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
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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
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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
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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.
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<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
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<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
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<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%
====== ====== ===== ======
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<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.
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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
====== =====
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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
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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%
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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>