FARNSWORTH BANCORP INC
10KSB, 1998-12-29
SAVINGS INSTITUTION, FEDERALLY CHARTERED
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                       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, 1998

[ ]  Transition   report  pursuant  to  section  13 or  15(d) of the  Securities
     Exchange Act of 1934
     For the transition period from              to             .
                                    ------------    ------------

                           Commission File No. 0-24261

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

                   New Jersey                                  22-3591051     
- ---------------------------------------------             ---------------------
(State or Other Jurisdiction of Incorporation             (I.R.S. Employer
               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: (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. [ ]

         State issuer's revenues for its most recent fiscal year:   $2,723,840

         The aggregate  market value of the voting stock held by  non-affiliates
of the registrant,  based on the average bid and asked price of the registrant's
Common Stock on December 10, 1998, was $3.4 million.

     As of December 10, 1998,  there were issued and outstanding  379,858 shares
of the registrant's Common Stock.

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

                       DOCUMENTS INCORPORATED BY REFERENCE

1.   Portions  of the Annual  Report to  Stockholders  for the fiscal year ended
     September 30, 1998. (Part II)


<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 of 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,  which was  founded  in 1880  under the name The  Bordentown
Building  and Loan  Association,  is a federally  chartered  stock  savings bank
headquartered in Bordentown,  New Jersey.  In 1965, the Bank merged with Peoples
Building and Loan Association and changed its name to Bordentown Peoples Savings
and Loan  Association.  The Bank  acquired  Florence  Township  Savings and Loan
Association  and  Beverly  Building  and  Loan  Association  in 1985  and  1989,
respectively. The Beverly

                                        1

<PAGE>



branch was  subsequently  closed in 1994. In 1995,  the Bank changed its name to
Peoples  Savings Bank,  SLA. In 1996, the Bank converted from a  state-chartered
mutual  savings  bank  to  a  federally   chartered  mutual  savings  bank,  and
concurrently  changed its name to Peoples  Savings Bank.  The Bank is subject to
examination  and  comprehensive  regulation by the Office of Thrift  Supervision
("OTS")  and its  deposits  are  federally  insured by the  Savings  Association
Insurance Fund ("SAIF"). 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.

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.

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,
                                              -----------------------------------------
                                                        1998                 1997
                                              --------------------    -----------------
                                                   $           %         $          %
                                                  ---         ---       ---        ---
                                                            (Dollars in thousands)
<S>                                          <C>            <C>      <C>         <C>  
Type of Loans:
  Residential...............................  $  24,736       77.6%   $20,220      73.5%
  Construction..............................      2,435        7.6      2,842      10.3
  Commercial real estate....................      1,019        3.2      1,144       4.2
  Commercial Business.......................        181        0.6         18       0.1
  Consumer loans:...........................
    Home equity.............................      3,197       10.0      3,004      10.9
    Savings account loans...................        157        0.5        246       0.9
    Automobile loans .......................         37        0.1         --        --
    Other...................................        114        0.4         50       0.1
                                              ---------     ------    -------    ------
                                                 31,876      100.0%    27,524     100.0%
                                              ---------      =====     ------     =====

Less:
  Loans in process..........................        500                   895
  Deferred loan origination fees and costs..        199                   154
  Allowance for loan losses.................        135                    66
                                              ---------               -------
Total loans, net............................ $   31,042               $26,409
                                              =========                ======
</TABLE>


                                        2

<PAGE>



Loan Maturity Tables

         The  following  table sets forth the  estimated  maturity of the Bank's
loan portfolio at September 30, 1998. The table does not include  prepayments or
scheduled principal  repayments.  Prepayments and scheduled principal repayments
on  loans  totalled  $3.6  million  for  the  year  ended  September  30,  1998.
Adjustable-rate  mortgage  loans  are  shown as  maturing  based on  contractual
maturities.

                                          Due after
                              Due within  1 through  Due after
                                1 year     5 years   5 years    Total
                              ---------   ---------  -------   --------  
                                            (In thousands)

1-4 family mortgage..........    2,511      1,880     20,345    24,736
Construction.................    1,835        600         --     2,435
Commercial real estate.......       --         --      1,019     1,019
Commercial business..........       16        165         --       181
Consumer.....................      349        890      2,266     3,505
                                ------     ------    -------   -------
     Total...................    4,711      3,535     23,630    31,876
                                 =====     ======     ======    ======


         The following table sets forth the dollar amount of all loans due after
September  30, 1999,  which have  pre-determined  interest  rates and which have
floating or adjustable interest rates.


                                             Floating or
                             Fixed Rates  Adjustable Rates   Total
                             -----------  ----------------  --------
                                            (In thousands)
Residential.................   22,046             179        22,225
Construction................      600              --           600
Commercial real estate......      833             186         1,019
Commercial business.........      165              --           165
Consumer....................    2,935             221         3,156
                                -----         -------       -------
    Total...................  $26,579         $   586      $ 27,165
                               ======          ======       =======



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, 1998, the Bank had two 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

                                        3

<PAGE>



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 generally do not exceed $500,000,  although they may be
made in an  amount  up to the  Bank's  maximum  loan to one  borrower  limit  of
approximately $671,000.  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 limit the loan to value ratio to 75%.

     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.  The  Bank's  two  current
projects are a shopping center (in the amount  $500,000) and a medical  facility
(in the amount of $527,000).

         Interest  payments only are required during  construction and these are
to be 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.


                                        4

<PAGE>



         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.

         The Bank is also a Small  Business  Administration  ("SBA")  authorized
lender. A variety of types of small business administration loans are available.
Currently there are no SBA loans in the portfolio.

         Consumer Loans.  The Bank offers  non-collateralized  personal loans in
the  amounts  of up to $5,000 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 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 of prime plus 1.5% 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 Servicing Manager, approves one- to four-family
mortgage loans up to the conforming loan limit of $227,150,  and all other loans
up to $50,000.  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, 1998, commitments to cover originations
of mortgage loans totalled $295,000. 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 the  greater of $500,000 or 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 loan to one borrower limit was
approximately  $671,000 at September  30,  1998.  At  September  30,  1998,  the
aggregate loans of the Bank's five largest  borrowers have outstanding  balances
of between $289,930 and $527,000.

Nonperforming 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

                                        5

<PAGE>



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.

         Nonperforming  Assets.  The  following  table  sets  forth  information
regarding nonaccrual loans and real estate owned, as of the dates indicated. For
the year ended September 30, 1998, interest income that would have been recorded
on loans  accounted for on a non-accrual  basis under the original terms of such
loans was $27,162.
<TABLE>
<CAPTION>
                                                                      At September 30,
                                                                   ---------------------
                                                                    1998            1997
                                                                  --------        -------
<S>                                                             <C>            <C>     
Loans accounted for on a non-accrual basis:
Mortgage loans:
  Permanent loans secured by 1-4 family units.................... $    195       $    199
  All other mortgage loans.......................................       95             --
                                                                   -------        -------
Total............................................................ $    290       $    199
                                                                   =======        =======

Accruing loans which are contractually past due 90 days or more: 
Mortgage loans:
  Permanent loans secured by 1-4 family units.................... $     --       $     --
Total............................................................       --             --
Total non-accrual and accrual loans..............................      290            199
Real estate owned................................................       --             --
Total nonperforming assets.......................................      290            199
Total non-accrual and accrual loans to net loans.................     0.93%          0.75%
Total non-accrual and accrual loans to total assets..............     0.69%          0.53%
Total non performing assets to total assets......................     0.69%          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

                                        6

<PAGE>



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 generally do not qualify
as regulatory  capital.  At September  30, 1998,  the Bank had $290,000 of loans
classified as special mention, and no loans classified as substandard,  doubtful
and 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 the
Bank's  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,
                                   --------------------------------------------
                                          1998                   1997
                                   --------------------  ----------------------
                                            Percent of             Percent of
                                           Allowance in           Allowance in
                                               Each                   Each
                                             Category               Category
                                              to Total               to Total
                                   Amount    Allowance   Amount    Allowance
                                   ------    ---------   ------    ---------
                                             (Dollars in thousands)

Residential................       $    84       62.22%    $  66      100.00%
Construction...............            --          --        --          --
Commercial real estate.....             4        2.96        --          --
Commercial Business........            41       30.37        --          --
Consumer ..................             6        4.45        --          --
                                   ------      ------     -----      ------
    Total allowance for
      loan losses..........       $   135      100.00%    $  66      100.00%
                                   ======      ======     =====      ======





                                        7

<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,
                                                  -----------------------
                                                     1998          1997
                                                  ---------     ---------
                                                   (Dollars in thousands)
Total loans outstanding (1)...................    $  31,042       $26,409
                                                   ========        ======
Average loans outstanding(1)..................    $  28,699       $24,832
                                                   ========        ======

Allowance balances (at beginning of period)...           66            58
Provision:
  Residential.................................           18             8
  Commercial real estate......................            4            --
  Commercial Business.........................           41            --
  Consumer....................................            9            --
Net recoveries (charge offs)..................           (3)           --
                                                   -------         ------
Allowance balance (at end of period)..........     $    135       $    66
                                                    =======        ======
Allowance for loan losses as a percent of
  total loans outstanding.....................          .43%         0.25%
Net loans charged off as a percent of average
  loans outstanding...........................          .01%           --%


- -----------------------------
(1) Excludes  allowance for loan losses and deferred loan  origination  fees and
costs.

Investment Activities

         Investment  Securities.  The Bank is required under federal regulations
to maintain a minimum amount of 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, 1998 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.

         Mortgage-Backed  Securities. 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.


                                        8

<PAGE>



     Investment Portfolio.  The following table sets forth the carrying value of
the Bank's  investments.  See Notes 3 and 4 to the Bank's  financial  statements
elsewhere in this document.

                                                           At September 30,
                                                          ------------------
                                                          1998          1997
                                                          ----          ----
                                                            (In thousands)

Investments securities held-to-maturity:                                     
  U.S. agency securities...............................   $ 2,662    $3,656
  State and local government...........................        99        99
                                                           ------     -----
     Total investment securities held-to-maturity......     2,761     3,755

Investment securities available-for-sale:
  FHLMC Stock..........................................       134        96
                                                           ------      ----
      Total investment securities available-for-sale...       134        96

Interest-bearing deposits..............................     3,400     1,082
FHLB stock.............................................       261       234
Mortgage-backed securities held-to-maturity............     1,891     3,016
                                                           ------     -----
      Total investments................................   $ 8,447    $8,183
                                                           ======     =====





                                        9

<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, 1998 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 Investment 
                             One Year or Less    One to Five Years   Five to Ten Years   More than Ten Years       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>   
U.S. agency securities......  $   --      --%  $ 1,248    5.92%   $  1,414     4.11%    $  --       --%     $2,662     4.96% $2,773
State and local government..      --      --        --      --         --        --        99     6.05          99     6.05     115
FHLMC stock.................     134    3.72        --      --         --        --        --       --         134     3.72     134
Interest-bearing deposits...   3,400    5.50        --      --         --        --        --       --       3,400     5.50   3,400
FHLB stock..................      --      --        --      --         --        --       261     7.02         261     7.02     261
Mortgage-backed securities..   --         --       541    6.50         --        --     1,350     6.83       1,891     6.73   1,919
                               -----   -----     -----  ------   --------   -------     -----    -----       -----    -----   -----
  Total investments.........  $3,534    5.43%   $1,789    6.09%    $1,414      4.11%   $1,710     6.81%     $8,447    5.70%  $8,602
                               =====   =====     =====  ======      =====     =====    ======    =====      ======   =====   ======

</TABLE>






                                       10

<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  mortgage-backed   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, 1998.

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

Within three months...............         $     335
Three through six months..........               404
Six through twelve months.........               432
Over twelve months................               328
                                            --------
                                           $   1,499


         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.

         The following table sets forth the terms of the Bank's  short-term FHLB
advances.

                                             During the Year ended September 30,
                                             -----------------------------------
                                                      1998        1997
                                                    -------      -------
                                                    (Dollars in thousands)

Balance at period end............................. $    --      $     --
Average balance outstanding during the period.....      --         1,302

Maximum amount outstanding at any month-end
  during the period...............................      --         3,585
Weighted average interest rate during the period..      --%         6.14%







                                       11

<PAGE>



Personnel

         At  September  30,  1998 the Bank had 16  full-time  employees  and one
part-time employee. None of the Bank's employees are represented by a collective
bargaining  group.  The Bank  believes  that its  relationship  with the  Bank's
employees is good.

Regulation

         Set forth below is a brief  description of certain laws which relate to
us.  The  description  is not  complete  and is  qualified  in its  entirety  by
references to applicable laws and regulation.

Holding Company Regulation

         General.  The Company is required to register and file reports with the
OTS and is subject to regulation and  examination  by the OTS. In addition,  the
OTS has enforcement  authority over the Company and any non-savings  institution
subsidiaries.  This permits the OTS to restrict or prohibit  activities  that it
determines  to be a  serious  risk to the  Bank.  This  regulation  is  intended
primarily for the protection of the Bank's depositors and not for the benefit of
stockholders of the Company.

         Qualified  Thrift  Lender  ("QTL")  Test.  As the Company owns only one
savings institution,  it is able to diversify its operations into activities not
related to banking,  but only so long as the Bank satisfies the QTL test. If the
Company controlled more than one savings institution,  it would lose the ability
to diversify its operations  into  nonbanking  related  activities,  unless such
other savings  institutions  each also  qualified as a QTL or were acquired in a
supervised  acquisition.  See "-- Savings  Institution  Regulation  -- Qualified
Thrift Lender Test."

Savings Institution Regulation

         General. As a federally  chartered,  SAIF-insured  savings institution,
the Bank is subject to extensive  regulation by the OTS and the Federal  Deposit
Insurance  Corporation  ("FDIC").  Lending activities and other investments must
comply with various federal and state statutory and regulatory requirements. The
Bank is also subject to certain reserve requirements promulgated by the Board of
Governors of the Federal Reserve System ("Federal Reserve").

         Insurance of Deposit Accounts.  The Bank's deposit accounts are insured
by the SAIF to a maximum of $100,000 for each insured  member (as defined by law
and  regulation).  Insurance  of deposits may be  terminated  by the FDIC upon a
finding that the institution has engaged in unsafe or unsound  practices,  is in
an unsafe or unsound  condition  to  continue  operations  or has  violated  any
applicable law, regulation,  rule, order or condition imposed by the FDIC or the
institution's primary regulator.

         As a member of the  SAIF,  the Bank pays an  insurance  premium  to the
FDIC. The FDIC also maintains  another  insurance  fund, the Bank Insurance Fund
("BIF"), which primarily insures commercial bank deposits. The deposit insurance
assessment for most SAIF members is .064% of deposits on an annual basis through
the end of  1999.  During  this  same  period,  BIF  members  will  be  assessed
approximately  .013%  of  deposits.  After  1999,  assessments  for BIF and SAIF
members should be the same. It is expected that these continuing assessments for
both  SAIF  and  BIF  members  will  be  used  to  repay  outstanding  Financing
Corporation bond obligations.


                                       12

<PAGE>



         Regulatory  Capital  Requirements.   OTS  capital  regulations  require
savings institutions to meet three capital standards: (1) tangible capital equal
to 1.5% of total adjusted assets, (2) core capital equal to at least 4% of total
adjusted assets, and (3) risk-based  capital equal to 8% of total  risk-weighted
assets.

         Dividend and Other Capital  Distribution  Limitations.  OTS regulations
require  the  Bank  to  give  the OTS 30 days  advance  notice  of any  proposed
declaration of dividends to the Company, and the OTS has the authority under its
supervisory  powers to  prohibit  the  payment of  dividends  by the Bank to the
Company.  In  addition,  the Bank may not declare or pay a cash  dividend on its
capital  stock if the effect  would be to reduce the Bank's  regulatory  capital
below the amount required for the liquidation account established at the time of
the conversion from mutual to stock form.

         In the event the Bank's capital falls below the Bank's fully  phased-in
requirement  or the OTS notifies the Bank that it is in need of more than normal
supervision,   the  Bank's  ability  to  make  capital  distributions  could  be
restricted.  In addition, the OTS could prohibit a proposed capital distribution
by any institution, which would otherwise be permitted by the regulation, if the
OTS  determines  that such  distribution  would  constitute an unsafe or unsound
practice.

         Qualified  Thrift  Lender  Test.  Savings   institutions  must  meet  a
qualified thrift lender ("QTL") test. If the Bank maintains an appropriate level
of qualified thrift investments  ("QTIs") (primarily  residential  mortgages and
related  investments,   including  certain   mortgage-related   securities)  and
otherwise  qualify as a QTL,  the Bank will  continue  to enjoy  full  borrowing
privileges from the FHLB of New York. The required  percentage of QTIs is 65% of
portfolio assets (defined as all assets minus intangible  assets,  property used
by the  institution in conducting its business and liquid assets equal to 10% of
total assets).  Certain assets are subject to a percentage  limitation of 20% of
portfolio assets. In addition,  savings institutions may include shares of stock
of the  FHLBs,  FNMA,  and  FHLMC  as  QTIs.  Compliance  with  the QTL  test is
determined  on a monthly  basis in nine out of every 12 months.  As of September
30, 1998, the Bank was in compliance with its QTL requirement.

         Federal   Reserve.   The  Federal   Reserve   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 may be used to
satisfy liquidity requirements that are imposed by the OTS.

Item 2. Description of Property

(a)      Properties.

         The Bank operates from its main office and one branch office.

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

MAIN OFFICE:
789 Farnsworth Avenue
Bordentown, NJ  08505                  Owned

BRANCH OFFICE:
4 Broad Street
Florence, NJ  08518                    Owned



                                       13

<PAGE>




(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) Investments in 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.

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 and Related Stockholder Matters

(a)  The  information   contained  under  the  section  captioned  "Stock  Price
Information" of the Company's  Annual Report to Stockholders for the fiscal year
ended  September  30, 1998 (the  "Annual  Report"),  is  incorporated  herein by
reference.

(b) Use of Proceeds. The Registration Statement on Form SB-2 (No. 333-56689) for
which the use of proceeds  information is being disclosed was declared effective
by the  Securities  and Exchange  Commission  on August 10,  1998.  The offering
commenced on August 10, 1998 and  terminated on September 29, 1998 after 379,858
shares were sold.  The  Registration  Statement  covered the issuance of 548,838
shares. The managing underwriter for the offering was Ryan, Beck & Co. The title
of the securities  registered was Common Stock,  par value $0.10 per share.  The
aggregate  price of the  offering  amount  registered  was  $5,488,380,  and the
aggregate offering price of the amount sold was $3,798,580. From August 10, 1998
to  September  30, 1998,  the  expenses  incurred by the Company and the Bank in
connection  with the issuance and  distribution of the securities were $364,331,
including  $125,000  in  underwriting  fees.  Such  payments  were not direct or
indirect  payments to  directors,  officers,  general  partners of the issuer or
their associates, persons owning 10 percent or more of any class of equity

                                       14

<PAGE>



security of the Company or affiliates of the Company.  The net offering proceeds
to the Company  were  $3,434,249.  Of this amount,  between  August 10, 1998 and
September 30, 1998, $2,548,435 was contributed to working capital.

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

         The  information  contained  in  the  section  captioned  "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of the
Annual Report is incorporated herein by reference.

Item  7.  Financial Statements

         The  Registrant's   financial  statements  listed  under  Item  13  are
incorporated herein by reference.

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

         On October 20, 1998, the Registrant retained Kronick Kalada Berdy & Co.
as its independent  public accountants for the purpose of auditing its financial
statements  and  providing  an  independent  accountant's  report  thereon.  The
Registrant has not consulted Kronick Kalada Berdy & Co. of the matters set forth
in Item  304(a)(2)  of  Regulation  S-K prior to that date.  Prior to becoming a
public company in September 1998, Lewis W. Parker,  III,  independent  certified
public  accountant,   audited  the  financial  statements  of  the  Registrant's
wholly-owned  subsidiary,  Peoples  Savings Bank,  and provided the  independent
accountant's  report thereon.  Lewis W. Parker, III is still actively engaged by
the Registrant for accounting and related services.

         In connection with the audits of Peoples Savings Bank's two most recent
fiscal  years  ended  September  30, 1997 and 1996,  and for the interim  period
through  the date of this  Report,  there  were no  disagreements  with Lewis W.
Parker,  III on any matter of  accounting  principles  or  practices,  financial
statement  disclosure,  or auditing scope or procedures that, if not resolved to
his satisfaction, would have caused him to make reference to the subject of such
disagreement in connection with his reports. In addition,  during these periods,
the  reports of Lewis W.  Parker,  III on the  financial  statements  of Peoples
Savings Bank did not contain any adverse  opinion or disclaimer  of opinion,  or
was  qualified  or  modified  as  to  uncertainty,  audit  scope  or  accounting
principles.

         Lewis W. Parker III has not advised the  Registrant  concerning  any of
the items set forth in Item 304(a)(1)(v) of Regulation S-K.





                                       15

<PAGE>




                                    PART III

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

         The  following  table  sets  forth  information  with  respect  to  the
Company's directors and executive officers.
<TABLE>
<CAPTION>
                                   Age at                                                                 Current
                                September 30,                                           Director           Term
Name                                 1998         Position                                Since           Expires
- ----                           ---------------    --------                              --------          -------

<S>                                 <C>         <C>                                      <C>              <C> 
Herman Gutstein                      85           Chairman                                1965             1999

George G. Aaronson, Jr.              66           Director                                1970             1999

G. Edward Koenig, Jr.                57           Director                                1981             1999

Charles E. Adams                     83           Director                                1985             1998

Edgar N. Peppler                     62           Director (Vice Chairman)                1970             2000

William H. Wainwright, Jr.           68           Director                                1986             1998

Gary N. Pelehaty                     45           President, CEO and Director             1992             2000

Charles Alessi                       36           Vice President, CFO,                     N/A             N/A
                                                  Secretary and Treasurer

</TABLE>



         The  business  experience  for  the  past  five  years  of  each of the
directors and executive officers is as follows:

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

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

     Herman  Gutstein  has been a director of the Bank since  1965.  He has also
served as chairman of the board since 1992. Mr. Gutstein is retired. He formerly
owned a convenience store.

     G. Edward Koenig,  Jr. has,  except for a three year hiatus ending in 1993,
been a director since 1981. Mr. Koenig is 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.


                                       16

<PAGE>



     Edgar N. Peppler has been a director of the Bank since 1970.  He has served
as  vice-chairman  of the  board  since  1992.  Mr.  Peppler  is 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,  and a past  master of the Masonic
Lodge.

     William H.  Wainwright,  Jr. has been a  director  of the Bank since  1968.
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.

         Gary N. Pelehaty has served the Bank as a director  since October 1992.
He has also  been  President  and  Chief  Executive  Officer  of the Bank  since
February of the same year. Mr. Pelehaty is a director of First Nations Financial
Services  Company.  Active in the local  community,  Mr.  Pelehaty serves on the
boards of directors of Bordentown Rotary, Burlington County Burn Foundation, and
is the finance chairman of Bordentown Veterans' Memorial Foundation.  He is also
a former director of Bordentown's  Chamber of Commerce and Vice President of the
Burlington/Camden Savings League.

     Charles   Alessi  has  been   employed  by  the  Bank  since  1992  and  is
Vice-President  and  our  Chief  Financial  Officer.  He is also  Secretary  and
Treasurer of the Bank. Mr. Alessi is a member of the Financial Managers Society.


Section 16(a) Beneficial Ownership Reporting Compliance

         Section  16(a) of the 1934 Act  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, on Forms
3, 4 and 5, with the Securities and Exchange  Commission  ("SEC") and to provide
copies of those Forms 3, 4 and 5 to the Company. The Company is not aware of any
beneficial owner of more than ten percent of its Common Stock. The directors and
executive  officers of the Company (the  "Reporting  Persons")  were required to
file an Initial  Statement of Beneficial  Ownership of Securities on Form 3 with
the SEC on or before  August 20, 1998. In addition,  the Reporting  Persons were
also required under applicable SEC regulations to file a Statement of Changes of
Beneficial  Ownership of Securities on Form 4 with the SEC on or before  October
10, 1998. The Reporting  Persons filed all required Forms 3 and Forms 4 with the
SEC on November 18, 1998.  The Reporting  Persons intend to timely file all such
reports in future periods.

Item 10.  Executive Compensation

Director Compensation

         Each  director  is  paid  monthly.  Total  aggregate  fees  paid to the
directors for the year ended  September 30, 1998 were $44,600.  Since October 1,
1997,  each  director  (including  the  chairman  of the  board) has been paid a
monthly fee of $500.



                                       17

<PAGE>



Executive Compensation

         The Company has no full time employees,  but relies on the employees of
the Bank for the limited services required by the Company. All compensation paid
to officers and employees by the Company is paid by the Bank.

         Summary Compensation Table. The following table sets forth the cash and
non-cash compensation awarded to or earned by the Bank's chief executive officer
at September  30, 1998. No other  employee  earned in excess of $100,000 for the
fiscal year ended September 30, 1998.


                                              Annual Compensation
                                 ---------------------------------------------
                                                   Other Annual     All Other
Name and Principal Position      Salary    Bonus   Compensation   Compensation
- ---------------------------      ------    -----   ------------   ------------

Gary N. Pelehaty
Director, President and CEO   $  98,912  $   --     $ 6,000(1)   $  2,946(2)

- -----------------------------------
(1)      Consists of Board fees.
(2)      Consists of 401(k) plan matching contributions and cost of automobile.

         Employment Agreement. The Bank has entered into an employment agreement
with its  President,  Gary N.  Pelehaty.  Mr.  Pelehaty's  base salary under the
employment  agreement is $90,000.  The employment  agreement has a term of three
years.  The  agreement is  terminable by the Bank for "just cause" as defined in
the agreement.  If the Bank terminates Mr. Pelehaty  without just cause, he will
be entitled to a continuation of his salary from the date of termination through
the  remaining  term of the  agreement but in no event for a period of less than
twenty-four  months. The employment  agreement contains a provision stating that
in the event of the  termination of employment in connection  with any change in
control of the Bank,  Mr.  Pelehaty will be paid a lump sum amount equal to 2.99
times his five year average annual taxable cash  compensation.  If such payments
had been made under the agreement as of September 30, 1998,  such payments would
have equaled approximately $281,000. The aggregate payments that would have been
made to Mr.  Pelehaty  would be an expense  to the Bank,  thereby  reducing  the
Bank's net income and its capital by that amount.  The  agreement may be renewed
annually by the Bank's board of directors upon a  determination  of satisfactory
performance  within the board's sole  discretion.  If Mr.  Pelehaty shall become
disabled during the term of the agreement,  he shall continue to receive payment
of 100% of the base salary for a period of 12 months and 65% of such base salary
for the remaining term of such agreement.  Such payments shall be reduced by any
other benefit  payments made under other  disability  programs in effect for the
Bank's employees.


Item 11.  Security Ownership of Certain Beneficial Owners and Management

         (a)      Security Ownership of Certain Beneficial Owners

         Persons  and  groups  owning in excess  of 5% of the  Common  Stock are
required  to file  certain  reports  regarding  such  ownership  pursuant to the
Securities  Exchange Act of 1934,  as amended (the "1934  Act").  The  following
table sets forth, as of December 4, 1998, persons or groups who own more than 5%
of the Common Stock and the ownership of all executive officers and directors of
the Company

                                       18

<PAGE>



as a group.  Other than as noted below,  management  knows of no person or group
that owns more than 5% of the outstanding  shares of Common Stock at December 4,
1998.


                                         Amount and Nature of  Percent of Shares
Name and Address of Beneficial Owner     Beneficial Ownership  of Common Stock
- ------------------------------------     --------------------  ---------------

Farnsworth Bancorp, Inc.
Employee Stock Ownership Plan ("ESOP")
789 Farnsworth Avenue
Bordentown, New Jersey 08505(1)                  30,388            8.00%

All directors and officers of the Company
  as a group (8 persons)(2)                      38,782           10.21%




- ----------------------------------
(1)      The Bank's Employee Stock Ownership Plan ("ESOP") purchased such shares
         for the exclusive benefit of ESOP participants with funds borrowed from
         the Company.

(2)      Includes  shares of Common Stock held directly as well as by spouses or
         minor children,  in trust and other indirect ownership,  over which the
         individual exercises sole voting and investment power, unless otherwise
         indicated.  Excludes  30,388  unallocated  shares held by the ESOP over
         which  certain  directors,  as  trustees to the ESOP,  exercise  shared
         voting and  investment  power.  Such  individuals  disclaim  beneficial
         ownership  with  respect to such shares  held in a  fiduciary  capacity
         under the ESOP.

         (b)      Security Ownership of Management

         Ownership by Directors and Executive Officers as of December 4, 1998.

                               Number of Shares(1)   Percent of Shares of Common
                               -------------------   ---------------------------
                                                          Stock Outstanding
                                                          -----------------

George G. Aaronson, Jr.            6,000(2)                   1.58%

Charles E. Adams                   6,000(2)                   1.58%

Herman Gutstein                    6,000                      1.58%

G. Edward Koenig, Jr.              4,000(2)                   1.05%

Edgar N. Peppler                   6,000                      1.58%
 
William H. Wainwright, Jr.         6,000                      1.58%

Gary N. Pelehaty                   4,000                      1.05%

Charles Alessi                       782                       .21%



- --------------------------------------
(1)      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.

                                       19

<PAGE>



(2)  Excludes  30,388  shares of Common Stock held under the ESOP for which such
     individual  serves as either a member of the ESOP  Committee  or as an ESOP
     Trustee.  Such individual  disclaims  beneficial  ownership with respect to
     shares held in a fiduciary capacity. The ESOP purchased such shares for the
     exclusive  benefit  of ESOP  participants  with  funds  borrowed  from  the
     Company.  These shares are held in a suspense account and will be allocated
     among ESOP  participants  annually on the basis of compensation as the ESOP
     debt is repaid. The Board of Directors has appointed Messrs. Koenig, Adams,
     and Aaronson to serve on the ESOP  Committee and to serve as ESOP Trustees.
     The ESOP  Committee  or the  Board  instructs  the ESOP  Trustee  regarding
     investment  of ESOP plan  assets.  The ESOP  Trustees  must vote all shares
     allocated  to  participant  accounts  under  the ESOP as  directed  by ESOP
     participants.  Unallocated  shares and  shares  for which no timely  voting
     direction is received will be voted by the ESOP Trustees as directed by the
     Board or the ESOP Committee.


         (c) Management of the Registrant  knows of no  arrangements,  including
any pledge by any person of securities of the Registrant, the operation of which
may at a subsequent date result in a change in control of the Registrant.


Item 12.  Certain Relationships and Related Transactions

Certain Related Transactions

         No directors,  executive officers,  or immediate family members of such
individuals  were  engaged in  transactions  with the Company or any  subsidiary
involving  more  than  $60,000  during  the  year  ended   September  30,  1998.
Furthermore, the Company had no "interlocking" relationships existing during the
year ended September 30, 1998, in which (i) any executive officer is a member of
the  Board of  Directors/Trustees  of  another  entity,  one of whose  executive
officers  is a member of the  Company's  Board of  Directors,  or where (ii) any
executive  officer is a member of the compensation  committee of another entity,
one of whose executive officers is a member of the Company's Board of Directors.

         The Bank,  like many financial  institutions,  has followed a policy of
granting various types of loans to officers, directors, and employees. The loans
have been made in the ordinary course of business and on substantially  the same
terms, including interest rates and collateral,  as those prevailing at the time
for comparable transactions with the Bank's other customers,  and do not involve
more than the  normal  risk of  collectibility,  or  present  other  unfavorable
features.


Item 13.  Exhibits, List, and Reports on Form 8-K

         (a) Listed below are all  financial  statements  and exhibits  filed as
part of this report.

               1.   The  consolidated   statements  of  financial  condition  of
                    Farnsworth  Bancorp,  Inc. as of September 30, 1998 and 1997
                    and  the   related   consolidated   statements   of  income,
                    consolidated statements of equity and cash flows for each of
                    the years in the two year period ended  September  30, 1998,
                    together  with  the  related   notes  and  the   independent
                    auditors'  reports of Kronick  Kalada Berdy & Co.,  P.C. and
                    Lewis W. Parker, III, Certified Public Accountant.

               2.   Schedules omitted as they are not applicable.

                                       20

<PAGE>




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

                    (a)  List of Exhibits:

                    3(i) Articles 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 *
                    13   Portions  of  Annual  Report  to  Stockholders  for the
                         fiscal year ended September 30, 1998
                    21   Subsidiaries   of  the   Registrant   (See   Item  1  -
                         Description of Business)
                    27   Financial Data Schedule (electronic filing only)

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

*    Incorporated by reference to the Registration  Statement on Form SB-2 (File
     No. 333-56689) declared effective by the SEC on August 10, 1998.

                  (b)      Not applicable


                                       21

<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, 1998.

                            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, 1998.


/s/ Gary N. Pelehaty                     /s/ Charles Alessi        
- -------------------------------------    ---------------------------
Gary N. Pelehaty                         Charles Alessi
President and Chief Executive Officer    Vice President, Secretary and Treasurer
(Principal Executive Officer)            (Principal Accounting and Financial 
                                          Officer)


/s/ Herman Gutstein                      /s/ George G. Aaronson, Jr.     
- -------------------------------------    ---------------------------
Herman Gutstein                          George G. Aaronson, Jr.
Chairman of the Board                    Director



/s/ G. Edward Koenig, Jr.                /s/ 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








                                   EXHIBIT 13


                            FARNSWORTH BANCORP, INC.
                       1998 ANNUAL REPORT TO STOCKHOLDERS





<PAGE>



                            FARNSWORTH BANCORP, INC.
                                  ANNUAL REPORT







TABLE OF CONTENTS

                                                                         Page
                                                                         ----

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

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

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

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

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

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

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

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

                                        i

<PAGE>




                      [FARNSWORTH BANCORP, INC. LETTERHEAD]



To Our Stockholders:

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

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

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

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

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

                                       Sincerely,


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

                                        1

<PAGE>



Corporate Profile

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

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

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

Stock Price Information

The Company's  common stock has been traded on the Nasdaq  SmallCap Market under
the trading  symbol of "FNSW" since it commenced  trading on September 30, 1998.
The number of shareholders of record of common stock as of December 4, 1998, was
approximately  496.  This does not reflect the number of persons or entities who
held stock in nominee or "street"  name  through  various  brokerage  firms.  At
December 4, 1998, there were 379,858 shares outstanding. There were no dividends
paid by the  Company  during  the fiscal  year ended  September  30,  1998.  The
Company's ability to pay dividends to stockholders is largely dependent upon the
dividends  it  receives  from the Bank.  The Bank may not  declare or pay a cash
dividend  on any of its stock if the  effect  thereof  would  cause  the  Bank's
regulatory  capital  to be  reduced  below  (1)  the  amount  required  for  the
liquidation  account  established in connection with the Conversion,  or (2) the
regulatory requirements imposed by the OTS.






                                        2

<PAGE>





Selected Financial Ratios and Other Data



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

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


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


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


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


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


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


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


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




                                        3

<PAGE>



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

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

General

     The Company has recently  been formed and,  accordingly,  has no results of
operations.  The  following  discussion  relates  only to the  Bank's  financial
condition and results of operations.

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

Market Risk Analysis

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

         An asset or liability is interest rate sensitive within a specific time
period if it will  mature or  reprice  within  that time  period.  If the Bank's
assets  mature  or  reprice  more  quickly  or  to a  greater  extent  than  its
liabilities,  the Bank's net portfolio  value and net interest income would tend
to increase  during periods of rising interest rates but decrease during periods
of falling  interest rates.  Conversely,  if the Bank's assets mature or reprice
more slowly or to a lesser extent than its liabilities, the Bank's net portfolio
value and net interest  income would tend to decrease  during  periods of rising
interest rates but increase during periods of falling interest rates. The Bank's
policy has been to address the  interest  rate risk  inherent in the  historical
savings institution business of originating long-term loans funded by short-term
deposits by  maintaining  sufficient  liquid  assets for material and  prolonged
changes  in  interest  rates and by  originating  loans  with  shorter  terms to
maturity such as construction,  commercial and consumer loans. In addition,  the
Bank has invested in adjustable-rate  mortgage-backed  securities as an interest
rate risk management strategy.


                                        4

<PAGE>



         Quantitative  Analysis.  In order to encourage savings  associations to
reduce  their  interest  rate  risk,  the OTS  adopted a rule  incorporating  an
interest rate risk ("IRR") component into the risk-based  capital rules. The IRR
component is a dollar  amount that will be deducted  from total  capital for the
purpose of calculating an institution's  risk-based  capital  requirement and is
measured  in terms of the  sensitivity  of its net  portfolio  value  ("NPV") to
changes in interest rates.  NPV is the difference  between incoming and outgoing
discounted cash flows from assets, liabilities, and off-balance sheet contracts.
An  institution's  IRR is  measured  as the  change  to its NPV as a result of a
hypothetical 200 basis point ("bp") change in market interest rates. A resulting
change in NPV of more than 2% of the  estimated  present  value of total  assets
("PV")  will  require  the  institution  to deduct  from its capital 50% of that
excess  change.  The rules provide that the OTS will calculate the IRR component
quarterly for each  institution.  Based on the Bank's asset size and  risk-based
capital, the Bank has been informed by the OTS that it is exempt from this rule.
Nevertheless, the following table presents the Bank's NPV at September 30, 1998,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS.

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

    (basis points)                 (Dollars in Thousands)

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

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

            +200               4,304                     -922                   -18                10.41

            +100               4,820                     -407                    -8                11.46

               0               5,227                                                               12.26

            -100               5,430                      203                    +4                12.61

            -200               5,638                      411                    +8                12.97

            -300               5,985                      759                   +15                13.59

            -400               6,325                    1,099                   +21                14.18

</TABLE>

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

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes are based on numerous  assumptions,  including relative levels of market
interest rates,  prepayments and deposit  run-offs and should not be relied upon
as  indicative  of actual  results.  Certain  shortcomings  are inherent in such
computations.   Although   certain  assets  and  liabilities  may  have  similar
maturities  or periods of  repricing,  they may react at different  times and in
different degrees to changes in market rates of interest.  The interest rates on
certain types of assets and

                                        5

<PAGE>



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

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

Financial Condition

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

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

         Retained earnings  increased  $198,000 to $2.2 million or 5.3% of total
assets at  September  30,  1998,  as compared  to $2.1  million or 5.6% of total
assets at September 30, 1997.  The increases in retained  earnings are primarily
attributable to net income.

                                        6

<PAGE>

Average Balance Sheet

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

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

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

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

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

                                        7

<PAGE>



Rate/Volume Analysis

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



                                                 Year Ended September 30,
                                                      1998 vs. 1997
                                           -------------------------------------
                                                   Increase (Decrease)
                                                         Due to
                                           -------------------------------------
                                                               Rate/
                                            Volume     Rate    Volume       Net
                                            ------     ----    ------       ---
                                                        (In thousands)
Interest income:
 Loans receivable ......................    $ 316     $ (47)    $  (7)    $ 262
 Mortgage-backed securities ............      (26)        9        (1)      (18)
 Investment securities .................     (107)      (66)       22      (151)
 Other interest-earning assets .........       (2)       (1)        0        (3)
                                            -----     -----     -----     -----
  Total interest income ................    $ 181     $(105)    $  14     $  90
                                            =====     =====     =====     =====
Interest expense:
 NOW accounts ..........................    $   9     $   8     $   1     $  16
 Savings account .......................       19        (1)       (0)       18
 Money market accounts .................        4         2         0         6
 Certificates of deposit ...............       13        (2)       (0)       11
 Other liabilities .....................        0         0       (80)      (80)
                                            -----     -----     -----     -----
 Total interest expense ................       45         7       (81)      (29)
                                            =====     =====     =====     =====


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



                                        8

<PAGE>



Results of Operations

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

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

     Net interest income after provision for loan losses increased  $54,000,  or
4.4%,  to $1,272,000  for the year ended  September 30, 1998, as compared to the
year ended  September 30, 1997.  The increase was primarily due to the growth in
average  interest-earning  assets to $36.8 million in 1998 from $35.0 million in
1997 and growth in interest  rate  spread to 3.59% in 1998  compared to 3.28% in
1997.

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

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

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

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

                                        9

<PAGE>



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

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

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

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

         Noninterest  Expense.  Noninterest  expense increased $122,000 or 11.0%
from $1,106,000 for the year ended September 30, 1997 to $1,228,000 for the same
period in 1998.  The  increase  in the Bank's  noninterest  expense was due to a
$14,000  increase in the Bank's  occupancy and  equipment  expense and a $72,000
increase in other  noninterest  expense and an increase of $41,000 in the Bank's
compensation  and  benefits  and a  decrease  of  $5,000 in the  Bank's  federal
insurance premiums. The category of non-interest expense described as "Other" is
comprised  of  expenses  related to  advertising,  fees  charged by banks,  loan
processing   fees,   NOW  expenses,   costs  related  to  supplies  and  various
professional fees. The highest of these expenses was $73,000 for bank processing
fees.

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

Liquidity and Capital Resources

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

                                       10

<PAGE>



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

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

     Net cash provided by the Bank's  operating  activities (the cash effects of
transactions  that  enter  into the Bank's  determination  of net  income  e.g.,
non-cash items,  amortization and  depreciation,  provision for loan losses) for
the year ended  September  30, 1998 was  $523,000,  an increase of $346,000,  as
compared to the same period in 1997. The increase in 1998 was primarily due to a
$6,000 increase in the Bank's net income,  an increase in the provision for loan
losses of $64,000, and an increase in non-deposit liabilities of $229,000.

         Net  cash  used  by  the  Bank's  investing   activities   (i.e.,  cash
disbursements,  primarily for the purchase of the Bank's  investment  securities
and mortgage-backed securities portfolios and the Bank's loan portfolio) for the
year ended  September  30,  1998,  totalled  $2.7  million,  an increase of $1.2
million.  This  increase was primarily  attributable  to loan  originations  and
purchase  of  investment   securities.   The  decrease  in  cash  was  primarily
attributable  to funding net loan growth of $4.7  million in 1998 as compared to
$3.2 million in 1997 as well as investment purchases of $1.5 million as compared
to $2.5 million in 1997.  The decrease in cash was partially  offset by paydowns
and maturities of investment and  mortgage-backed  securities of $3.6 million in
1998 as compared to $3.9 million in 1997.

         Net cash  provided  in the  Bank's  financing  activities  (i.e.,  cash
receipts  primarily from net proceeds from stock issuance and from net increases
in deposits and net decreases in FHLB advances) for the year ended September 30,
1998,  totalled  $3.7  million,  an increase of $500,000 as compared to the year
ended September 30, 1997.

         Approximately  $14.2 million of the Bank's time deposits  mature within
the next 12  months.  The Bank  expects  such  deposits  to be renewed at market
rates.  In  addition to this source of  continuing  funding,  the Bank has total
borrowing  capacity of 50% of total first mortgage loans through the FHLB of New
York.

Year 2000 Issues

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

                                       11

<PAGE>



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

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

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

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

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

                                       12


<PAGE>

To the Board of Directors
Farnsworth Bancorp, Inc.


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

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

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

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


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

Kingston, Pennsylvania

November 9, 1998


                                      F-1
<PAGE>




To the Board of Directors
Peoples Savings Bank



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

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

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

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



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

Lawrenceville, New Jersey

October 29, 1997

                                      F-2
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                           September 30, 1998 and 1997

<TABLE>
<CAPTION>

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

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


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

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


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


                                      F-3

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

                 For the Years Ended September 30, 1998 and 1997


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

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

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

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

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




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

                                      F-4

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

                 For the Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>


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

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

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

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

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

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

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

</TABLE>



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

                                      F-5

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                 For the Years Ended September 30, 1998 and 1997

<TABLE>
<CAPTION>

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

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


                                  (Continued)

                                      F-6
<PAGE>



                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

                 For the Years Ended September 30, 1998 and 1997

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

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

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

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


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

                                       F-7

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


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

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

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

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

     The  consolidated  financial  statements,   which  have  been  prepared  in
     conformity  with  generally  accepted  accounting  principles,  include the
     accounts of the Company and its wholly owned  subsidiary,  Peoples  Savings
     Bank. All  significant  intercompany  accounts and  transactions  have been
     eliminated  in  consolidation.   In  preparing  the  financial  statements,
     management is required to make  estimates and  assumptions  that affect the
     reported  amount of assets and  liabilities,  the  disclosure of contingent
     assets and  liabilities  and the  reported  revenues and  expenses.  Actual
     results could differ significantly from those estimates.

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

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

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



                                      F-8
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

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

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

     Basic net income per common share is  calculated  by dividing net income by
     the  number  of  shares  of  common  stock  outstanding,  adjusted  for the
     unallocated  portion  of shares  held by the ESOP.  Diluted  net income per
     share is  calculated  by  adjusting  the  number of shares of common  stock
     outstanding   to  include   the  effect  of  stock   options,   stock-based
     compensation grants and other securities,  if dilutive,  using the treasury
     stock method. The Company has no potentially dilutive securities.

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

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

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


                                      F-9
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

      Securities
      ----------

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

     o    Securities Held to Maturity. Bonds, notes and debentures for which the
          Bank has the  positive  intent  and  ability to hold to  maturity  are
          reported at cost,  adjusted for amortization of premiums and accretion
          of  discounts.

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

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

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

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

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


                                      F-10
<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

     Impaired loans are measured  based on the present value of expected  future
     cash  flows  discounted  at the loan's  effective  interest  rate,  or as a
     practical  expedient,  at the loan's  observable  market  price or the fair
     value of the  collateral if the loan is collateral  dependent.  These loans
     include all loans, uncollateralized as well as collateralized, except large
     groups of smaller-balance  homogenous loans that are collectively evaluated
     for impairment and loans that are measured at fair value or at the lower of
     cost or fair  value.  A loan  evaluated  for  impairment  is  deemed  to be
     impaired when based on current  information and events, it is probable that
     the Bank  will be  unable to  collect  all  amounts  due  according  to the
     contractual  terms of the loan agreement.  All loans identified as impaired
     are evaluated independently.

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

     The  accrual  of  interest  on  impaired  loans is  discontinued  when,  in
     management's  opinion,  the borrower may be unable to meet payments as they
     become due.  When  interest  accrual is  discontinued,  all unpaid  accrued
     interest is reversed.  Interest income is  subsequently  recognized only to
     the extent cash payments are received.


                                      F-11

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

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

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

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


                                      F-12

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

      The ability of the Company to pay dividends to  stockholders  is dependent
      upon the receipt of income from the Bank.  The Bank may not declare or pay
      any  dividend  on or  repurchase  any of its  capital  stock if the effect
      thereof  would  cause its net worth to be  reduced  below:  (1) the amount
      required for the liquidation  account,  or (2) the net worth  requirements
      contained in section  563.13 (b) of the rules and regulation of the Office
      of Thrift Supervision (the "OTS").

                                      F-13

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

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

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

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

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

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

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

                                      F-14

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

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

<TABLE>
<CAPTION>

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

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

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

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

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

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

      Loans receivable at September 30, are summarized as follows:

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

                                      F-15

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

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


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

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

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

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

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

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

                                      F-16

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

      Accrued interest receivable is summarized as follows:

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

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

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

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

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

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

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

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


                                      F-17


<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

      Deposits  of  officers  and  directors  totalled  $249,488  in  1998.  The
      aggregate  amount  of  jumbo   certificates  of  deposit  with  a  minimum
      denomination  of $100,000 was  approximately  $1,499,000 and $2,237,000 at
      September 30, 1998 and 1997. These  certificates of deposit do not receive
      preferential  rates of  interest.  Deposits in excess of $100,000  are not
      federally insured.

      As of September 30, 1998 and 1997, scheduled maturities of certificates of
      deposit (rounded to the nearest $1,000) are summarized as follows:

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

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

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

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

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

                                      F-18

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

     The Bank has  qualified as a Savings  Institution  under  provisions of the
     Internal  Revenue Code.  Prior to January 1, 1996 the bank was permitted to
     deduct from taxable income an allowance for bad debts based on a percentage
     of  taxable income;  such  rate  was 8%  before  such  deduction.  Retained
     earnings  at  September  30,  1998 and 1997  included  untaxed  earnings of
     approximately  $407,133 and $432,775,  respectively,  representing such bad
     debt deductions.

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

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

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

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

      Effective tax rate                               .31%               30%


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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

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

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

<PAGE>
                    FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

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

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

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

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

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

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

                                      F-21
<PAGE>

                    FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

     The carrying amounts of accrued interest approximate their fair values.

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

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

     The Bank is a party to financial instruments with off-balance-sheet risk in
     the normal course of business to meet the  financing  need of its customers
     and to reduce its own exposure to  fluctuations  in interest  rates.  These
     financial   instruments   consist  of  commitments  to  extend  credit  and
     commerical  letters of credit.  Commitments to extend credit are agreements
     to lend to a customer  as long as there is no  violation  of any  condition
     established in the loan agreement.  These  commitments are comprised of the
     undisbursed  portion of  mortgages,  commercial  loans and home equity loan
     originations. The Bank's exposure to credit loss from nonperformance by the
     other party to the financial  instruments  for commitments to extend credit
     is represented by the  contractual  amount of those  instruments.  The Bank
     uses the  same  credit  policies  in  making  commitments  and  conditional
     obligations  as  it  does  for  on-balance-sheet  instruments.   Generally,
     collateral,  usually in the form of real  estate,  is  required  to support
     financial  instruments  with credit risk.  Such financial  instruments  are
     recorded in the financial  statements  when they are funded or related fees
     are incurred or received.


                                      F-22


<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

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

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

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

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

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

     ESOP
     ----

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

                                      F-23

<PAGE>

                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

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

      The ESOP shares were as follows:

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

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

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

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

                                      F-24

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)

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

     The Bank at September 30, 1998 and 1997 meets the regulatory  core capital,
     tangible capital,  Tier I capital and total risk based capital requirements
     as summarized below:

<TABLE>
<CAPTION>
                                                                                               To be Well-
                                                                                             Capitalized Under
                                                                      For Capital            Prompt Corrective
                                              Actual                Adequacy Purposes        Action Provisions
                                       -------------------        --------------------      --------------------
                                       Amount        Ratio        Amount        Ratio       Amount        Ratio 
                                       ------        -----        ------        ------      ------        ------ 
                                                              (Dollars to Thousands)
    <S>                               <C>            <C>           <C>           <C>         <C>          <C>  
      As of September 30, 1997:
        Risk-based capital            $  2,095        11.52         1,454         8.00        1,818        10.00
        Tier 1 capital                   2,029        11.16          N/A          N/A         1,091         6.00
        Core capital                     2,029         5.40         1,503         4.00        1,878         5.00
        Tangible capital                 2,029         5.40           563         1.50         N/A          N/A
      As of September 30, 1998:
        Risk-based capital            $  4,685        22.61         1,658         8.00        2,073        10.00
        Tier 1 capital                   4,465        22.55          N/A          N/A         1,188         6.00
        Core capital                     4,465        10.71         1,668         4.00        2,085         5.00
        Tangible capital                 4,465        10.71           625         1.50         N/A          N/A
</TABLE>
     The  Federal  Deposit  Insurance   Corporation   Improvement  Act  of  1991
     ("FDICIA")  imposes  increased  requirements on the operations of financial
     institutions  and  mandated  the  development  of  regulations  designed to
     empower  regulators  to take  prompt  corrective  action  with  respect  to
     institutions that fall below certain capital  standards.  FDICIA stipulates
     that an  institution  with  less  than  4% core  capital  is  deemed  to be
     undercapitalized.  Quantitative  measures  established  by FDICIA to ensure
     capital adequacy require the Bank to maintain minimum amounts and ratios of
     total,  core  and  Tier  I  capital  (as  defined  in the  regulations)  to
     risk-weighted assets (as defined),  and of Tier I capital to average assets
     (as defined).  Management believes, as of September 30, 1998, that the Bank
     meets all capital adequacy requirements to which it is subject.

     As of September 19, 1997,  the most recent  notification  from the OTS, the
     Bank was categorized as well capitalized under the regulatory framework for
     prompt corrective  action. To be categorized as well capitalized,  the Bank
     must maintain minimum risk-based, Tier I and total core ratios of 10%, 6%,
     and 5%, respectively. There are no conditions existing or events which have
     occurred  since  notification  that  management  believes  have changed the
     Bank's category.

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

                                      F-25

<PAGE>
                     FARNSWORTH BANCORP, INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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

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

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

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

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

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


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


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

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


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

      Stockholders' equity

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

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

 

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



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

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

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







                                      F-27


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

                              PEOPLES SAVINGS BANK

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

                               Board of Directors

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

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

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

                                Gary N. Pelehaty
                      President and Chief Executive Officer

                               Executive Officers

                                Gary N. Pelehaty
                      President and Chief Executive Officer

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

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

Special Counsel                       Transfer Agent and Registrar
Malizia, Spidi, Sloane & Fisch, P.C.  American Securities Transfer & Trust, Inc.
One Franklin Square                   1825 Lawrence Street, Suite 444
1301 K Street, N.W., Suite 700 East   Denver, Colorado 80201
Washington, D.C. 20005

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

The Company's  Annual Report on Form 10-KSB for the fiscal year ended  September
30, 1998 is available  without  charge upon written  request.  For a copy of the
Form 10-KSB,  please write or call Mr.  Charles  Alessi,  Vice  President at the
Company's  Office.  The Annual Meeting of Stockholders  will be held on April 6,
1999 at 2:00 p.m. at the Company's office.

                                       13



<TABLE> <S> <C>


<ARTICLE>                                            9
<LEGEND>
     THIS  SCHEDULE  CONTAINS  SUMMARY  FINANCIAL  INFORMATION  DERIVED FROM THE
ANNUAL REPORT ON FORM 10-KSB AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL INFORMATION.
</LEGEND>


<MULTIPLIER>                                   1000
       
<S>                                            <C>
<PERIOD-TYPE>                                  12-MOS
<FISCAL-YEAR-END>                              SEP-30-1998
<PERIOD-END>                                   SEP-30-1998
<CASH>                                             505
<INT-BEARING-DEPOSITS>                           3,400
<FED-FUNDS-SOLD>                                     0
<TRADING-ASSETS>                                     0
<INVESTMENTS-HELD-FOR-SALE>                          0
<INVESTMENTS-CARRYING>                           4,652
<INVESTMENTS-MARKET>                               134
<LOANS>                                         31,177
<ALLOWANCE>                                        135
<TOTAL-ASSETS>                                  41,774
<DEPOSITS>                                      35,778
<SHORT-TERM>                                         0
<LIABILITIES-OTHER>                                554
<LONG-TERM>                                          0
                                0
                                          0
<COMMON>                                            38
<OTHER-SE>                                       5,405
<TOTAL-LIABILITIES-AND-EQUITY>                  41,774
<INTEREST-LOAN>                                  2,295
<INTEREST-INVEST>                                  376
<INTEREST-OTHER>                                    53
<INTEREST-TOTAL>                                 2,724
<INTEREST-DEPOSIT>                               1,380
<INTEREST-EXPENSE>                               1,380
<INTEREST-INCOME-NET>                            1,344
<LOAN-LOSSES>                                       72
<SECURITIES-GAINS>                                   1
<EXPENSE-OTHER>                                  1,228
<INCOME-PRETAX>                                    287
<INCOME-PRE-EXTRAORDINARY>                         287
<EXTRAORDINARY>                                      0
<CHANGES>                                            0
<NET-INCOME>                                       198
<EPS-PRIMARY>                                      .57
<EPS-DILUTED>                                      .57
<YIELD-ACTUAL>                                    6.89
<LOANS-NON>                                        290
<LOANS-PAST>                                       290
<LOANS-TROUBLED>                                     0
<LOANS-PROBLEM>                                      0
<ALLOWANCE-OPEN>                                    66 
<CHARGE-OFFS>                                        3
<RECOVERIES>                                         0
<ALLOWANCE-CLOSE>                                  135
<ALLOWANCE-DOMESTIC>                               135
<ALLOWANCE-FOREIGN>                                  0
<ALLOWANCE-UNALLOCATED>                              0
        


</TABLE>


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