti-money  laundering
                  program.

         o        Section 326  authorizes  the  Secretary of the  Department  of
                  Treasury, in conjunction with other bank regulators,  to issue
                  regulations that provide for minimum standards with respect to
                  customer identification at the time new accounts are opened.

         o        Section 312 requires  financial  institutions  that establish,
                  maintain,  administer or manage  private  banking  accounts or
                  correspondence  accounts in the United  States for  non-United
                  States  persons or their  representatives  (including  foreign
                  individuals   visiting   the  United   States)  to   establish
                  appropriate,  specific,  and,  where  necessary,  enhanced due
                  diligence policies, procedures and controls designed to detect
                  and report money laundering.

         o        Effective  December  25,  2001,  financial   institutions  are
                  prohibited from  establishing,  maintaining,  administering or
                  managing   correspondent  accounts  for  foreign  shell  banks
                  (foreign  banks  that do not have a physical  presence  in any
                  country),  and  will be  subject  to  certain  record  keeping
                  obligations with respect to correspondent  accounts of foreign
                  banks.

         o        Bank  regulators are directed to consider a holding  company's
                  effectiveness  in combating  money  laundering  when ruling on
                  Federal Reserve Act and Bank Merger Act applications.

         Sarbanes-Oxley Act of 2002. On July 30, 2002, the President signed into
law the  Sarbanes-Oxley Act of 2002 (the "Act"),  which implemented  legislative
reforms intended to address  corporate and accounting  fraud. In addition to the
establishment of a new accounting  oversight board to enforce auditing,  quality
control and independence standards and which is funded by fees from all publicly
traded companies,  the Act places certain  restrictions on the scope of services
that may be provided by accounting  firms to their public company audit clients.
Any  non-audit  services  being  provided to a public  company audit client will
require preapproval by the company's audit committee. In addition, the Act makes
certain changes to the requirements for partner rotation after a period of time.
The Act requires chief executive officers and chief financial officers, or their
equivalent,  to certify  to the  accuracy  of  periodic  reports  filed with the
Securities and Exchange  Commission,  subject to civil and criminal penalties if
they knowingly or willingly violate this certification requirement. In addition,
under the Act, counsel is required to report evidence of a material violation of
the  securities  laws or a breach of  fiduciary  duty by a company  to its chief
executive  officer or its chief legal  officer,  and, if such  officer  does not
appropriately  respond,  to report such evidence to the audit committee or other
similar committee of the board of directors or the board itself.

         Under the Act,  longer prison terms apply to corporate  executives  who
violate federal  securities laws; the period during which certain types of suits
can be brought against a company or its officers is extended; and bonuses issued
to top executives prior to restatement of a company's  financial  statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives  are also  prohibited  from insider  trading during  retirement  plan
"blackout"  periods,  and  loans to  company  executives  (other  than  loans by
financial   institutions   permitted  by  federal  rules  and  regulations)  are

                                       14

<PAGE>

restricted.  In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal  Accounts  for  Investor  Restitution  provision  also  requires the
Securities and Exchange  Commission to develop  methods of improving  collection
rates.  The  legislation  accelerates  the time frame for  disclosures by public
companies,  as they must  immediately  disclose  any  material  changes in their
financial  condition or operations.  Directors and executive  officers must also
provide  information  for most changes in  ownership  in a company's  securities
within two business days of the change.

         The  Act  also  increases  the  oversight  of,  and  codifies   certain
requirements  relating  to audit  committees  of public  companies  and how they
interact with the company's "registered public accounting firm." Audit Committee
members must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose  whether at least one member of the  committee is a "financial  expert"
(as such term is defined by the Securities and Exchange  Commission) and if not,
why not. Under the Act, a company's  registered  public  accounting firm will be
prohibited from performing  statutorily mandated audit services for a company if
such company's chief executive officer,  chief financial  officer,  comptroller,
chief accounting officer or any person serving in equivalent  positions had been
employed by such firm and  participated  in the audit of such company during the
one-year period  preceding the audit initiation date. The Act also prohibits any
officer  or  director  of a  company  or any other  person  acting  under  their
direction from taking any action to fraudulently influence,  coerce,  manipulate
or mislead  any  independent  accountant  engaged in the audit of the  company's
financial  statements  for the purpose of  rendering  the  financial  statements
materially  misleading.  The Act  also  requires  the  Securities  and  Exchange
Commission to prescribe rules requiring inclusion of any internal control report
and  assessment  by management  in the annual  report to  shareholders.  The Act
requires the company's  registered  public accounting firm that issues the audit
report to  attest to and  report on  management's  assessment  of the  company's
internal controls.

Regulation of the Bank

         General. As a federally chartered savings bank with deposits insured by
the FDIC,  the Bank is  subject  to  extensive  regulation  by the OTS and FDIC.
Lending  activities  and other  investments  must comply with  federal and state
statutory  and  regulatory  requirements.  The Bank is also  subject  to reserve
requirements of the Federal Reserve System.  Federal  regulation and supervision
establishes a comprehensive  framework of activities in which an institution can
engage and is intended  primarily for the  protection  of the Deposit  Insurance
Fund  and  depositors.  The  regulatory  structure  also  gives  the  regulatory
authorities  extensive  discretion  in  connection  with their  supervisory  and
enforcement activities and examination policies, including policies with respect
to the  classification  of assets and the  establishment  of adequate  loan loss
reserves for regulatory purposes.

         The  OTS  regularly   examines  the  Bank  and  prepares   reports  for
consideration by the Bank's Board of Directors on deficiencies, if any, found in
the Bank's operations. The Bank's relationship with its depositors and borrowers
is also  regulated by federal and state law,  especially  in such matters as the
ownership of savings  accounts  and the form and content of the Bank's  mortgage
documents.

         The Bank must file reports with the OTS  concerning  its activities and
financial condition, and must obtain regulatory approvals prior to entering into
certain  transactions  such as mergers with or  acquisitions  of other financial
institutions.  Any change in such  regulations,  whether by the OTS, the FDIC or
the United States  Congress,  could have a material  adverse impact on the Bank,
the Company, and their operations.

                                       15

<PAGE>

         Deposit Insurance. The Bank's deposits are insured to applicable limits
by the Federal Deposit Insurance Corporation. Although the FDIC is authorized to
assess  premiums  under a  risk-based  system for such deposit  insurance,  most
insured  depository  institutions have not been required to pay premiums for the
last ten years.  The Federal  Deposit  Insurance  Reform Act of 2005,  which was
signed into law on February 15, 2006, has resulted in significant changes to the
federal  deposit  insurance  program:  (i)  effective  March 31, 2006,  the Bank
Insurance  Fund (which  formerly  insured the deposits of banks) and the Savings
Association  Insurance  Fund (which  formerly  insured  the  deposits of savings
associations  like the Bank) were merged into a new  combined  fund,  called the
Deposit  Insurance Fund; (ii) the current  $100,000 deposit  insurance  coverage
will be indexed for inflation  (with  adjustments  every five years,  commencing
January 1, 2011); and (iii) deposit insurance  coverage for retirement  accounts
has been  increased  to  $250,000  per  participant  subject to  adjustment  for
inflation.  The FDIC has been given greater  latitude in setting the  assessment
rates for insured depository institutions, which could be used to impose minimum
assessments.

         The  FDIC  is  authorized  to set the  reserve  ratio  for the  Deposit
Insurance Fund annually at between 1.15% and 1.5% of estimated insured deposits.
If the Deposit  Insurance  Fund's reserves exceed the designated  reserve ratio,
the FDIC is required to pay out all or, if the reserve  ratio is less than 1.5%,
a portion of the excess as a dividend to insured  depository  institutions based
on the  percentage  of insured  deposits  held on December 31, 1996 adjusted for
subsequently  paid  premiums.  Insured  depository  institutions  that  were  in
existence on December 31, 1996 and paid assessments prior to that date (or their
successors) are entitled to a one-time credit against future  assessments  based
on their past  contributions  to the BIF or the  Savings  Association  Insurance
Fund.

         In  addition,  all  FDIC-insured   institutions  are  required  to  pay
assessments  to the  FDIC to fund  interest  payments  on  bonds  issued  by the
Financing Corporation ("FICO"), an agency of the Federal government  established
to recapitalize  the predecessor to the SAIF. The FICO assessment  rates,  which
are determined  quarterly,  averaged 0.0128% of insured deposits in fiscal 2006.
These assessments will continue until the FICO bonds mature in 2017.

         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of adjusted  total  assets,  (2) Tier 1, or "core,"  capital equal to at
least 4% (3% if the institution  has received the highest  rating,  "composite 1
CAMELS,"  on its most recent  examination)  of adjusted  total  assets,  and (3)
risk-based capital equal to 8% of total risk-weighted assets.

         Tangible capital is defined as core capital less all intangible  assets
(including  supervisory  goodwill),  less certain mortgage  servicing rights and
less certain investments. Core capital is defined as common stockholders' equity
(including  retained  earnings),  noncumulative  perpetual  preferred  stock and
minority interests in the equity accounts of consolidated subsidiaries,  certain
nonwithdrawable accounts and pledged deposits of mutual savings associations and
qualifying supervisory goodwill,  less nonqualifying  intangible assets, certain
mortgage servicing rights,  certain  investments and unrealized gains and losses
on certain available-for-sale securities.

         The risk-based capital standard for savings  institutions  requires the
maintenance of total  risk-based  capital (which is defined as core capital plus
supplementary  capital)  of  8%  of  risk-weighted  assets.  The  components  of
supplementary capital include, among other items, cumulative perpetual preferred
stock,  perpetual  subordinated debt, mandatory  convertible  subordinated debt,
intermediate-term  preferred  stock,  and the portion of the  allowance for loan
losses not  designated  for  specific  loan  losses (up to a maximum of 1.25% of
risk-weighted  assets) and up to 45% of unrealized  gains on equity  securities.
Overall,  supplementary  capital is limited to 100% of core  capital.  A savings
association  must calculate its  risk-weighted  assets by multiplying each asset
and  off-balance  sheet item by various risk factors as

                                       16

<PAGE>

determined  by the OTS,  which  range  from 0% for  cash to 100% for  delinquent
loans,  property  acquired  through  foreclosure,  commercial  loans,  and other
assets.

         Dividend and Other Capital  Distribution  Limitations.  The OTS imposes
various  restrictions or requirements on the ability of savings  institutions to
make capital distributions including cash dividends.

         A  savings  association  that is a  subsidiary  of a  savings  and loan
holding company, such as the Bank, must file an application or a notice with the
OTS at least 30 days before making a capital distribution. A savings association
is not  required  to file  an  application  for  permission  to  make a  capital
distribution  and need only file a notice if the following  conditions  are met:
(1) it is eligible for expedited  treatment under OTS regulations,  (2) it would
remain adequately  capitalized after the distribution,  (3) the annual amount of
its capital distributions does not exceed net income for that year to date added
to  retained  net  income  for  the two  preceding  years,  and (4) the  capital
distribution  would not violate any  agreements  between the OTS and the savings
association  or any OTS  regulations.  Any  other  situation  would  require  an
application to the OTS.

         In addition, the OTS could prohibit a proposed capital distribution if,
after  making the  distribution,  which  would  otherwise  be  permitted  by the
regulation,  the OTS determines that the distribution would constitute an unsafe
or unsound practice.

         A federal  savings  institution  is  prohibited  from  making a capital
distribution if, after making the distribution,  the institution would be unable
to meet any one of its  minimum  regulatory  capital  requirements.  Further,  a
federal savings institution cannot distribute  regulatory capital that is needed
for its liquidation account.

         Qualified  Thrift  Lender  Test.  Savings   institutions  must  meet  a
qualified  thrift  lender  ("QTL")  test or they become  subject to the business
activity  restrictions  and branching  rules  applicable to national  banks.  To
qualify as a QTL, a savings  institution  must  either (i) be deemed a "domestic
building and loan association" under the Internal Revenue Code by maintaining at
least 60% of its total  assets in  specified  types of assets,  including  cash,
certain  government  securities,  loans  secured by and other assets  related to
residential real property,  educational loans and investments in premises of the
institution or (ii) satisfy the statutory QTL test set forth in the Home Owners'
Loan Act by  maintaining  at least  65% of its  "portfolio  assets"  in  certain
"Qualified Thrift  Investments"  (defined to include  residential  mortgages and
related equity investments,  certain mortgage-related securities, small business
loans,  student  loans and  credit  card  loans,  and 50% of  certain  community
development loans). For purposes of the statutory QTL test, portfolio assets are
defined  as  total  assets  minus  intangible  assets,   property  used  by  the
institution  in conducting  its  business,  and liquid assets up to 20% of total
assets.  A savings  institution  must  maintain its status as a QTL on a monthly
basis in at least nine out of every 12 months.  As of September  30,  2006,  the
Bank was in compliance with its QTL requirement.

         Federal Home Loan Bank System.  The Bank is a member of the FHLB of New
York,  which is one of 12  regional  FHLBs that  administer  the home  financing
credit  function  of  savings  associations.  Each FHLB  serves as a reserve  or
central bank for its members within its assigned region.  It is funded primarily
from  proceeds  derived from the sale of  consolidated  obligations  of the FHLB
System.  It makes loans to members (i.e.,  advances) in accordance with policies
and procedures established by the Board of Directors of the FHLB.

         As a member, the Bank is required to purchase and maintain stock in the
FHLB of New York in an amount equal to the greater of 1% of its aggregate unpaid
residential  mortgage loans, home purchase  contracts or similar  obligations at
the beginning of each year, or 5% of its outstanding advances.

                                       17

<PAGE>

         Federal  Reserve  System.  The  Federal  Reserve  System  requires  all
depository  institutions to maintain  non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking  accounts) and non-personal time deposits.  The balances  maintained to
meet the reserve  requirements imposed by the Federal Reserve System may be used
to satisfy the liquidity  requirements that are imposed by the OTS. At September
30, 2006, the Bank was in compliance with these requirements.

Item 2. Description of Property
-------------------------------

(a)      Properties.

         The Bank operates from its main office and three branch offices.

                                                Leased or
             Location                             Owned
             ----------------------------       ---------

             MAIN OFFICE:                         Owned
             Bordentown, New Jersey

             BRANCH OFFICES:
             Florence, New Jersey                 Owned
             Mount Laurel, New Jersey             Owned
             Marlton, New Jersey                  Leased

(b)      Investment Policies.

         See "Item 1.  Description of Business" above for a general  description
of the Bank's  investment  policies and any  regulatory  or Board of  Directors'
percentage  of assets  limitations  regarding  certain  investments.  The Bank's
investments are primarily  acquired to produce  income,  and to a lesser extent,
possible capital gain.

         (1)  Investments in Real Estate or Interests in Real Estate.  See "Item
1.  Description of Business - Lending  Activities,"  and "Item 2. Description of
Property."

         (2) Investments in Real Estate  Mortgages.  See "Item 1. Description of
Business - Lending Activities."

         (3)  Securities  of or Interests in Persons  Primarily  Engaged in Real
Estate Activities. See "Item 1. Description of Business - Lending Activities."

(c)      Description of Real Estate and Operating Data.

         Not applicable.

                                       18

<PAGE>

Item 3. Legal Proceedings
-------------------------

         There are various  claims and lawsuits in which the Company or the Bank
are  periodically  involved,  such as  claims  to  enforce  liens,  condemnation
proceedings  on properties in which the Bank holds  security  interests,  claims
involving  the making and  servicing of real  property  loans,  and other issues
incident to the Bank's business. In the opinion of management,  no material loss
is expected from any of such pending claims or lawsuits.

Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------

         No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year.

                                     PART II

Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
--------------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------

         (a) 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.


                                                                  Cash Dividends
Quarter Ended                         High              Low          Per Share
-------------                         -----             ----      --------------
December 31, 2004..........          $18.10           $18.10            $0.05
March 31, 2005.............          $19.25           $19.25            --
June 30, 2005 .............          $19.50           $19.50            --
September 30, 2005.........          $18.60           $18.60            $0.05

December 31, 2005..........          $26.00           $22.00            $0.05
March 31, 2006.............          $25.00           $25.00            --
June 30, 2006..............          $27.00           $27.00            --
September 30, 2006.........          $25.10           $25.10            $0.05

         The number of  shareholders of record of common stock as of December 8,
2006,  was  approximately  389.  This does not  reflect the number of persons or
entities who held stock in nominee or "street"  name through  various  brokerage
firms. At December 8, 2006, there were 650,530 shares issued and outstanding.

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

         (b) Not applicable.

         (c) There  were no shares  repurchased  during  the  fourth  quarter of
fiscal year 2006.

                                       19

<PAGE>

Item 6.  Management's Discussion and Analysis or Plan of Operation
------------------------------------------------------------------

                    Selected Financial Ratios and Other Data

                                                   At or For the Years Ended
                                                             September 30,
                                                   -----------------------------
                                                      2006              2005
                                                   -----------       -----------
Return on average assets...........................  (0.23)            0.33%
Return on average equity...........................  (2.75)            3.71
Average equity to average assets ratio.............   8.57             8.86
Equity to assets at period end.....................   8.72             8.86
Net interest rate spread...........................   3.41             3.58
Net yield on average interest-earning assets.......   3.68             3.86
Non-performing loans to total assets...............   0.97             0.53
Allowance for loan losses to total loans...........   0.82             0.69
Dividend payout ratio..............................   9.99             9.99


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

General

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

         The Bank's  results of  operations  depend  primarily  on net  interest
income,  which is determined by (I) the difference between rates of interest the
Bank  earns on its  interest-earning  assets  and the  rates  the  Bank  pays on
interest-bearing  liabilities  (interest  rate  spread),  and (ii) the  relative
amounts of interest-earning assets and interest-bearing  liabilities. The Bank's
results of  operations  are also  affected by  non-interest  income,  including,
primarily,  income from customer  deposit  account  service  charges,  gains and
losses  from  the  sale  of  investment  securities  and  non-interest  expense,
including,  primarily,  compensation and employee  benefits,  professional fees,
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.

                                       20

<PAGE>

         Quantitative  Analysis.  In order to encourage savings  associations to
reduce  their  interest  rate  risk,  the OTS  adopted a rule  incorporating  an
interest rate risk ("IRR") component into the risk-based  capital rules. The IRR
component is a dollar  amount that will be deducted  from total  capital for the
purpose of calculating an institution's  risk-based  capital  requirement and is
measured  in terms of the  sensitivity  of its net  portfolio  value  ("NPV") to
changes in interest rates.  NPV is the difference  between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An  institution's  IRR is  measured  as the  change  to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the  estimated  present  value of total  assets
("PV")  will  require  the  institution  to deduct  from its capital 50% of that
excess  change.  The rules provide that the OTS will calculate the IRR component
quarterly for each  institution.  Based on the Bank's asset size and  risk-based
capital, the Bank has been informed by the OTS that it is exempt from this rule.
Nevertheless,  the following table presents the Bank's NPV at September 30, 2006
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         $ 5,044        $-5,484          -52%        4.94%
           +200           6,995         -3,534          -34%        6.70%
           +100           8,886         -1,643          -16%        8.32%
              0          10,529             --           --%        9.66%
           -100          11,531          1,003          +10%       10.43%
           -200          12,172          1,644          +16%       10.89%

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

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

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

                                       21

<PAGE>

Financial Condition

         Total  assets  increased  $2.6  million  or 2.5% to $106.7  million  at
September 30, 2006 from $104.1  million at September 30, 2005.  The increase was
primarily attributable to a $3.9 million increase in the Bank's loans receivable
net,  partially offset by a $1.0 million decrease in cash and due from banks and
a $265,000  decrease in securities.  The increase in loans receivable was due to
greater  marketing and increased  demand in the Bank's  primary market area. The
Bank has increased its commercial real estate loan portfolio in recent periods.

         The Bank's total  liabilities  increased  $3.0 million or 3.1% to $97.9
million at  September  30, 2006 from $94.9  million at September  30, 2005.  The
increase was  primarily  attributable  to a $3.3  million  increase in deposits,
partially offset by a decrease in FHLB advances of $165,000.  Deposits increased
primarily due to increased marketing of the overall bank.

         Stockholders'  equity  was $8.8  million  or 8.29% of total  assets  at
September  30,  2006,  as compared to $9.2  million or 8.86% of total  assets at
September 30, 2005. The decrease resulted  primarily from a decrease in retained
earnings  of  $310,000  and  an  increase  in  the  unrealized  depreciation  in
securities available for sale of $129,000.

                                       22

<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,
                                                     ----------------------------------------------------------------
                                                                 2006                               2005
                                                     -----------------------------    -------------------------------
                                                                           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).....................        $ 71,305     $5,013      7.03%      $68,107     $4,653      6.83%
    Investment securities(2)................          28,477      1,270      4.46        30,217      1,068      3.53
                                                    --------     ------    ------      --------     ------    ------
        Total interest-earning assets.......          99,782      6,283      6.30        98,324      5,721      5.82
Noninterest-earning assets..................           4,179         --    ------         3,230         --    ------
                                                    --------     ------                --------    -------
        Total assets........................        $103,961      6,283                $101,554      5,721
                                                    ========     ------                ========    -------
Interest-bearing liabilities:
    NOW accounts............................        $  9,172         30      0.33      $ 10,203         70      0.68
    Savings accounts........................          13,679         76      0.56        16,875        170      1.00
    Money market accounts...................          13,156        270      2.05        14,023        297      2.12
    Certificates of deposit.................          53,876      2,202      4.09        44,519      1,350      3.03
    FHLB - Advances.........................             569         33      5.80           727         43      5.91
                                                    --------     ------    ------      --------     ------    ------
        Total interest-bearing liabilities..          90,452      2,611      2.89        86,347      1,930      2.24
Noninterest-bearing liabilities.............           4,592     ------    ------         6,212     ------    ------
                                                    --------                           --------
        Total liabilities...................          95,043                             92,559
Stockholders' equity........................           8,918                              8,995
                                                    --------                           --------
        Total liabilities and
        stockholders' equity................        $103,961                           $101,554
                                                    ========                           ========
Net interest income.........................                     $3,672                             $3,791
                                                                 ======                             ======
Interest rate spread(3).....................                                 3.41%                              3.58%
                                                                           ======                             ======
Net yield on interest-earning assets(4).....                                 3.68%                              3.86%
                                                                           ======                             ======
Ratio of average interest-earning assets
    to average interest-bearing liabilities.                               110.31%                            113.87%
                                                                           ======                             ======
</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.

                                       23

<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,
                                                       2006 vs. 2005
                                           -------------------------------------
                                                    Increase (Decrease)
                                                          Due to
                                           -------------------------------------
                                                                Rate/
                                            Volume     Rate     Volume     Net
                                           -------    ------    ------    ------
                                                           (In thousands)
Interest income:
    Loans receivable ...................    $ 218     $ 136     $   6     $ 360
    Investment securities ..............      (61)      279       (16)      202
                                            -----     -----     -----     -----
        Total interest income ..........      157       415       (10)      562

Interest expense:
    NOW accounts .......................       (7)      (37)        4       (40)
    Savings account ....................      (32)      (75)       13       (94)
    Money market accounts ..............      (19)      (10)        2       (27)
    Certificates of deposits ...........      283       470        99       852
    FHLB advances ......................       (9)       (1)       --       (10)
                                            -----     -----     -----     -----
        Total interest expense .........      216       347       118       681

Change in net interest income ..........    $ (59)    $  68     $(128)    $(119)
                                            =====     =====     =====     =====


Results of Operations

         Net Income/Loss.  The Bank's net income decreased $582,000 for the year
ended  September 30, 2006, to a net loss of $246,000 from net income of $336,000
for the year ended September 30, 2005. This decrease was primarily  attributable
to an increase  in  interest  expense of  $681,000,  an increase in  noninterest
expense of $541,000,  which included  merger expenses of $449,000 and a decrease
in non-interest  income of $44,000  partially  offset by an increase in interest
income of $563,000 and a decrease in income taxes of $141,000.

         Net  Interest  Income.  Net  interest  income  is the most  significant
component  of the Bank's  income from  operations.  Net  interest  income is the
difference  between interest the Bank received on its  interest-earning  assets,
primarily loans, investment and mortgage-backed securities and interest the Bank
pays on its interest-bearing liabilities, primarily deposits and borrowings. Net
interest  income  depends on the volume of and rates earned on  interest-earning
assets and the volume of and rates paid on interest-bearing liabilities.

         Net interest income after provision for loan losses decreased  $137,000
from $ $3.7  million for the year ended  September  30, 2005 to $3.6 million for
year ended  September 30, 2006. The decrease was  attributable to higher cost of
funds.

                                       24

<PAGE>

         The increase in the average balance of interest-earning  assets of $1.5
million primarily reflects increases of approximately $3.2 million in the Bank's
average balance of loans  partially  offset by a decrease of $1.7 million in the
average balance of securities.

         The increase in average  interest-bearing  liabilities  of $4.1 million
reflects an increase of $9.3 million in the average  balance of  certificates of
deposit,  partially  offset  by  decreases  in  the  average  balance  of  other
interest-bearing liabilities of $5.3 million.

         Provision  for Loan Losses.  Provision for loan losses was $128,000 for
the year ended  September  30, 2006,  as compared to $109,000 for the year ended
September 30, 2005.  The provision is  established  to adjust the balance of the
allowance for loan losses to a level  management  feels is appropriate  based on
the risk characteristics of the loan portfolio.

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

         Noninterest Income.  Noninterest income decreased $44,000 or 15.6% from
$281,000  for the year ended  September  30,  2005 to  $237,000  for 2006.  This
decrease  in the Bank's  noninterest  income was due to a decrease of $26,000 in
net realized gains on the sale of available for sale securities and loans, and a
decrease in fees and other service charges of $18,000.

         Noninterest  Expense.  Noninterest  expense increased $541,000 or 16.2%
from $3.3 million for the year ended  September  30,  2005,  to $3.9 million for
2006.  The  increase  in the Bank's  noninterest  expense was due  primarily  to
merger-related  expenses  of $449,000 in 2006 as compared to none in 2005 and to
an increase of $107,000 in the Bank's compensation and benefits,  an increase of
$21,000 in the Bank's occupancy and equipment expense and an increase of $31,000
in other  noninterest  expenses,  partially offset by a decrease in professional
and service fees of $67,000.  The increase in compensation  and benefits expense
was due in part to additional  personnel required to support the commercial loan
department.

         Income Tax Expense. Income tax expense decreased $141,000 from $288,000
for the year ended  September  30, 2005 to $147,000 for 2006.  This  decrease in
income tax expense was primarily due to the decrease in net taxable  earnings of
the Bank.

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 used in the Bank's  operating  activities (the cash effects of
transactions  that  enter  into the Bank's  determination  of net  income  e.g.,
non-cash  items,  depreciation,  provision  for loan  losses) for the year ended
September 30, 2006 totaled  $189,000,  a decrease of $927,000 as compared to net
cash provided in 2005 of $738,000.

                                       25

<PAGE>

This  decrease  was mainly due to the decrease in net income of $582,000 and the
change in income taxes of $262,000.

         Net  cash  used  by  the  Bank's  investing   activities   (i.e.,  cash
disbursements,  primarily for the purchase of the Bank's  investment  securities
and mortgage-backed securities portfolios and the Bank's loan portfolio) for the
year ended September 30, 2006, totaled $3.7 million, a decrease of $1.1 million.
The decrease in cash used was primarily attributable to less investment activity
of approximately $1.1 million in fiscal year 2006.

         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,
2006  totaled $2.8  million,  a decrease of $5.5 million as compared to the year
ended September 30, 2005.  This decrease was primarily  attributable to decrease
in deposits of $3.5 million and issuance of additional  common stock net of $1.8
million in 2005  versus  none in 2006.

         Approximately $29 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.

         The  following  table  sets  forth  our  contractual   obligations  and
commitments as of September 30, 2006.

<TABLE>
<CAPTION>
                                                   Total
                                                  Amounts       Less Than                                  Over
                                                 Committed        1 Year      1-3 Years    4-5 Years     5 Years
                                                 ---------        ------      ---------    ---------     -------
<S>                                              <C>             <C>          <C>          <C>           <C>
Construction loans in process............          3,555         3,555           --           --            --
Other commitments to extend credit.......          3,923         3,923           --           --            --
                                                   -----         -----          ---          ---           ---
    Total................................          7,478         7,478           --           --            --


                                                                Less Than                                 After
                                                   Total          1 Year      1-3 Years    4-5 Years     5 Years
                                                 ---------        ------      ---------    ---------     -------
FHLB advances............................            490           175          315           --            --
Rentals under operating leases...........            911            54          109          113           635
                                                   -----         -----          ---          ---           ---
    Total................................          1,401           229          424          113           635
</TABLE>


Item 7.  Financial Statements
-----------------------------

         The Company's financial  statements are contained in this Annual Report
on Form 10-KSB immediately following Item 14.

Item 8.  Changes  in  and  Disagreements  with  Accountants  On  Accounting  and
--------------------------------------------------------------------------------
         Financial Disclosure
         --------------------

         None.

                                       26

<PAGE>

Item 8A.  Controls and Procedures
---------------------------------

         (a)  Evaluation of disclosure  controls and procedures.  Based on their
evaluation of the Company's  disclosure  controls and  procedures (as defined in
Rule 13a-15(e) under the Securities  Exchange Act of 1934 (the "Exchange Act")),
the Company's  principal  executive officer and principal financial officer have
concluded that as of the end of the period covered by this Annual Report on Form
10-KSB such  disclosure  controls and  procedures  are  effective to ensure that
information  required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,  processed,  summarized and reported
within the time periods  specified in Securities and Exchange  Commission  rules
and forms.

         (b)  Changes in internal control over financial  reporting.  During the
last  quarter of the year  under  report,  there was no change in the  Company's
internal control over financial  reporting that has materially  affected,  or is
reasonably  likely to materially  affect,  the Company's  internal  control over
financial reporting.

Item 8B.  Other Information
---------------------------

          Not Applicable

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
--------------------------------------------------------------------------------
        With Section 16(a) of the Exchange Act
        --------------------------------------

         Set forth  below is  information  about  the  directors  and  executive
officers  and  significant   employees  of  the  Company.   The  Certificate  of
Incorporation require that the Board of Directors be divided into three classes,
as nearly  equal in number as  possible,  each  class to serve for a  three-year
period,  with  approximately  one-third of the directors  elected each year. The
Board of Directors  currently consists of nine members.  Each director is also a
director of the Bank.

<TABLE>
<CAPTION>
                                                                                        Current Term
Name                            Age     Positions with the Company                        To Expire
----                            ---     --------------------------                        ---------

<S>                            <C>    <C>                                                 <C>
Charles E. Adams                 91     Director of the Company and the Bank                2007

William H. Wainwright, Jr.       76     Director of the Company and the Bank                2007

Coby M. Frier                    39     Director of the Company and the Bank                2007

George G. Aaronson, Jr.          74     Director of the Company and the Bank                2008

Joseph H. Kelly                  52     Director of the Company and the Bank                2008

G. Edward Koenig, Jr.            65     Director of the Company and the Bank                2008

John J. Maley, Jr.               58     Director of the Company and the Bank                2009

Edgar N. Peppler                 70     Chairman of the Board and Director of the           2009
                                        Company and the Bank

Gary N. Pelehaty                 53     President and Chief Executive Officer of the        2009
                                        Company and the Bank

Charles Alessi                   44     Vice President and Chief Financial Officer of        --
                                        the Company and the Bank
</TABLE>

                                       27

<PAGE>

         The principal occupation of, and other information about, each director
and/or  executive  officer of the Company is set forth below as of September 30,
2006. Each director and/or  executive  officer has held his present position for
five years unless otherwise stated.

         Charles E.  Adams has been a  director  since  1985.  Mr.  Adams is now
retired,  but was the administrator of Florence Township for 20 years. Mr. Adams
is on the  administrative  board of Florence  United  Methodist  Church,  and is
treasurer of the Florence Historical Society.

         William  H.  Wainwright,  Jr. has been a director  since  1968.  He was
elected vice chairman of the Board in January 2002.  Before retiring in 1995, he
was employed  for 20 years as a loan officer at the Farmers Home  Administration
and the Small Business  Administration.  Mr.  Wainwright is a member of the Surf
City Yacht Club and served as their commodore in 1996.

         Coby M. Frier was  appointed to the Board of Directors in 2004.  He has
been the president and general  manager of Eastampton  Auto Center,  Inc.  since
2002. Prior to that, Mr. Frier was the general manager of Matt Blatt Imports, an
auto dealership.  Mr. Frier is a member of the National Independent Auto Dealers
Association  and is also a consultant  for Chase Dealer  Financial  Services,  a
national training and sales company.

         George G. Aaronson,  Jr. has been a director since 1970. He is employed
by Falconer & Bell as a real estate sales agent.

         Joseph H. Kelly has been a director  since 2001. Mr. Kelly is president
and  owner  of  Kelly  Enterprises,  Inc.,  a real  estate  development  company
specializing in commercial  real estate.  A registered  investment  advisor with
American  Portfolios,  Inc.,  Mr.  Kelly is a  member  of the New  Jersey  State
Executive  Council of the National  Federation of  Independent  Business and the
Burlington County Economic Development Committee.  Mr. Kelly is also a member of
the  Bordentown  Area  Veterans  Memorial  Committee,  a member  of the Board of
Trustees of The Peddie School,  and a past  president of the  Bordentown  Rotary
Club.

         G. Edward  Koenig,  Jr. has,  except for a three year hiatus  ending in
1993,  been a director  since 1981.  Mr.  Koenig is a licensed real estate sales
agent for Falconer & Bell  Realtors.  Prior to that,  he was  president of E. J.
Koenig  Inc., a fuel service  petroleum  products  company and a heating and air
conditioning equipment sales, installation and service business. Mr. Koenig sits
on the Burlington County Military Affairs  Committee  Executive Board and served
as its chairman from 1996 to 1997.

         John  J.  Maley,  Jr.  is the  owner  of  John J.  Maley,  Jr.  CPA/RMA
accounting  practice in Bordentown  City formed in 1985. Mr.  Maley's  community
activities  include  serving as chairman of the City of Bordentown  Zoning Board
and as a past president of the Bordentown  Rotary Club. Mr. Maley is a member of
the New Jersey Society of Certified Public  Accountants,  the American Institute
of  Certified  Public  Accountants  and  the  Registered  Municipal  Accountants
Association. Mr. Maley is also a licensed public school accountant and certified
municipal finance officer.

         Edgar N.  Peppler  has  been a  director  since  1970.  He was  elected
chairman of the Board of Directors in January 2002 and was  vice-chairman of the
board from 1992 to 2002.  Mr. Peppler  retired on January 1, 2002.  Prior to his
retirement he was part owner and  president of Peppler  Funeral Home, a business
he has  been  associated  with  since  1957.  Mr.  Peppler  is a  member  of the
Bordentown Chamber of Commerce, a past president of the Bordentown Kiwanis Club,
a past Master of Mt. Moriah of Bordentown  and Past Grand Master of the State of
New Jersey Masons.

                                       28

<PAGE>

         Gary N.  Pelehaty has been a director  since  October 1992. He has also
been  president and chief  executive  officer of the Bank since  February of the
same  year.  Elected  to the  Board of  Governors  of the New  Jersey  League of
Community  Bankers,  Mr.  Pelehaty has been appointed to its executive board and
also serves as vice chairman of the League's Audit Committee.  Mr. Pelehaty is a
director and past president of the Burlington/Camden  County Savings League. Mr.
Pelehaty has been appointed to the Burlington  County Military Affairs Committee
Executive Board.  Active in the local  community,  Mr. Pelehaty is a director of
Burlington County Burn Foundation,  the finance chairman of Bordentown Veterans'
Memorial  Foundation,  and a  former  director  of  the  Bordentown  Chamber  of
Commerce.

         Charles  Alessi  has been  employed  by the Bank since 1992 and is vice
president and the chief financial officer. He is also secretary and treasurer of
the Bank. Mr. Alessi is a member of the Financial  Managers Society and a member
of the Bordentown Rotary.

Audit Committee

         The Company does not have a standing audit committee.  The entire Board
of Directors  regularly  reviews the  financial  statements  of the Company.  In
addition,  the Board of Directors of the Bank meets  annually with the Company's
independent  accountants to review audit matters.  The Board of Directors of the
Bank met one time during the 2006 fiscal year with the  independent  accountants
for this purpose.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the  Securities  and Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than ten
percent  of the  Common  Stock,  to file  reports of  ownership  and  changes in
ownership of the Common Stock with the Securities and Exchange Commission and to
provide  copies of those  reports to the Company.  To the best of the  Company's
knowledge,  all section 16(a) filing requirements applicable to its officers and
directors  were complied  with during the 2006 fiscal year.  The Company has not
been  provided  with any reports of  ownership  by persons who own more than ten
percent of the Common Stock.

Item 10.  Executive Compensation

         Summary Compensation Table. The following table sets forth the cash and
non-cash  compensation  awarded to or earned by our chief executive  officer and
chief financial officer.

<TABLE>
<CAPTION>

                                           Annual Compensation                       Long Term Compensation
                                    ---------------------------------------        --------------------------
                                                                                   Restricted     Securities
Name and                 Fiscal                             Other Annual             Stock        Underlying         All Other
Principal Position        Year      Salary        Bonus     Compensation(1)          Awards       Options (#)      Compensation
------------------        ----      ------        -----     ---------------          ------       -----------      ------------
<S>                      <C>      <C>           <C>         <C>                     <C>            <C>             <C>
Gary N. Pelehaty,         2006     $215,515      $  -         $   15,525                -               -            $ 27,694 (2)
 President, CEO   and     2005      196,916         -             14,500                -               -              22,409
Director                  2004      174,935         -             13,850                -               -              17,671

Charles Alessi,           2006     $115,830      $  -         $   10,425                -               -            $ 14,273 (3)
   Vice President,        2005      106,408         -              9,450                -               -               8,342
   CFO and                2004       93,693         -              8,645                -               -               7,751
   Secretary
</TABLE>

--------------
(1)      Consists of Board  fees.  Mr.  Pelehaty  and Mr.  Alessi  also  receive
         automobile allowances.
(2)      Represents  the  award of 21,816  shares  under the ESOP as of June 30,
         2006 based upon the last  reported  sales price of the Common  Stock on
         the  date  of  the  award,  plus  $5,878  for a  401(k)  plan  matching
         contribution.
(3)      Represents  the  award of 13,203  shares  under the ESOP as of June 30,
         2006 based upon the last  reported  sales price of the Common  Stock on
         the  date  of  the  award,  plus  $1,070  for a  401(k)  plan  matching
         contribution.

                                       29

<PAGE>

         Employment Agreements.  The Company and the Bank have each entered into
employment  agreements  (together,  the  "Agreements")  with Gary  Pelehaty  and
Charles Alessi, each for a three-year term. Mr. Pelehaty's and Mr. Alessi's base
salaries are $208,000 and  $112,000,  respectively.  Under the  Agreements,  Mr.
Pelehaty's and Mr.  Alessi's  employment may be terminated by the Company or the
Bank for "just cause," as defined in the Agreements.  If the Company or the Bank
terminates Mr. Pelehaty or Mr. Alessi without just cause,  they will be entitled
to a  continuation  of their  salaries and benefits from the date of termination
through the remaining term of the Agreements. In the event of the termination of
employment in  connection  with any change in control of the Company or the Bank
during the term of the  Agreements,  Mr.  Pelehaty and Mr. Alessi will be paid a
lump  sum  equal  to  2.999  times  their  prior  five  year   average   taxable
compensation. The lump sum shall be paid as soon as practicable on or before the
occurrence  of such  change in control,  without  regard to whether or not their
employment is terminated at such time.  Additionally,  Mr. Pelehaty,  Mr. Alessi
and their dependent family members are entitled under the Agreements to continue
to participate in all benefits available to employees of the Company or the Bank
for a  period  of  not  less  than  thirty-six  months  following  the  date  of
termination of employment  following a change in control.  The  Agreements  also
provide that  following the  termination  of  employment  in connection  with or
following a change in control  that is approved by the Board of  Directors,  Mr.
Pelehaty and Mr.  Alessi shall provide  consulting  services to the Company on a
transitional  basis for a period of thirty-six  months.  Mr.  Pelehaty's and Mr.
Alessi's compensation for such services shall be equal to their base salaries in
effect immediately prior to such change in control.

         All sums payable to Mr. Pelehaty and Mr. Alessi under the Agreements in
connection  with a change in control shall be reduced in such manner and to such
extent so that no such payments made  thereunder  when aggregated with all other
payments to be made will be deemed an "excess  parachute  payment" under Section
280G of the  Internal  Revenue  Code.  In the  event of a change in  control  at
September  30, 2006,  Mr.  Pelehaty and Mr. Alessi would have been entitled to a
lump sum payment of approximately $600,000 and $335,000, respectively.

         Stock Awards.  The following  table sets forth  information  concerning
options  previously  granted to Mr.  Pelehaty and Mr. Alessi.  There were no new
options  granted to Mr.  Pelehaty or Mr.  Alessi  during fiscal 2006 and neither
exercised any options during the fiscal year.

                                 FY-End Option Values
                                 --------------------
                                                             Value of
                       Number of Options                In-the-Money Options
                    At Fiscal Year-End (#)             at Fiscal Year-End ($)
                 ---------------------------      ------------------------------
     Name        Exercisable   Unexercisable      Exercisable   Unexercisable(1)
     ----        -----------   -------------      -----------   ----------------
Gary N. Pelehaty    20,874          0              $350,475          0
Charles Alessi      11,803          0              $199,471          0

-----------------------
(1)  Based upon the  difference  between the weighted  average  option  exercise
     price of $8.31  for Mr.  Pelehaty  and $8.20  for Mr.  Alessi  and the last
     reported  sales  price  of the  Common  Stock  of  $25.10  per  share as of
     September 30, 2006.

Director Compensation

         Directors of the Company are also directors of the Bank.  Each director
(including  the chairman of the board) is paid a monthly fee of $1,000 plus $150
per meeting  attended.  Total  aggregate fees paid to the directors for the year
ended September 30, 2006 were $148,000.

                                       30

<PAGE>

Item 11.  Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------

         (a) Security  Ownership of Certain  Beneficial  Owners.  The  following
table sets forth information  regarding all persons known to the Company to have
beneficially  owned more than 5% of the  Company's  Common Stock as of September
30, 2006.

<TABLE>
<CAPTION>
                                                                              Percent of Shares of
                                                Amount and Nature of              Common Stock
Name and Address of Beneficial Owner            Beneficial Ownership              Outstanding
------------------------------------            --------------------              -----------

<S>                                                 <C>                            <C>
Craig W. Yates                                         57,200                         8.80%
227 Cliff Avenue
Edgewater Park, New Jersey(1)

Gary N. Pelehaty                                       54,305                         8.09%
789 Farnsworth Avenue,
Bordentown, New Jersey(2)

Joseph H. Kelly                                        33,386                         5.11%
25 Germantown Road
Bordentown, New Jersey(3)

First Banker's Trust Company,                          51,673                         7.94%
Trustee for the Peoples Savings Bank ESOP
789 Farnsworth Avenue,
Bordentown, New Jersey(4)

All directors and officers of the Company             223,957                        40.35%
   as a group (10 persons)(5)
</TABLE>

--------------
(1)  Number of shares is based upon an amended  Schedule  13D filed on  November
     17, 2004 showing sole voting and  dispositive  power with respect to 57,200
     shares.
(2)  Includes  20,814 shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(3)  Includes  3,299  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(4)  The Employee Stock  Ownership  Plan (the "ESOP")  purchased such shares for
     the exclusive  benefit of plan  participants  with funds  borrowed from the
     Company.  These  shares are held in a suspense  account  and are  allocated
     among ESOP  participants  annually on the basis of compensation as the ESOP
     debt is repaid.  The ESOP Committee  instructs the ESOP trustees  regarding
     investment of ESOP plan assets. The ESOP trustee votes all shares allocated
     to  participant  accounts  under  the  ESOP as  directed  by  participants.
     Unallocated  shares,  and shares for which no timely  voting  direction  is
     received, are voted by the ESOP trustee,  subject to its fiduciary duty, as
     directed by the ESOP Committee. As of September 30, 2006, 34,038 shares had
     been allocated to ESOP participants.
(5)  Includes  shares of Common  Stock  held  directly  as well as by spouses or
     minor children,  in trust and other indirect  ownership,  over which shares
     the  individuals  effectively  exercise sole voting and  investment  power,
     unless  otherwise  indicated.  Excludes 17,635 shares held by the ESOP over
     which certain directors, as members of the ESOP Committee,  exercise shared
     voting power. Such individuals  disclaim beneficial  ownership with respect
     to the ESOP shares.  Includes 64,564 shares subject to options  exercisable
     within 60 days of September 30, 2006.

                                      31

<PAGE>

         (b) Security  Ownership of  Management.  The following  table  provides
information  as of September  30, 2006  concerning  ownership  of the  Company's
Common Stock (which constitutes its only class of equity securities) each of its
directors, the Named Executive Officers and all executive officers and directors
as a group. Each person listed has sole voting and investment power with respect
to the shares listed across from his name except as noted otherwise.

                                              Beneficial Ownership(1)
                                      ---------------------------------------
                                                               Percentage of
                                                                   Shares
Name                                  Number of Shares         Outstanding(2)
----                                  ----------------         --------------

Charles E. Adams                       22,960    (3)(4)            3.50%

William H. Wainwright, Jr.             29,869    (5)               4.54%

Coby M. Frier                           5,845                      0.90%

George G. Aaronson, Jr.                18,403    (3)(6)            2.81%

Joseph H. Kelly                        33,386    (7)               5.11%

G. Edward Koenig                       11,129    (9)               1.70%

John J. Maley, Jr.                      6,518    (3)               1.00%

Edgar N. Peppler                       29,435    (8)               4.48%

Gary N. Pelehaty                       54,305    (10)              8.09%

Charles Alessi                         24,998    (11)              3.77%

All directors and executive           236,848    (12)             33.12%
officers as a group (10 persons)

--------------
(1)  Beneficial  ownership as of September 30, 2006.  Includes  shares of Common
     Stock held directly as well as by spouses or minor children,  in trust, and
     other indirect  ownership,  over which shares the  individuals  effectively
     exercise  sole or shared  voting and  investment  power,  unless  otherwise
     indicated.
(2)  In  calculating  percentage  ownership  for a given  individual or group of
     individuals,  the number of shares of the Common Stock outstanding includes
     unissued shares subject to options  exercisable within 60 days of September
     30, 2006 held by that individual or group.
(3)  Excludes  17,673 shares of Common Stock held under the ESOP over which such
     individual,  as a member  of the  ESOP  Committee  and as an ESOP  Trustee,
     exercises  shared  voting  power.  Such  individual   disclaims  beneficial
     ownership with respect to the ESOP shares.
(4)  Includes  5,873  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(5)  Includes  6,766  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(6)  Includes  5,110  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(7)  Includes  3,299  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(8)  Includes  6,453  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(9)  Includes  4,386  shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(10) Includes  20,874 shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(11) Includes  11,803 shares  subject to options  exercisable  within 60 days of
     September 30, 2006.
(12) Includes  64,564 shares which  directors  and  executive  officers have the
     right to acquire pursuant to the exercise of options.

                                       32

<PAGE>

         (c) Changes in Control.  On June 23, 2006, the Company  entered into an
Agreement and Plan of Merger with Sterling  Banks,  Inc.  which provides for the
acquisition of the Company by Sterling.  The  acquisition is subject to a number
of conditions  including  approval of  shareholders  and receipt of all required
regulatory approvals.

         (d) Securities Authorized for Issuance Under Equity Compensation Plans.
Set  forth  below is  information  as of  September  30,  2006 with  respect  to
compensation   plans  under  which  equity  securities  of  the  Registrant  are
authorized for issuance.

<TABLE>
<CAPTION>
                          EQUITY COMPENSATION PLAN INFORMATION

                                               (a)                          (b)                       (c)
                                                                                              Number of securities
                                                                                             remaining available for
                                                                                              future issuance under
                                       Number of securities to       Weighted-average          equity compensation
                                       be issued upon exercise       exercise price of          plans (excluding
                                       of outstanding options,     outstanding options,      securities reflected in
                                         warrants and rights        warrants and rights            column (a))
                                       -----------------------     --------------------      -----------------------

<S>                                          <C>                         <C>                         <C>
Equity compensation plans
  approved by shareholders

Farnsworth Bancorp, Inc.
    1999 Stock Option Plan.........            35,547                      7.38                        --

Equity compensation plans
  not approved by shareholders

Farnsworth Bancorp, Inc.
    2002 Stock Option Plan.........            31,117                      10.07                       --
                                               ------                      -----                      ---
     TOTAL........................             66,664                      $8.92                       --
                                               ======                      =====                      ===
</TABLE>

Item 12.  Certain Relationships and Related Transactions
--------------------------------------------------------

         None.

Item 13.  Exhibits
------------------

         (a)      The following documents are filed as a part of this report.

         1.  The following  financial  statements and the independent  auditor's
report included in the Annual Report are incorporated herein by reference.

               Independent Auditor's Report

               Consolidated  Statements  of Financial  Condition as of September
               30, 2006 and 2005

               Consolidated  Statements of Income and  Comprehensive  Income for
               the Years Ended September 30, 2006 and 2005

               Consolidated  Statements of Changes in  Stockholders'  Equity for
               the Years Ended September 30, 2006 and 2005

               Consolidated  Statements  of  Cash  Flows  for  the  Years  Ended
               September 30, 2006 and 2005

               Notes to Consolidated Financial Statements

                                       33


<PAGE>


         2. Schedules omitted as they are not applicable.

         3. The following  exhibits are included in this Report or  incorporated
herein by reference:

         (a) List of Exhibits:

<TABLE>
<CAPTION>
<S>              <C>
                   2       Agreement and Plan of Merger ****
                   3(i)    Certificate of Incorporation of Farnsworth Bancorp, Inc.*
                   3(ii)   Bylaws of Farnsworth Bancorp, Inc. *
                  10.1     Employment Agreement with Gary N. Pelehaty *
                  10.2     Employment Agreement with Charles Alessi *
                  10.3     Severance Agreement with Elaine Denelsbeck *
                  10.4     Farnsworth Bancorp, Inc. 1999 Stock Option Plan**
                  10.5     Peoples Savings Bank Restricted Stock Plan**
                  10.6     Farnsworth Bancorp, Inc. 2002 Stock Option Plan***
                  10.7     Peoples Savings Bank 2002 Stock Bonus Plan***
                  21       Subsidiaries of the Registrant
                  23       Consent of Kronick Kalada Berdy & Co.
                  31       Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
                  32       Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
</TABLE>

------------------
*    Incorporated by reference to the Registration  Statement on Form SB-2 (File
     No. 333-56689) declared effective by the SEC on August 10, 1998.
**   Incorporated  by reference to the exhibits to the Proxy  Statement  for the
     Annual Meeting of Stockholders held on April 6, 1999 and filed with the SEC
     on February 22, 1999 (File No. 0-24621).
***  Incorporated  by reference to the September 30, 2002 Form 10-KSB filed with
     the SEC on December 23, 2002.
**** Incorporated by reference to the Company's Current Report on Form 8-K dated
     June 23, 2006 and filed with the SEC on June 26, 2006.

Item 14.  Principal Accountant Fees and Services
------------------------------------------------

         Effective  July 30, 2002,  the  Securities and Exchange Act of 1934 was
amended by the  Sarbanes-Oxley  Act of 2002 to require all auditing services and
non-audit services provided by an issuer's independent auditor to be approved by
the issuer's  audit  committee  prior to such services  being  rendered or to be
approved  pursuant to  pre-approval  policies and procedures  established by the
issuer's audit  committee.  The Company's Board of Directors has not established
pre-approval  procedures and instead specifically approves each service prior to
the engagement of the auditor for all audit and non-audit  services.  All of the
services  listed below for 2006 and 2005 were approved by the Board of Directors
prior to the  service  being  rendered.  There  were no  services  that were not
recognized to be non-audit services at the time of engagement that were approved
after the fact.

         Audit Fees.  The  aggregate  fees billed by Kronick  Kalada Berdy & Co.
("KKB") for professional services rendered for the audit of the Company's annual
consolidated  financial  statements  and  for  the  review  of the  consolidated
financial  statements included in the Company's Quarterly Reports on Form 10-QSB
for the fiscal years ended September 30, 2006 and 2005 were $15,500 and $13,625,
respectively.

         Audit Related Fees.  The aggregate fees billed by KKB for assurance and
related services related to the audit of the annual financial  statements and to
the review of the quarterly  financial  statements for the years ended September
30, 2006 and 2005 were $5,320 and $6,734, respectively.

         Tax Fees.  There were no fees billed by KKB for  professional  services
rendered  for tax  compliance,  tax advice or tax  planning  for the years ended
September 30, 2006 and 2005.

                                       34

<PAGE>

         All Other  Fees.  The  aggregate  fees  billed by KKB for  professional
services  rendered  for  services or products  other than those listed under the
captions "Audit Fees,"  "Audit-Related Fees," and "Tax Fees" for the years ended
September 30, 2006 and 2005 were $11,440 and $4,150, respectively.


                            FARNSWORTH BANCORP, INC.

                                    INDEX TO
                        CONSOLIDATED FINANCIAL STATEMENTS
                 FOR THE YEARS ENDED SEPTEMBER 30, 2006 AND 2005


                                                                            Page

Independent Auditor's Report...........................................     F-1

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

Consolidated Statements of Income and Comprehensive Income.............     F-3

Consolidated Statements of Changes in Stockholders' Equity.............     F-4

Consolidated Statements of Cash Flows..................................     F-5

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

                                       35


<PAGE>



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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, 2006 and 2005,
and the related  consolidated  statements  of income and  comprehensive  income,
changes in stockholders'  equity and cash flows for the years then ended.  These
consolidated  financial  statements  are  the  responsibility  of the  Company's
management.  Our  responsibility is to express an opinion on these  consolidated
financial statements based on our audits.

We conducted our audits in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and  perform  the  audit  to  obtain  reasonable  assurance  about  whether  the
consolidated financial statements are free of material misstatement. The Company
is not  required  to  have,  nor were we  engaged  to  perform,  an audit of its
internal control over financial reporting.  Our audits included consideration of
internal  control  over  financial  reporting  as a basis  for  designing  audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the  effectiveness  of the Company's  internal  control
over  financial  reporting.  Accordingly,  we express no such opinion.  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, 2006 and 2005, and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.






/S/ KRONICK KALADA BERDY & CO.
Kingston, Pennsylvania
December 18, 2006


                                                                             F-1

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                          September 30, 2006 and 2005

<TABLE>
<CAPTION>
                                     ASSETS                          2006             2005
                                     ------                     -------------    -------------

<S>                                                           <C>              <C>
Cash and due from banks                                         $   9,248,363    $  10,278,409
Securities available for sale                                      19,962,480       19,418,925
Securities held to maturity (fair value $163,290
  and $973,520 at September 30, 2006 and 2005,
  respectively)                                                       161,862          969,864
Loans receivable, net                                              73,894,943       70,005,215
Accrued interest receivable                                           481,452          438,935
Prepaid expenses
         Other assets                                                  94,938           85,247
         Income taxes                                                 202,141
Federal Home Loan Bank of New York stock at
  cost, substantially restricted                                      204,700          520,200
Premises and equipment                                              2,100,403        2,211,706
Deferred income taxes                                                 374,919          216,990
                                                                -------------    -------------

Total assets                                                    $ 106,726,201    $ 104,145,491
                                                                =============    =============

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

Deposits:
   Non interest bearing                                         $   5,603,736    $   6,529,683
   Interest bearing                                                91,240,976       87,053,377
Federal Home Loan Bank advance                                        489,941          654,696
Advances by borrowers for taxes and insurance                         215,480          404,956
Accrued income taxes                                                       --           26,586
Accrued interest payable                                              130,637           84,606
Accounts payable and other accrued expenses                           196,968          154,816
                                                                -------------    -------------

Total liabilities                                                  97,877,738       94,908,720
                                                                -------------    -------------

Preferred stock $.10 par value, 1,000,000 shares
  authorized; none issued and outstanding                                  --               --
Common stock $.10 par value, 5,000,000 shares
  authorized; 662,698 shares issued for 2006
  and 2005; shares outstanding 650,535 and 650,316
  for 2006 and 2005, respectively                                      66,270           66,270
Additional paid in capital                                          8,483,529        8,481,669
Treasury stock at cost, 12,163 and 12,382
  for 2006 and 2005, respectively                                    (118,521)        (120,658)
Retained earnings                                                   1,028,671        1,339,579
Common stock acquired by employee stock
ownership plan (ESOP)                                                (192,411)        (240,021)
Accumulated other comprehensive loss, unrealized
  depreciation on available for sale securities,
  net of income taxes                                                (419,075)        (290,068)
                                                                -------------    -------------

Total stockholders' equity                                          8,848,463        9,236,771
                                                                -------------    -------------

Total liabilities and stockholders' equity                      $ 106,726,201    $ 104,145,491
                                                                =============    =============
</TABLE>

                   The accompaying notes are an integral part
                  of these consolidatead financial statements.

                                                                             F-2
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

                 For the Years Ended September 30, 2006 and 2005

<TABLE>
<CAPTION>
                                                                        2006              2005
                                                                    ------------      ------------
<S>                                                               <C>               <C>
Interest income:
  Loans receivable                                                  $ 5,013,985       $ 4,652,498
  Investments                                                         1,269,904         1,068,202
                                                                    -----------       -----------

       Total interest income                                          6,283,889         5,720,700
                                                                    -----------       -----------
Interest expense:
  Deposits                                                            2,577,375         1,887,366
  Federal Home Loan Bank advances                                        33,477            42,959
                                                                    -----------       -----------

       Total interest expense                                         2,610,852         1,930,325
                                                                    -----------       -----------

       Net interest income                                            3,673,037         3,790,375
Provision for loan losses                                               128,146           108,732
                                                                    -----------       -----------
       Net interest income after provision
         for loan losses                                              3,544,891         3,681,643
                                                                    -----------       -----------
Noninterest income:
  Fees and other service charges                                        227,065           245,001
  Net realized gains on sale of:
    Available for sale securities                                         8,489            16,888
    Loans                                                                 1,522            19,119
                                                                    -----------       -----------

       Total noninterest income                                         237,076           281,008
                                                                    -----------       -----------
Noninterest expense:
  Compensation and benefits                                           1,981,811         1,874,676
  Occupancy and equipment                                               692,999           671,992
  Merger expenses                                                       449,167
  Federal insurance premiums and assessments                             12,021            11,339
  Service fees                                                           86,247           114,551
  Professional fees                                                     163,027           202,092
  Other                                                                 495,276           464,213
                                                                    -----------       -----------
       Total noninterest expense                                      3,880,548         3,338,863
                                                                    -----------       -----------
(Loss) income before provision for income taxes                         (98,581)          623,788

Provision for income taxes                                              147,274           287,821
                                                                    -----------       -----------

       Net (loss) income                                               (245,855)          335,967

Other comprehensive loss:
  Unrealized loss on securities available for sale,
    arising during the period, net of tax benefit
    of $82,485, 2006; $129,539, 2005                                   (123,818)         (194,646)
  Reclassification adjustment, net of taxes
    of $3,300, 2006; $6,800, 2005                                        (5,189)          (10,088)
                                                                    -----------       -----------
       Comprehensive loss                                           $  (374,862)      $   131,233
                                                                    ===========       ===========
Net (loss) income per common share:
  Basic                                                             $     (0.39)      $      0.54
                                                                    ===========       ===========
  Diluted                                                           $     (0.39)      $      0.51
                                                                    ===========       ===========
Weighted average number of shares outstanding during the year:
  Basic                                                                 638,311           616,543
                                                                    ===========       ===========
  Diluted                                                               638,311           652,790
                                                                    ===========       ===========
</TABLE>
                   The accompaying notes are an integral part
                  of these consolidatead financial statements.

                                                                             F-3

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 For the Years Ended September 30, 2006 and 2005
<TABLE>
<CAPTION>
                                                                                                      Unrealized
                                                                   Retained      Common    Common    Depreciation
                                           Additional              Earnings      Stock     Stock     on Securities     Total
                                 Common     Paid in   Treasury   Substantially  Acquired  Acquired   Available for  Stockholders'
                                 Stock      Capital     Stock     Restricted    By ESOP    By RSP   Sale, Net of Tax   Equity
                                 -------  ----------  ---------  ------------- ---------- --------- ---------------- ------------
<S>                             <C>      <C>         <C>        <C>           <C>        <C>          <C>           <C>
Balance at September 30, 2004    $54,267  $6,515,350  $(120,658) $ 1,068,643   $(113,694) $(55,100)    $ (85,334)    $ 7,263,474

Net income for the year ended
September 30, 2005                                                   335,967                                             335,967

Issuance of additional common
  stock                           12,003   1,966,319                                                                   1,978,322
Acquisition of common stock
  by ESOP                                          -          -            -    (172,500)        -                      (172,500)
Acquisition of common stock
  by RSP                                                                                   (20,131)                      (20,131)
RSP shares allocated                               -          -            -                75,231                        75,231
ESOP shares allocated                                                             46,173                                  46,173
Unrealized depreciation on
  securities                                                                                                   -               -
available for sale, net of tax                                             -                            (204,734)       (204,734)
Cash dividends ($.10 per share)        -           -                 (65,031)                                            (65,031)
                                 -------- ----------- ---------- ------------  ---------  --------     ---------     -----------

Balance at September 30, 2005    $66,270  $8,481,669  $(120,658) $ 1,339,579   $(240,021) $      -     $(290,068)    $ 9,236,771

Net loss for the year ended
September 30, 2006                                                  (245,855)                                           (245,855)

Acquisition of common stock
  by RSP                                       1,860      2,137                             (3,997)                            -
RSP shares allocated                                                                         3,997                         3,997
ESOP shares allocated                                                             47,610                                  47,610
Unrealized depreciation on
  securities available for
  sale, net of tax                                                                                      (129,007)       (129,007)
Cash dividends ($.10 per share)                                      (65,053)                                            (65,053)
                                 -------- ----------- ---------- ------------  ---------  --------     ---------     -----------
Balance at September 30, 2006    $66,270  $8,483,529  $(118,521) $ 1,028,671   $(192,411) $      -     $(419,075)    $ 8,848,463
                                 ======== =========== ========== ============  =========  ========     =========     ===========
</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, 2006 and 2005

<TABLE>
<CAPTION>
                                                                 2006            2005
                                                            ------------    ------------
<S>                                                       <C>             <C>
Cash flows from operating activities:
  Net (loss) income                                         $   (245,855)   $    335,967
                                                            ------------    ------------

Adjustments to reconcile net (loss) income to net cash
  (used in) provided by operating activities:
      Depreciation                                               152,302         166,541
      Provision for loan losses                                  128,146         108,732
      Net gain on sale of investments                             (8,489)        (16,888)
      Net gain on loans sold                                      (1,522)        (19,119)
      Stock compensation                                          51,607         121,404
      (Increase) decrease in accrued interest receivable         (42,517)          9,259
      (Increase) decrease in other prepaid expenses               (9,691)         41,403
      Decrease in income taxes                                  (301,075)        (39,048)
      Increase in accrued interest payable                        46,031          21,387
      Increase in accounts payable
        and other accrued liabilities                             42,152           8,777
                                                            ------------    ------------

            Total adjustments                                     56,944         402,448
                                                            ------------    ------------

            Net cash provided by (used in) operations           (188,911)        738,415
                                                            ------------    ------------

Cash flows from investing activities:
  Net increase in loans receivable                            (4,016,352)     (3,592,459)
  Redemption and principal payments of
     held to maturity securities                               3,032,404          46,437
  Purchase of held to maturity securities                     (2,224,402)       (755,000)
  Purchase of available for sale securities                   (6,686,354)    (14,433,157)
  Proceeds from sale of available for sale securities          5,936,700      13,978,426
  Redemption (purchase) of Federal Home Loan Bank stock          315,500         (30,000)
  Purchase of premises and equipment                             (40,999)        (37,606)
                                                            ------------    ------------

            Net cash used in investing activities             (3,683,503)     (4,823,359)
                                                            ------------    ------------

Cash flows from financing activities:
  Issuance of additional common stock, net                                     1,785,691
  Increase in deposits                                         3,261,652       6,757,255
  Federal Home Loan Bank repayments                             (164,755)       (155,317)
  Increase (decrease) in advances by borrowers                  (189,476)         31,425
  Cash dividends                                                 (65,053)        (65,031)
                                                            ------------    ------------

            Net cash provided by financing activities          2,842,368       8,354,023
                                                            ------------    ------------

Net increase (decrease) in cash and due from banks            (1,030,046)      4,269,079

Cash and due from banks at beginning of year                  10,278,409       6,009,330
                                                            ------------    ------------

Cash and due from banks at end of year                      $  9,248,363    $ 10,278,409
                                                            ============    ============

Supplement disclosure:
  Cash paid during the period for:
    Interest                                                $  2,564,821    $  1,908,939
                                                            ============    ============
    Income taxes                                            $    529,345    $    367,833
                                                            ============    ============
Non cash items:
  Unrealized loss on securities available for
    sale, net of deferred income taxes                      $   (129,007)   $   (204,734)
                                                            ============    ============
  Common stock acquired by Restricted Stock Plan and ESOP   $      3,997    $    192,631
                                                            ============    ============
</TABLE>
                  The accompanying notes are an integral part
                   of these consolidated financial statements

                                                                             F-5

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

      The  consolidated  financial  statements,  which  have  been  prepared  in
      conformity with  accounting  principles  generally  accepted in the United
      States of America,  include the accounts of Farnsworth  Bancorp,  Inc. and
      its wholly  owned  subsidiaries,  Peoples  Savings  Bank (the  "Bank") and
      Peoples  Financial  Services,  Inc. (PFSI).  All significant  intercompany
      accounts  and  transactions  have been  eliminated  in  consolidation.  In
      preparing  the  financial  statements,  management  is  required  to  make
      estimates and assumptions  that affect the reported  amounts of assets and
      liabilities and disclosure of contingent  assets and liabilities as of the
      date of the statements of financial  condition and the reported amounts of
      revenues and expenses for the  reporting  periods.  Actual  results  could
      differ  significantly  from those estimates.  Material  estimates that are
      particularly susceptible to significant changes in the near term relate to
      the  determination  of the allowance for loan losses and the assessment of
      prepayment risks associated with  mortgage-backed  securities.  Management
      believes  that the  allowance  for loan losses is adequate and  prepayment
      risks associated with mortgage-backed  securities are properly recognized.
      While management uses available  information to recognize losses on loans,
      future  additions to the allowance for loan losses may be necessary  based
      on changes  in  economic  conditions  in the  market  area.  Additionally,
      assessments of prepayment risks related to mortgage-backed  securities are
      based upon  current  market  conditions,  which are  subject  to  frequent
      change.

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

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

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

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

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

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

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


                                                                             F-6

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

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

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

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

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

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

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

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

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

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

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

      Loans  classified as impaired,  if any, are measured  based on the present
      value of expected  future cash flows  discounted  at the loan's  effective
      interest  rate or, as a  practical  expedient,  at the  loan's  observable
      market price or the fair value of the collateral if the loan is collateral
      dependent.  A loan evaluated for impairment is deemed to be impaired when,
      based on current information and events, it is probable that the Bank will
      be unable to collect all amounts due according to the contractual terms of
      the loan  agreement.  All  loans  identified  as  impaired  are  evaluated
      independently.  The accrual of interest on impaired loans is  discontinued
      when, in management's opinion, the borrower may be unable to meet payments
      as they become due.  When  interest  accrual is  discontinued,  all unpaid
      accrued interest is reversed.  Interest income is subsequently  recognized
      only to the extent cash payments are received. No loans were identified as
      impaired as of September 30, 2006 and 2005, respectively, or for the years
      then ended.

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

                                                                             F-7
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

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

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

      The ability of Farnsworth  Bancorp,  Inc. to pay dividends to stockholders
      is  dependent  upon the receipt of  dividends  from the Bank.  The Bank is
      subject to a dividend  restriction  which generally  limits the amounts of
      dividends that can be paid.  The amount  available for payment by the Bank
      in 2007,  without  approval  from the  Office of Thrift  Supervision  (the
      "OTS") was approximately $517,000.

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

      The carrying amounts and fair values of these investments at September 30,
      2006 and 2005 are summarized as follows:

<TABLE>
<CAPTION>
                                                                        September 30, 2006
                                                   --------------------------------------------------------------
                                                                      Gross          Unrealized
                                                    Amortized      -------------    -------------       Fair
           Held to maturity:                          Cost            Gains            Losses           Value
                                                   ------------    -------------    -------------    ------------
<S>                                               <C>              <C>               <C>            <C>
               Mortgage backed securities           $ 161,862        $ 1,700           $ 272          $ 163,290
                                                   ============    =============    =============    ============
</TABLE>

<TABLE>
<CAPTION>
                                                                        September 30, 2005
                                                   --------------------------------------------------------------
                                                                      Gross          Unrealized
                                                    Amortized      -------------    -------------       Fair
           Held to maturity:                          Cost            Gains            Losses           Value
                                                   ------------    -------------    -------------    ------------
<S>                                               <C>              <C>               <C>            <C>
               Municipal bonds                       $ 755,000       $      -          $    -         $ 755,000
               Mortgage backed securities              214,864          3,824             168           218,520
                                                   ------------    -------------    -------------    ------------
                                                     $ 969,864       $  3,824          $  168         $ 973,520
                                                   ============    =============    =============    ============
</TABLE>
                                                                             F-8

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

<TABLE>
<CAPTION>
                                                                        September 30, 2006
                                                   ----------------------------------------------------------------------
                                                                           Gross          Unrealized
                                                      Amortized         -------------    -------------        Fair
                                                         Cost              Gains           Losses             Value
                                                   -----------------    ------------     ------------    ----------------
<S>                                              <C>                    <C>             <C>              <C>
           Available for sale securities:
             U.S. Government and agency
               securities                          $  7,598,233                  -        $ 307,950       $  7,290,283
             Mortgage backed securities              13,061,461                  -          455,594         12,605,867
                                                   -----------------    ------------     ------------    ----------------
                Total debt securities                20,659,694           $      -          763,544         19,896,150
             Equity securities                            1,243             65,087                -             66,330
                                                   -----------------    ------------     ------------    ----------------
                                                   $ 20,660,937           $ 65,087        $ 763,544        $ 19,962,480
                                                   =================    ============     ============    ================
</TABLE>

<TABLE>
<CAPTION>
                                                                        September 30, 2005
                                                   ----------------------------------------------------------------------
                                                                           Gross          Unrealized
                                                      Amortized         -------------    -------------        Fair
                                                         Cost              Gains           Losses             Value
                                                   -----------------    ------------     ------------    ----------------
<S>                                              <C>                    <C>             <C>              <C>
           Available for sale securities:
             U.S. Government and agency
               securities                          $  7,596,355                  -        $ 242,552      $  7,353,803
             Mortgage backed securities              12,304,770                  -          296,108        12,008,662
                                                   -----------------    ------------     ------------    ----------------
                Total debt securities                19,901,125                  -          538,660        19,362,465
             Equity securities                            1,243           $ 55,217                -            56,460
                                                   -----------------    ------------     ------------    ----------------
                                                   $ 19,902,368           $ 55,217        $ 538,660      $ 19,418,925
                                                   =================    ============     ============    ================
</TABLE>

      The  schedule of  maturities  of  available  for sale debt  securities  at
September 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                            Amortized            Fair
                                                              Cost               Value
                                                         ---------------     --------------
<S>                                                      <C>                <C>
             Due within one year to five years            $ 1,644,369        $  1,579,710
             Due after five to ten years                    3,988,864           3,823,430
             Due after ten years                            1,965,000           1,887,143
                                                         ---------------     --------------
                                                            7,598,233           7,290,283
             Mortgage backed securities                    13,061,461          12,605,867
                                                         ---------------     --------------
                                                         $ 20,659,694        $ 19,896,150
                                                         ===============     ==============
</TABLE>

      There is no schedule of maturities for mortgage backed securities  because
      these investments are subject to prepayment.
                                                                             F-9

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



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

      Mortgage-backed  securities  with a  carrying  value  and  fair  value  of
      $102,035 and  $102,823 at September  30, 2006 and $130,786 and $132,637 at
      September  30, 2005 are pledged as security for  deposits of  governmental
      entities under the provisions of the Governmental Unit Deposit  Protection
      Act.

      Information  pertaining  to  securities  with gross  unrealized  losses at
      September 30, 2006 is as follows:

<TABLE>
<CAPTION>

                                                        Less than twelve months            Over twelve months
                                                  -------------------------------    -------------------------------
                                                     Gross                              Gross
                                                   Unrealized          Fair           Unrealized           Fair
                                                     Losses            Value            Losses             Value
                                                  -------------    --------------    -------------    ----------------
<S>                                              <C>             <C>                  <C>              <C>
             Securities Available for  Sale
             U.S. Government and agency
                 securities                                                           $ 307,950        $  7,290,283
             Mortgage-backed securities            $   10,156      $ 1,889,765          445,438          10,716,098
                                                  -------------    --------------    -------------    ----------------
                 Total securities available
                   for sale                        $   10,156      $ 1,889,769        $ 753,388        $ 18,006,381
                                                  =============    ==============    =============    ================
</TABLE>

      Information  pertaining  to  securities  with gross  unrealized  losses at
      September 30, 2005 is as follows:

<TABLE>
<CAPTION>
                                                        Less than twelve months            Over twelve months
                                                  -------------------------------    -------------------------------
                                                     Gross                              Gross
                                                   Unrealized          Fair           Unrealized           Fair
                                                     Losses            Value            Losses             Value
                                                  -------------    --------------    -------------    ----------------
<S>                                              <C>             <C>                  <C>              <C>
             Securities Available for  Sale
             U.S. Government and agency
                 securities                                                           $ 242,552        $  7,353,803
             Mortgage-backed securities            $   94,019      $ 2,838,826          202,089           9,169,836
                                                  -------------    --------------    -------------    ----------------
                 Total securities available
                   for sale                        $   94,019      $ 2,838,826        $ 444,641        $ 16,523,639
                                                  =============    ==============    =============    ================
</TABLE>

      Management evaluates securities for other-than-temporary  impairment on at
      least a quarterly basis.  Consideration is given to the (1) length of time
      and  extent  to which  the fair  value as been  less  than  cost,  (2) the
      financial  condition  of the issuer and, (3) the intent and ability of the
      Bank to retain the investment for a period of time sufficient to allow for
      any  anticipated  recovery in fair  value.  At  September  30,  2006,  the
      nineteen  securities with unrealized  losses have  depreciated 4% from the
      Bank's amortized cost basis. All these securities are either guaranteed by
      the U.S.  Government or secured by mortgage loans. These unrealized losses
      relate  principally  to  current  interest  rates  for  similar  types  of
      securities.  As management has the ability to hold these  securities until
      maturity,  or for the  foreseeable  future,  no declines  are deemed to be
      other-than temporary.

                                                                            F-10

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      Loans receivable are summarized as follows:

<TABLE>
<CAPTION>

                                                            2006            2005
                                                       ------------    ------------
<S>                                                   <C>             <C>
         First mortgage loans
             Secured by one to four family residence   $ 38,472,344    $ 36,296,324
             Construction loans                           3,465,781       7,556,321
             Commercial real estate                      24,091,843      22,135,480
                                                       ------------    ------------
                                                         66,029,968      65,988,125
           Less:
             Loans in process - real estate              (3,554,831)     (6,663,049)
             Net deferred loan origination costs             43,597          14,524
                                                       ------------    ------------
         Total first mortgage loans                      62,518,734      59,339,600
                                                       ------------    ------------

         Consumer and other loans:
             Home equity                                  4,632,266       3,433,987
             Personal loans                                 259,682         306,642
             Loans secured by savings                        94,094         237,693
             Commercial business loans                    1,501,206       1,309,773
             Mobile and automobile                        5,529,885       5,908,283
                                                       ------------    ------------
         Total consumer and other loans                  12,017,133      11,196,378
                                                       ------------    ------------
         Total loans
                                                         74,535,867      70,535,978
         Less allowance for loan losses                    (640,924)       (530,763)
                                                       ------------    ------------
                                                       $ 73,894,943    $ 70,005,215
                                                       ============    ============
</TABLE>

      At September 30, 2006 and 2005,  nonaccrual  loans for which  interest had
      been   discontinued   totaled   approximately   $1,039,000  and  $601,000,
      respectively.   Interest  income  actually  recognized  is  summarized  as
      follows:

                                                       2006         2005
                                                    ---------    ---------
         Interest income that would have
           been recognized                          $ 104,097    $  78,028
         Income recognized                             42,560       10,889
                                                    ---------    ---------
         Interest income foregone                   $  61,537    $  67,139
                                                    =========    =========

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

                                                       2006         2005
                                                    ---------    ---------
         Allowance for loan losses:
               Beginning of year                    $ 530,763    $ 450,700
               Additional provisions                  128,146      108,732
               Charge offs                            (17,985)     (28,669)
                                                    ---------    ---------
                                                    $ 640,924    $ 530,763
                                                    =========    =========

                                                                            F-11

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)
4.    Loans Receivable (Continued)
      ----------------

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

                                                      2006           2005
                                                  -----------    -----------

        Beginning of year                         $ 1,976,198    $   761,254
        Loans originated                              684,807      1,288,924
        Collection of principal                      (651,259)       (73,980)
                                                  -----------    -----------
        End of year                               $ 2,009,746    $ 1,976,198
                                                  ===========    ===========

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

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

      Loans   serviced  for  others  are  not   included  in  the   accompanying
      consolidated  statements  of  financial  position.  The  unpaid  principal
      balances of mortgage and other loans serviced for others were  $15,450,888
      and $12,077,944 at September 30, 2006 and 2005, respectively.

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

      Accrued interest receivable is summarized as follows:

                                                    2006             2005
                                                  --------         --------

        Loans receivable                          $ 350,563         $ 314,153
        Mortgage backed securities                   52,113            45,271
        Other securities                             78,776            79,511
                                                  ---------         ---------
                                                  $ 481,452         $ 438,935
                                                  =========         =========


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

      Premises and equipment are summarized by major classification as follows:

<TABLE>
<CAPTION>
                                                          2006            2005           Useful lives
                                                      -------------   -------------    ------------------
<S>                                                  <C>              <C>             <C>
        Land                                           $   125,553      $   125,553
        Office building improvements (Marlton)             119,022          119,022      7 to 40 years
        Office building (Bordentown)                     1,368,932        1,365,920     25 to 40 years
        Office building (Florence)                          58,554           58,554     25 to 40 years
        Office building (Mount Laurel)                     680,877          680,877     25 to 40 years
        Deferred construction costs                         32,684           14,200
        Furniture, fixtures and equipment                1,141,413        1,121,910      5 to 7 years
                                                       -----------      -----------
                                                         3,527,035        3,486,036
        Less: accumulated depreciation                   1,426,632        1,274,330
                                                       -----------      -----------
                                                       $ 2,100,403      $ 2,211,706
                                                       ===========      ===========
</TABLE>

      Depreciation  charged to operations was $152,302 and $166,541 for 2006 and
      2005, respectively. The Bank leases the Marlton building and has renovated
      the leased space as a branch.

                                                                            F-12
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

8.    Deposits
      --------

      Deposits as of September 30 are summarized as follows:

                                                         2006          2005
                                                     -----------   -----------

          NOW accounts                               $ 9,575,844   $10,663,316
          Money market accounts                       10,605,155    16,286,611
          Passbook and club accounts                  12,115,541    11,602,005
          Non interest bearing                         5,603,736     6,529,683
                                                     -----------   -----------
          Subtotal                                    37,900,276    45,081,615
                                                     -----------   -----------
          Certificates of deposit:
            1.01% to 2.00%                                51,530     1,018,948
            2.01% to 3.0%                                539,996    12,339,243
            3.01% to 4.0%                              6,751,837    25,138,797
            4.01% to 5.0%                             29,025,590     9,900,815
            5.01% to 6.0%                             22,575,483       103,642
                                                     -----------   -----------
          Subtotal                                    58,944,436    48,501,445
                                                     -----------   -----------
                                                     $96,844,712   $93,583,060
                                                     ===========   ===========


      Deposits  of officers  and  directors  totaled  $373,592  and  $127,400 at
      September 30, 2006 and 2005,  respectively.  The aggregate amount of jumbo
      certificates  of  deposit  with a minimum  denomination  of  $100,000  was
      approximately  $11,195,000  and $6,242,000 at September 30, 2006 and 2005.
      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, 2006 and 2005, scheduled maturities of certificates of
      deposit (rounded to the nearest $1,000) are summarized as follows:

                                                   2006                2005
                                               -----------         -----------

          Due in 3 months or less              $ 8,658,000         $ 4,763,000
          Due after 3 months to 1 year          20,138,000          25,388,000
          Due after 1 year to 3 years           27,702,000          12,804,000
          Due after 3 years to 5 years           2,446,000           5,546,000
                                               -----------         -----------
                                               $58,944,000         $48,501,000
                                               ===========         ===========

      Interest  expense  on  deposits for the years ended September 30, 2006 and
      2005 is summarized as follows:

                                                   2006                2005
                                               -----------         -----------

          NOW accounts                         $    60,886         $    69,730
          Money market accounts                    285,818             297,905
          Passbook and club accounts               138,125             169,546
          Certificates of deposit                2,092,546           1,350,185
                                               -----------         -----------
                                               $ 2,577,375         $ 1,887,366
                                               ===========         ===========

                                                                            F-13

<PAGE>


                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      This advance bears fixed interest at 5.9% and matures in April 2009. It is
      collateralized  by FHLB  stock  and  investment  securities.  The Bank has
      approximately  $31,259,367  available  for  borrowing as of September  30,
      2006.

             Principal payment are as follow:

                2007                                             $ 174,762
                2008                                               186,292
                2009                                               128,887
                                                                 ---------
                Total                                            $ 489,941
                                                                 =========

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

      For the years ended  September  30, 2006 and 2005,  proceeds from sales of
      securities  available  for sale amounted to  $5,936,700  and  $13,978,426,
      respectively.  Gross  realized  gains  amounted  to  $8,489  and  $16,888,
      respectively.

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

      The Bank has qualified as a Savings  Institution  under  provisions of the
      Internal  Revenue Code. Prior to January 1, 1996 the Bank was permitted to
      deduct  from  taxable  income  an  allowance  for  bad  debts  based  on a
      percentage-of   taxable  income.   Such  percentage  was  8%  before  such
      deduction.  Retained  earnings at  September  30,  2006 and 2005  included
      untaxed  earnings of  approximately  $201,000 and $227,300,  respectively,
      representing such bad debt deductions.

      Retained  earnings at September 30, 2006 and 2005  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 the
      provision (benefit) computed at the statutory rate as follows:

                                                        2006         2005
                                                     ---------     ---------
              Statutory tax rates                        34%           34%
              Tax at statutory rates                 $ (33,517)      212,088
              Non-deductible merger expenses           152,717
              New Jersey
                 Corporation Tax                        31,552        56,342
              Miscellaneous
                                                        (3,478)       19,391
                                                     ---------     ---------
                                                     $ 147,274     $ 287,821
                                                     =========     =========

                                                                            F-14

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      The tax provision is summarized as follows:

                                                    2006               2005
                                                 ---------          ---------
       Current federal                           $  63,833          $ 198,330
       Deferred federal                             61,350             45,986
       Current state                                11,265             35,391
       Deferred state                               10,826              8,114
                                                 ---------          ---------
                                                 $ 147,274          $ 287,821
                                                 =========         =========

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

                                                     2006              2005
                                                 --------          --------
       Deferred tax assets:
         Allowance for loan losses               $ 256,370          $ 212,305
         Unrealized depreciation
           on investments                          279,383            193,630
         Loans                                      29,275             32,413
         Accrued compensation                       25,754             25,583
                                                 ---------          ---------
         Total deferred tax assets                 590,782            463,931
                                                 ---------          ---------
       Deferred tax liabilities:
         Premises and equipment                     85,054            105,875
         Tax reserve for loan losses               130,809            141,066
                                                 ---------          ---------
         Total deferred tax liabilities            215,863            246,941
                                                 ---------          ---------
         Net deferred tax asset                  $ 374,919          $ 216,990
                                                 =========          =========

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

      At September 30, 2006 the Bank had the following commitments  outstanding.
      Mortgage  commitments are for 45 days. Home equity  commitments are for 60
      days.  Commitments  on other loans are for 90 days.  The  commitments  are
      summarized as follows:

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

        Mortgages (fixed rate)  $   468,400     6.25% to 6.75%     30 years
                                                   0 points
        Home equity loans           435,000     6.25% to 8.25%     5 to 15 years
                                                   0 points
        Other loans               3,020,000     7.00% to 9.25%     1 to 10 years
                                                 0 to 1 points
                                -----------
                                $ 3,923,400
                                ===========
                                                                            F-15

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      There are fourteen letters of credit outstanding at September 30, 2006. An
      annual  fee of 1/2 to 1 percent  is due on each of the  letters of credit.
      Interest is due at various  rates if the  letters of credit are  utilized.
      The amount of the fourteen  letters totals  $1,425,128.  The Bank also has
      consumer  and  commercial   lines  of  credit  with  undrawn  balances  of
      $2,638,735 and $1,409,265, 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
      $10,457,200.  Additionally, a one month overnight repricing line of credit
      is available in the amount of $10,457,200.

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

                        2007                $  54,440
                        2008                   55,969
                        2009                   52,553
                        2010                   55,706
                        2011                   57,676
                     Thereafter               634,303
                                            ---------
                        Total               $ 910,647
                                            =========

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.

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

                                                                            F-16

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

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

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

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

      The carrying amounts of accrued interest approximate their fair values.

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

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

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

      The carrying amounts of these liabilities approximate their fair values.

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

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

                                                                            F-17

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

<TABLE>
<CAPTION>
                                                      2006                       2005
                                             ----------------------   ------------------------
                                               Carrying      Fair       Carrying       Fair
                                                amount       value       amount        value
                                                ------       -----       ------        -----
<S>                                         <C>           <C>        <C>          <C>
         Financial Assets (000's omitted)
         ------------------------------------
         Cash and due from banks              $  9,248      $9,248     $  10,278    $  10,278
         Securities held to maturity               162         163           970          973
         Securities available for sale          19,962      19,962        19,419       19,419
         FHLB stock                                205         205           520          520
         Loans receivable                       73,895      72,429        70,005       70,620
         Accrued interest receivable               481         481           439          439
         ------------------------------------
         Financial Liabilities (000's omitted)
         ------------------------------------
         Deposit liabilities                    96,845      96,717        93,583       92,838
         FHLB advances                             489         501           655          728
         Accrued interest payable                  131         131            85           85
         Other liabilities                         412         412           586          586
</TABLE>

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

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

      A  401  (k)  Plan  covers  substantially  all  employees.   Employees  may
      contribute  up to 15  percent  of their  compensation  subject  to certain
      limits  based  on  federal  tax  laws.  The  Corporation   makes  matching
      discretionary  contributions equal to 50 percent of the first 6 percent of
      an employee's compensation contributed to the Plan. Matching contributions
      vest immediately. For the years ended September 30, 2006 and 2005, expense
      attributable to the Plan amounted to $31,789 and $25,472, respectively.

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

      The Bank has established an ESOP for all eligible employees. The ESOP used
      $303,880 of proceeds from a term loan from  Farnsworth to purchase  43,759
      shares of Company common stock.  The term loan of $56,656 at September 30,
      2006, including interest, is payable in equal monthly installments through
      March 2008.  The interest rate is 8.50% fixed for the term of the loan. In
      November 2004, the ESOP used $172,500 from a term loan with  Farnsworth to
      purchase  10,000  shares of Company  stock.  The term loan of  $143,013 at
      September  30,  2006,  including  interest,  is payable  in equal  monthly
      installments  through  November 2014. The interest rate is 4.75% 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 loans.  Unallocated  shares  purchased with the loan proceeds are
      pledged  as  collateral  for the term  loans  and are  held in a  suspense
      account for future allocation among participants. Shares released from the
      suspense  account are  allocated  among the  participants  on the basis of
      compensation.  ESOP shares  pledged as  collateral  are reported as common
      stock  acquired  by  ESOP  in the  consolidated  statements  of  financial
      condition.  As shares are  committed to be released  from  collateral  the
      shares become outstanding for net income per common share computations.

                                                                            F-18

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



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

                                                       2006             2005
                                                    ---------        ---------
             Allocated shares                          37,001           31,626
             Unallocated shares                        16,758           22,133
                                                    ---------        ---------
             Total ESOP shares                         53,759           53,759
                                                    =========        =========
             Fair value of unallocated shares       $ 420,625        $ 411,674
                                                    =========        =========

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

      On April 16, 2000 the Bank established a RSP to provide both key employees
      and  outside  directors  with a  proprietary  interest  in it in a  manner
      designed to  encourage  such  person to remain  with the Bank.  A total of
      21,879  restricted  shares were  purchased  at an average  market value of
      $7.27.  Rights to a total of  15,308  shares  were  issued to the board of
      directors  and two  executive  officers  in 2000.  The fair value of these
      shares was  charged  to  expense  over the five year  vesting  period.  At
      September 30, 2006 and 2005, all shares were vested.

      On September 5, 2002 the Bank  established  an  additional  RSP to provide
      both key employees and outside directors with a proprietary interest in it
      in a manner  designed to encourage such person to remain with the Bank. To
      fund this plan, the Bank purchased a total of 15,590  restricted shares at
      a market value of $16.  Rights to a total of 15,590  shares were issued to
      the board of directors,  two executive  officers and three employees.  The
      fair  value of these  shares was  charged  to  expense  over the four year
      vesting  period.  During the year ended  September 30, 2005,  3,900 shares
      vested. At September 30, 2006 and 2005, all shares were vested.

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

      Farnsworth  has a stock  option  plan that  provides  for the  granting of
      non-qualified stock options. In April 1999, it issued 38,279 options at an
      exercise price of $7.38 per share to key Bank  employees and  non-employee
      members  of its  Board of  Directors.  The  options  vest  ratably  on the
      anniversary  date over five years.  The options expire ten years after the
      initial  grant date.  At  September  30, 2006 and 2005,  a total number of
      38,279 options were vested, and none were exercised or forfeited.

      In September 2002,  Farnsworth  issued 31,177 options at an exercise price
      of $10.07 per share to key and non-key  Bank  employees  and  non-employee
      members  of  its  Board  Directors.   The  options  vest  ratably  on  the
      anniversary  date over three years. The options expire ten years after the
      initial  grant date.  At  September  30, 2006 and 2005,  a total number of
      31,177 options were vested, and none were exercised or forfeited.

                                                                            F-19

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


15.   Net (Loss) Income Per Common Share
      ----------------------------------

      Basic net (loss)  income per common  share is  calculated  by dividing net
      (loss)  income by the number of shares of common stock  outstanding,  less
      shares that have not been committed to be released. Diluted net income per
      share for 2005 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.  Unexercised  stock options to purchase  Company's
      common stock as of September 30, 2006 were excluded in the  computation of
      diluted earnings per share as the computation would be anti-dilutive.

<TABLE>
<CAPTION>
                                                      2006                                         2005
                                     ----------------------------------------    ------------------------------------------
                                                      Weighted        Per-                         Weighted        Per-
                                                      Average        Share                         Average         Share
                                        Loss           Shares        Amount         Income          Shares        Amount
                                     ------------    -----------    ---------    -------------    -----------    ----------
<S>                                  <C>               <C>            <C>         <C>               <C>               <C>
         Net (loss) income
           available to Common
           Shareholders                $ (245,855)       650,530                    $ 335,967         638,802
         ESOP shares, not
           committed to be
           released                                      (12,219)                                     (19,498)
         RSP shares                                                                                    (2,761)
                                      -------------    -----------    ---------    -------------   ------------    ----------
         Basic earnings per share        (245,855)       638,311        ($.39)        335,967         616,543           $.54
         Common stock
           equivalents                                                                                 36,247
                                      -------------    -----------    ---------    -------------   ------------    ----------
         Diluted earnings
           per share                   $ (245,855)       638,311        ($.39)      $ 335,967         652,790           $.51
                                      =============    ===========    =========    =============   ============    ==========
</TABLE>


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

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

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

                                                                            F-20

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



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

      The Bank at September  30, 2006 and 2005 meets the  regulatory  risk based
      capital, Tier 1 capital, core capital and tangible capital requirements as
      summarized below:

<TABLE>
<CAPTION>
                                                                                            To Be Well
                                                                  For Capital            Capitalized Under
                                           Actual              Adequacy Purposes         Prompt Corrective
                                     ------------------        -----------------         -----------------
                                      Amount    Ratio           Amount    Ratio           Amount    Ratio
                                      ------   -------         -------   -------          ------  --------
<S>                                <C>        <C>            <C>         <C>           <C>       <C>
             As of September 30,
             2006:
               Risk-based capital    $ 9,080    13.92%         $ 5,218     8.00%         $ 6,522   10.00%
               Tier 1 capital          8,439    12.94%             N/A      N/A            3,913    6.00%
               Core capital            8,439     7.89%           4,278     4.00%           6,417    5.00%
               Tangible capital        8,439     7.89%           1,604     1.50%             N/A     N/A

             As of September 30,
             2005:
               Risk-based capital    $ 8,651    14.11%         $ 4,904     8.00%         $ 6,130   10.00%
               Tier 1 capital          8,120    13.25%             N/A      N/A            3,678    6.00%
               Core capital            8,120     7.84%           4,143     4.00%           5,179    5.00%
               Tangible capital        8,120     7.84%           1,554     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, 2006, that the Bank
      meets all capital adequacy requirements to which it is subject.

      As of September  2006, the date of the most recent  notification  from the
      OTS, the Bank was  categorized  as well  capitalized  under the regulatory
      framework  for  prompt  corrective  action.  To  be  categorized  as  well
      capitalized, the Bank must maintain risk based capital, Tier I capital and
      core  capital  ratios  of 10%,  6%,  and 5%,  respectively.  There  are no
      conditions  existing or events which have occurred since notification that
      management believes have changed the Bank's category.

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

                                                                            F-21

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



17.   Parent Only Financial Information
      ---------------------------------

      The earnings of the  subsidiaries  are recognized by Farnsworth  using the
      equity method of accounting. Accordingly, the earnings of the subsidiaries
      are recorded as increases in Farnsworth's investment in subsidiaries.  The
      following are the condensed  financial  statements for Farnsworth  (parent
      company  only) as of  September  30,  2006 and 2005 and for the years then
      ended.

          Statement of Financial Condition       2006                2005
                                             -----------         -----------
          Assets
            Cash                             $   637,372         $ 1,111,770
            ESOP loan receivable                 199,669             247,307
            Investment in subsidiaries         8,006,288           7,838,874
            Other assets                          76,993              67,292
                                             -----------         -----------
            Total assets                     $ 8,920,322         $ 9,265,243
                                             ===========         ===========

          Liabilities
            Accrued expenses                 $    71,859         $    28,472
                                             -----------         -----------
            Total liabilities                     71,859              28,472

            Stockholders' equity               8,848,463           9,236,771
                                             -----------         -----------
            Total liabilities and
              stockholders' equity           $ 8,920,322         $ 9,265,243
                                             ===========         ===========

                                                 2006                2005
                                             -----------         -----------

            Income from subsidiaries         $   249,753         $   412,134
            Interest income                       52,301              40,113
                                             -----------         -----------
            Total income                         302,054             452,247

            Merger expense                       449,167
            Stock transfer fees                   12,464               4,101
            Professional fees                    105,502             121,205
            Other                                 10,776              29,453
                                             -----------         -----------
            Total expenses                       577,909             154,759

           (Loss) income before
              income taxes                      (275,855)            297,488
            Income tax benefit                    30,000              38,479
                                             -----------         -----------
            Net (loss) income                $  (245,855)        $   335,967
                                             ===========         ===========

                                                                            F-22

<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

<TABLE>
<CAPTION>
       Statement of Cash Flows                                                   2006           2005
                                                                             -----------    -----------
<S>                                                                        <C>            <C>
         Cash flows from operations activities:
           Net (loss) income                                                 $  (245,855)   $   335,967
         Adjustments to reconcile net (loss) income to net cash
             used in operating activities:

                  Increase in accrued expenses                                    43,387          1,998
                  Equity in undistributed earnings of subsidiaries              (244,814)    (1,412,134)
                  Decrease (increase) in other assets                             (9,701)        31,138
                                                                             -----------    -----------

                      Net cash used in operating activities                     (456,983)    (1,043,031)
                                                                             -----------    -----------
         Cash flows from investing activities:
           Repayment of ESOP loan                                                 47,638         46,201
           Proceeds of ESOP loan                                                       -       (172,500)
                                                                             -----------    -----------
                       Net cash provided by (used in) investing activities        47,638       (126,299)
                                                                             -----------    -----------
         Cash flows from financing activities:
         Issuance of stock                                                                    1,978,323
         Dividends                                                               (65,053)       (65,031)
                                                                             -----------    -----------
                      Net cash provided by (used in) financing activities        (65,053)     1,913,292
                                                                             -----------    -----------
       Net (decrease) increase in cash                                          (474,398)       743,962
       Cash - beginning                                                        1,111,770        367,808
                                                                             -----------    -----------
       Cash - ending                                                         $   637,372    $ 1,111,770
                                                                             ===========    ===========
</TABLE>

18.   Recent Developments
      -------------------

      On June 23, 2006,  Farnsworth,  Sterling Banks,  Inc. and Sterling Bank, a
      New  Jersey  chartered  commercial  bank  ("Sterling"),  entered  into  an
      Agreement  and Plan of Merger  (the  "Agreement").  Under  the  Agreement,
      Farnsworth   will  merge  with  and  into   Sterling   Banks,   Inc.   (In
      Organization),  the  proposed  bank  holding  company  for  Sterling  (the
      "Merger"),  in exchange for 2.3625 shares of Sterling Bank,  Inc.'s common
      stock,  or $27.50 in cash, or a combination of cash and stock,  and at the
      election  of  Farnsworth's  stockholders,  subject to an overall mix of 50
      percent stock and 50 percent cash.  The Merger is valued at  approximately
      $19.1  million.  Sterling  will be the surviving  bank in the Merger.  The
      Agreement  and the  transactions  contemplated  thereby are subject to the
      approval  of the  stockholders  of  Farnsworth,  and  the  receipt  of all
      required regulatory approvals, as well as other customary conditions.  The
      Merger is currently  expected to be completed  during the first quarter of
      calendar year 2007,  although no assurances  can be given as to whether or
      when the Merger will be consummated.

19.   Fourth Quarter Adjustments (Unaudited)
      --------------------------------------

      Year end  adjustments,  which  affected the results of operations  for the
      fourth quarter of 2006, relating principally to merger expenses,  resulted
      in fourth  quarter  losses of $212,000,  which is $.33 per share.  Had the
      adjustments been reported in prior quarters, results of operations for the
      fourth  quarter would have been a net loss of $244,000,  which is $.38 per
      share.

                                                                            F-23
<PAGE>

                                   SIGNATURES

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended,  the registrant has duly caused this report to
be signed on its behalf by the  undersigned,  thereunto  duly  authorized  as of
December 29, 2006.

                                     FARNSWORTH BANCORP, INC.


                                     By:  /s/Gary N. Pelehaty
                                          --------------------------------------
                                          Gary N. Pelehaty
                                          President and Chief Executive Officer
                                          (Duly Authorized Representative)

         Pursuant to the requirement of the Securities  Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated as of December 29, 2006.


<TABLE>
<CAPTION>
<S>                                             <C>
/s/Gary N. Pelehaty                                  /s/Charles Alessi
-------------------------------------                ----------------------------------------
Gary N. Pelehaty                                     Charles Alessi
President and Chief Executive Officer                Vice President, Chief Financial Officer,
Secretary (Principal Executive Officer)              and Treasurer (Principal Accounting and
                                                     Financial Officer)


/s/Joseph H. Kelly                                   /s/George G. Aaronson, Jr.
-------------------------------------                ----------------------------------------
Joseph H. Kelly                                      George G. Aaronson, Jr.
Director                                             Director

/s/G. Edward Koenig, Jr.                             Edgar N. Peppler
-------------------------------------                ----------------------------------------
G. Edward Koenig, Jr.                                Edgar N. Peppler
Director                                             Director

/s/William H. Wainwright, Jr.                        /s/Charles E. Adams
-------------------------------------                ----------------------------------------
William H. Wainwright, Jr.                           Charles E. Adams
Director                                             Director


/s/John J. Maley, Jr.                                /s/Coby M. Frier
-------------------------------------                ----------------------------------------
John J. Maley, Jr.                                   Coby M. Frier
Director                                             Director
</TABLE>


                                       36