SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________.
Commission File No. 0-24621
Farnsworth Bancorp, Inc.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3591051
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
789 Farnsworth Avenue, Bordentown, New Jersey 08505
---------------------------------------------------
(Address of Principal Executive Offices)
(609) 298-0723
- --------------------------------------------------------------------------------
Issuer's Telephone Number, Including Area Code
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
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Number of shares of Common Stock outstanding as of July 21, 1999: 379,858
Transitional Small Business Disclosure Format (check one)
YES NO X
--- ---
1
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FARNSWORTH BANCORP, INC.
Contents
--------
<TABLE>
<CAPTION>
Page(s)
PART I - FINANCIAL INFORMATION -------
<S> <C>
Item 1. Financial Statements................................................................................3
Consolidated Statements of Financial Condition at June 30, 1999
(unaudited) and September 30, 1998 (audited)............................................................3
Consolidated Statements of Income and Comprehensive Income for the
three months ended June 30, 1999 and June 30, 1998 (unaudited)
and for the nine months ended June 30, 1999 and June 30, 1998 (unaudited)...............................4
Consolidated Statement of Changes in Stockholders' Equity for the
year ended September 30, 1998 (audited)
and the nine months ended June 30, 1999 (unaudited).....................................................5
Consolidated Statements of Cash Flows for the nine months ended
June 30, 1999 and June 30, 1998 (unaudited).............................................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................................7
PART II - OTHER INFORMATION
Item 1. Legal Proceedings..................................................................................13
Item 2. Changes in Securities and Use of Proceeds..........................................................13
Item 3. Defaults upon Senior Securities....................................................................13
Item 4. Submission of Matters to a Vote of Security Holders................................................13
Item 5. Other Information..................................................................................14
Item 6. Exhibits and Reports on Form 8-K...................................................................14
Signatures..................................................................................................15
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
FARNSWORTH BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
---------- ------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,328,789 $ 3,928,077
Securities available for sale 6,814,519 134,187
Securities held to maturity:
Mortgage-backed 1,852,705 1,890,642
Other 2,265,755 2,761,367
Loans receivable, net 37,232,416 31,041,552
Real Estate Owned, net 88,804
Accrued interest receivable 345,543 227,318
Federal Home Loan Bank of New York
stock at cost substantially restricted 296,800 261,300
Premises and equipment 1,538,908 1,468,846
Others assets 40,147 60,458
---------- ----------
Total assets $51,804,386 $41,773,747
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $41,564,112 $35,777,855
Borrowings from FHLB 4,490,803
Advances by borrowers for taxes and insurance 211,144 214,884
Accrued and deferred income taxes 30,621 183,698
Accrued interest payable 89,221 38,692
Accounts payable and other accrued expenses 72,489 115,890
---------- ----------
Total liabilities 46,458,390 36,331,019
---------- ----------
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 and outstanding 37,985 37,985
Additional paid in capital 3,396,262 3,396,262
Retained earnings substantially restricted 2,368,400 2,227,363
Unreleased common stock and related additional
paid in capital acquired by employee stock
ownership plan (ESOP) (303,880) (303,880)
Treasury stock (83,591)
Net unrealized (depreciation) appreciation on available
for sale securities net of income taxes (69,180) 84,998
---------- ----------
Total stockholders' equity 5,345,996 5,442,728
---------- ----------
Total liabilities and stockholders' equity $51,804,386 $41,773,747
========== ==========
</TABLE>
The accompanying notes to unaudited consolidated interim financial
statements are an integral part of these statements.
3
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FARNSWORTH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $ 691,600 $ 591,977 $1,961,239 $1,698,411
Securities 171,434 83,115 388,765 257,213
Federal funds sold 13,684 20,278 46,905 57,737
-------- -------- --------- ---------
Total interest income 876,718 695,370 2,396,909 2,013,361
-------- -------- --------- ---------
Interest expense:
Deposits 365,302 352,479 1,068,326 1,028,990
Federal Home Loan Bank advances 52,963 -- 97,653 500
-------- -------- --------- ---------
Total interest expense 418,265 352,479 1,165,979 1,029,490
-------- -------- --------- ---------
Net interest income 458,453 342,891 1,230,930 983,871
Provision for loan losses 17,000 5,000 31,000 64,000
-------- -------- --------- ---------
Net interest income after provision for loan
losses 441,453 337,891 1,199,930 919,871
-------- -------- --------- ---------
Noninterest income:
Fees and other service charges 53,473 52,256 179,797 145,853
Net realized Gains on Sale of
Available-for-Sale Securities 1,875 -- 3,359 933
Collection on deficiency judgment -- -- -- 54,024
-------- -------- --------- ---------
Total noninterest income $ 55,348 $ 2,258 $ 183,156 $ 200,810
-------- -------- --------- ---------
Noninterest expense:
Compensation and benefits $ 200,985 $ 157,592 $ 548,235 $ 440,796
Occupancy and equipment 74,018 36,869 215,414 153,584
Federal insurance premiums and assessments 10,561 8,651 21,255 25,856
Other 119,901 109,978 374,845 270,504
-------- -------- --------- ---------
Total noninterest expense 405,465 313,090 1,159,749 890,740
Income before provision for income taxes 91,336 77,057 223,337 229,941
Provision for income taxes 28,500 29,500 82,300 67,545
-------- -------- --------- ---------
Net income $ 62,836 $ 47,557 $ 141,037 $ 162,396
======== ======== ========= =========
Other Comprehensive Income, net of taxes:
Unrealized Gain (Loss) on Securities
Available for Sale $(154,178) $ (4,391) $ (170,722) $ 18,754
Reclassification adjustment for gains included
in net income (1,875) -- (3,359) (933)
-------- -------- --------- ---------
Comprehensive (Loss) Income $ (93,217) $ 43,166 $ (33,044) $ 180,217
======== ======== ========= =========
Net income per common share: Basic $ 0.18 $ 0.14 $ 0.41 $ 0.46
Shares used in computing basic income per share 343,973 349,470 347,637 349,470
</TABLE>
The accompanying notes to unaudited consolidated interim financial statements
are an integral part of these statements.
4
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FARNSWORTH BANCORP INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
THE YEAR ENDED SEPTEMBER 30, 1998 (AUDITED)AND
FOR THE NINE MONTHS ENDED JUNE 30, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
NET UNREALIZED
APPRECIATION
(DEPRECIATION)
RETAINED ON SECURITIES COMMON
ADDITIONAL EARNINGS AVAILABLE STOCK
COMMON PAID IN SUBSTANTIALLY FOR SALE ACQUIRED BY TREASURY
STOCK CAPITAL RESTRICTED NET OF TAXES ESOP STOCK TOTAL
----- ------- ---------- ------------ ----------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
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 84,998 (303,880) - 5,442,728
Net Income for the Nine Months
Ended June 30, 1999 - - 141,037 - - - 141,037
Acquisition of Treasury Stock
Change in Unrealized
Depreciation on Securities - - - - - (83,591) (83,591)
Change in Unrealized
Depreciation on Securities
Available for Sale, Net of Tax - - - (154,178) - - (154,178)
------ --------- --------- ------- ------- ------- ---------
Balance at June 30, 1999 $37,985 $3,396,262 $2,368,400 $ (69,180) $(303,880) $(83,591) $5,345,996
====== ========= ========= ======= ======== ======= =========
</TABLE>
5
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FARNSWORTH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended June 30,
1999 1998
------------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 141,037 $ 162,397
------------ -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 53,238 48,818
Provision for loan losses 31,000 64,000
Net gain on sale of assets (3,359) (933)
Increase in accrued interest receivable (118,225) (10,116)
Increase (decrease) in other assets 20,311 (121,836)
(Decrease) increase in advances from borrowers (3,740) 33,514
(Decrease) increase in accrued income taxes and
deferred income taxes (108,697) 68,104
Increase in accrued interest payable 50,529 (5,525)
(Decrease) in other accrued liabilities (43,401) (2,991)
------------ ------------
Total adjustments (122,344) 73,035
------------ ------------
Net cash provided by operating activities 18,693 235,432
------------ ------------
Cash flows from investing activities:
Net increase in loans receivable (6,310,668) (3,673,294)
Purchase of securities held to maturity (503,574)
Redemption of securities, held to maturity 1,042,165 2,289,616
Purchase of Federal Home Loan Bank stock (35,500) (27,000)
Proceeds from sale of securities available for sale 1,464,532 997,808
Purchase of securities, available for sale (8,341,107) (997,835)
Purchase of premises and equipment (127,298) (48,241)
------------ ------------
Net cash used in investing activities (12,811,450) (1,458,946)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 5,786,257 1,845,500
Increase in Federal Home Loan Bank Borrowings 4,490,803 --
Purchase of Treasury Stock (83,591) --
------------ ------------
Net cash provided by financing activities 10,193,469 1,845,500
------------ ------------
Net (decrease) increase in cash and due from banks (2,599,288) 621,986
Cash at beginning of period 3,928,077 2,364,541
------------ ------------
Cash at end of period $ 1,328,789 $ 2,986,527
============ ============
Supplemental disclosure:
Cash paid during the period for:
Interest $ 1,082,096 $ 1,032,229
============ ============
Income taxes $ 64,000 $ 6,500
============ ============
Unrealized gain (loss) on securities available for sale,
net of
Deferred income taxes $ (69,180) $ 78,069
============ ============
Non cash items:
Acquisition of real estate in settlement of loans $ 88,804 $ --
============ ============
</TABLE>
The accompanying notes to unaudited consolidated interim financial statements
are an integral part of these statements.
6
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FARNSWORTH BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. Presentation of Financial Information
-------------------------------------
The accompanying unaudited consolidated interim financial statements include the
accounts of Farnsworth Bancorp, Inc. (the "Company") and its subsidiary Peoples
Savings Bank (the "Bank"). The accompanying unaudited consolidated interim
financial statements have been prepared in accordance with the instructions to
Form 10-QSB. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accounting and reporting policies of the Company
conform in all material respects to generally accepted accounting principles and
to general practice within the savings bank industry. It is the opinion of
management that the accompanying unaudited consolidated interim financial
statements reflect all adjustments which are considered necessary to report
fairly the financial position as of June 30, 1999, the Consolidated Statements
of Income and Comprehensive Income for the nine months ended June 30, 1999 and
1998, and the Consolidated Statements of Cash Flows for the nine months ended
June 30, 1999 and 1998. The results of operations for the nine months ended June
30, 1999, are not necessarily indicative of results that may be expected for the
entire year ending September 30, 1999 or for any other period. The accompanying
unaudited consolidated interim financial statements should be read in
conjunction with the Company's September 30, 1998 consolidated financial
statements including the notes thereto, which are included in the Company's
Annual Report on Form 10-KSB for the fiscal year ended September 30, 1998.
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 write-downs on foreclosed real estate
based on their judgments about information available to them at the time of
their examination.
Cash Equivalents
- ----------------
For the purpose of presentation in the Consolidated 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 Company considers all
highly liquid investments with original maturities of three months or less when
purchased as cash equivalents.
Nature of Operations
- --------------------
The Company is a non-operating savings and loan holding company. 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 businesses and
middle-income individuals.
7
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NOTE 2. Net Income Per Common Share
---------------------------
In February 1997, the Financial Accounting Standards Board 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 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 Company's Employee Stock Ownership Plan ("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, generally, using the
treasury stock method. The Company has no potentially dilutive securities.
Per share amounts for the quarters ended June 30, 1999 and 1998 have been
calculated based on the net income for the entire year and assume the common
stock issued has been outstanding since October 1, 1997.
<TABLE>
<CAPTION>
For the three months ended June 30,
-----------------------------------
1999 1998(1)
---------- ----------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to Common
Shareholders $62,836 343,973 $ 0.18 $47,557 349,470 $ 0.14
====== ======= ==== ====== ======= ====
</TABLE>
<TABLE>
<CAPTION>
For the nine months ended June 30,
----------------------------------
1999 1998(1)
---------- ----------
Weighted Weighted
Average Per-Share Average Per-Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS
Net income available to Common
Shareholders $141,037 347,637 $ 0.41 $171.864 349,470 $ 0.46
======== ======= ==== ======= ======= ====
</TABLE>
There were no dilutive effects as of June 30, 1999 or 1998.
- --------------------
(1) 1998 shown for comparison only.
NOTE 3. Recent Accounting Pronouncements
--------------------------------
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income and
its components in financial statements. Statement 130 states that comprehensive
income includes reported net income of a company, adjusted for items that are
currently accounted for as direct entries to equity, such as the net unrealized
gain or loss on securities available for sale, foreign currency items, and
minimum pension liability adjustments. This statement is effective for both
interim and annual periods beginning after December 15, 1997. As required, the
Company adopted Statement 130 in the first quarter of fiscal 1999, and reported
comprehensive income in accordance with the new statement.
8
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NOTE 4. Management Stock Bonus Plan
---------------------------
On April 6, 1999 the stockholders of Farnsworth Bancorp Inc. voted for
the ratification of the Peoples Savings Bank Management Stock Bonus Plan. This
plan was subsequently approved by The Office of Thrift Supervision and the Bank
began to repurchase 15,194 shares of Farnsworth Bancorp Stock on the open
market. At June 30 there were 8,350 shares repurchased.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
Total assets increased $10.0 million or 23.97% to $51.8 million at June
30, 1999 from $41.8 million at September 30, 1998. The increase was primarily
attributable to a $6.2 million increase in the Bank's loans receivable, net, and
a $6.7 million increase in securities available for sale, partially offset by a
decrease in cash and equivalents of $2.6 million, as well as a decrease in
mortgage-backed securities of $38,000. The Bank's total liabilities increased
$10.11 million or 27.9%, to $46.5 million at June 30, 1999 from $36.3 million at
September 30, 1998. The increase was primarily attributable to a $5.8 million
increase in deposits and an increase in borrowings from the FHLB of $4.5
million.
Stockholders' equity decreased $91,000 to $5.4 million or 10.3% of
total assets at June 30, 1999, as compared to $5.4 million or 13.0% of total
assets at September 30, 1998. The decrease in stockholders' equity is primarily
attributable to the purchase of restricted stock plan shares of $84,000, a
change in the unrealized appreciation of securities available for sale of
$170,000 offset by net income of $141,000.
Results of Operations
Net Income. Net income was $63,000 or $0.18 per share for the quarter
ended June 30, 1999 compared to $48,000 or $0.14 per share for the quarter ended
June 30, 1998. For the nine months ended June 30, 1999 net income was $141,000
or $.41 per share compared to $162,000 or $.46 per share for the nine months
ended June 30, 1998. The decrease was attributable to a $54,000 collection of a
deficiency judgement in the first quarter of 1998 compared to no such collection
in 1999. The decrease in net income for the nine months ended June 30, 1999 was
partially offset by an increase in net interest income of $247,000, and a
decrease in the provision for loan losses of $33,000, partially offset by an
increase in non-interest expense of $270,000 and an increase in income taxes of
$15,000.
Net Interest Income. Net interest income is the most significant
component of the Bank's income from operations. Net interest income is the
difference between interest the Bank received on its interest-earning assets,
primarily loans, investment and mortgage-backed securities, and interest the
Bank pays on its interest-bearing liabilities, primarily deposits and
borrowings. Net interest income depends on the volume of and rates earned on
interest-earning assets and the volume of and rates paid on interest-bearing
liabilities.
Net interest income after provision for the loan losses was $441,000
for the quarter ended June 30, 1999 compared to $338,000 for the quarter ended
June 30, 1998. Net interest income after provision for loan losses increased
$280,000 or 30.4%, to $1,200,000 for the nine months ended June 30, 1999, as
compared to the nine months ended June 30, 1998. The increase was primarily due
to the growth in interest-earning assets to $49.8 million in 1999 from $37.8
million in 1998.
Provision for Loan Losses. Provision for loan losses was $17,000 for
the quarter ended June 30, 1999 as compared to $5,000 for the quarter ended June
30 1998. The increase in 1999 is to bring the allowances for loan losses to a
level that is adequate to provide for estimated losses, given the increase in
loans.
9
<PAGE>
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. For the
nine months ended June 30, 1999 the provision for loan losses were $31,000
compared to $64,000 for the nine months ended June 30, 1998.
Non-Interest Income. Non-interest income was $55,000 for the quarter
ended June 30, 1999 compared to $52,000 for the same period in 1998. For the
nine months ended June 30, 1999 non-interest income was $183,000 compared to
$201,000 for the same period in 1998. This decrease in the Bank's non-interest
income was due to the collection of a $54,000 deficiency judgment in the first
quarter of 1998 offset by an increase in fees and other service charges of
$34,000 and a gain on sale of available for sale securities of $2,000.
Non-Interest Expense. Non-interest expense was $405,000 for the quarter
ended June 30, 1999 compared to $313,000 for the same period of 1998. For the
nine months ended June 30, 1999 non-interest expenses increased by $270,000 to
$1,160,000 from $890,000 for the nine months ended June 30, 1998. The increase
is attributed to an increase of $107,000 in the Bank's compensation and benefits
partly due to the increase in personnel needed to accommodate the growth in
assets especially in the lending area. Also an increase in office occupancy and
equipment of $62,000 and an increase of $104,000 in other non-interest expense
which include additional legal, professional and printing expenses related to
the costs of being a public company, as well as higher lending and NOW account
processing fees.
Income Tax Expense. Income tax expense increased $14,000 from $68,000
in the first nine months of 1998 to $82,000 in 1999. This increase in income tax
expense is due to permanent differences.
Liquidity and Capital Resources
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of the Bank's deposits and short-term borrowings. The required ratio currently
is 4.0% and the Bank's regulatory liquidity ratio average was 12.82% and 10.86%
at June 30, 1999 and 1998, 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 nine months ended June 30, 1999 was $19,000, a decrease of $216,000, as
compared to the same period in 1998. The decrease in cash used in 1999 was
primarily due to a $31,000 decrease in the Bank's net income, a decrease in the
accrued income tax and deferred income taxes of $173,000, and a decrease in
non-deposit liabilities of $46,000, as well as an increase in accrued interest
receivable of $108,000 offset by an increase in accrued interest payable of
$51,000 and a decrease in other assets of $20,000.
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
nine months ended June 30, 1999, totaled $12.8 million, an increase of $11.3
million from the same
10
<PAGE>
period in 1998. The increase in cash used was primarily attributable to funding
net loan growth of $6.2 million in 1999 as compared to $3.6 million in 1998 as
well as investment purchases of $8.8 million in 1999 compared to $1.0 million in
1998. The decrease in cash was partially offset by redemptions and sales of
securities of $2.5 million in 1999 as compared to $3.3 million in 1998.
Net cash provided in the Bank's financing activities (i.e., cash
receipts primarily from net increases in deposits and net increases in FHLB
advances) for the nine months ended June 30, 1999, totaled $10.2 million, an
increase of $8.3 million as compared to the nine months ended June 30, 1998.
Office of Thrift Supervision ("OTS") capital regulations applicable to
the Bank require savings institutions to meet three capital standards: (1)
tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio
(core capital) equal to at least 3% of total adjusted assets, and (3) a
risk-based capital requirement equal to 8.0% of total risk-weighted assets. In
addition, the OTS prompt corrective action regulation provides that a savings
institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. The Bank was in
compliance with these requirements at June 30, 1999, with tangible, core and
risk based capital ratios of 8.88%, 8.88% and 18.15%, respectively.
Year 2000 Readiness Disclosure
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 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 is based on management's best
estimate, which was 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 assurance that
the estimate will not be exceeded 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 Company.
The Company places a high degree of reliance on computer systems of
third parties, such as customers, suppliers, and other financial and
governmental institutions. Although the Company is assessing the readiness of
these third parties and preparing contingency plans, there can be no assurance
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 Company's internal Year 2000 Working Committee, comprised of senior
management was formed to address the potential risks that Year 2000 poses for
the Company. This committee reports to the board of directors. In June 1997, the
committee compiled a written Year 2000 Action Plan (the "Plan") to promote
awareness of pertinent issues and to provide for evaluation and testing of the
Company's electronic systems, programs and processes.
Accurate data processing is essential to the Company's operations and a
lack of accurate processing by the Company's vendor or by the Company could have
a significant adverse impact on the Company's
11
<PAGE>
financial condition and results of operations. The Company has been advised 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. The Company has performed significant testing of the
software utilized by its data processing service bureau with successful results.
If the Company's primary data processing service bureau encounters unforeseen
problems and, as a result, fails to maintain its system in compliant state or
incurs other obstacles prior to Year 2000, the Company would likely experience
significant data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the consolidated
financial statements of the Company.
The Company will monitors its Year 2000 readiness by continuing to
request an update on all critical and important vendors throughout the remainder
of 1999. If the Company identifies any concern related to any critical or
important vendor, the contingency plans will be implemented immediately.
All costs to replace certain non-compliant software and hardware have
been expended as of June 30, 1999. The Company has upgrade of its teller
equipment to be year 2000 compliant. All other PCs have been tested and
replaced, if necessary, as of June 30, 1999.
No assurance can be given that the Plan will be completed successfully
by the Year 2000, in which event the Company could incur significant costs.
Successful and timely completion of the Plan is based on management's best
estimates derived from various assumptions of future events, which are
inherently uncertain, including the progress and results of the Company's data
processing service bureau, and all vendors', suppliers' and customers'
readiness.
Despite the best efforts of management to address this issue, the vast
number of external entities that have direct and indirect business relationships
with the Company, such as customers, vendors, payment system providers and other
financial institution, makes it impossible to assure that a failure to achieve
compliance by one or more of these entities would not have material adverse
impact on the operations of the Company.
12
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not engaged in any legal proceedings at the
present time. From time to time, the Company is a party to
legal proceedings within the normal course of business wherein
it enforces its security interests in loans made by it, and
other similar matters.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The annual meeting of stockholders of the Company was held on April 6,
1999 and the following matters were voted upon:
Proposal I - Election of directors:
FOR WITHHELD
------- --------
Edgar N. Peppler 311,482 750
Gary N. Pelehaty 311,422 810
Charles E. Adams 304,482 7,750
William H. Wainwright, Jr. 311,482 750
George G. Aaronson, Jr. 304,482 7,750
Herman Gutstein 304,482 7,750
G. Edward Koenig, Jr. 311,482 810
Proposal II - The ratification of the amendment to the Farnsworth Bancorp, Inc.
1999 Stock Option Plan:
FOR: 214,966
AGAINST: 16,183
ABSTAIN: 5,285
Proposal III - The ratification of the Peoples Savings Bank Management Stock
Bonus Plan:
FOR: 215,821
AGAINST: 16,028
ABSTAIN: 4,585
13
<PAGE>
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) None.
14
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
as amended, the registrant has caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FARNSWORTH BANCORP, INC.
Date: August 13, 1999 By: /s/Gary N. Pelehaty
--------------------------------------------
Gary N. Pelehaty
President and Chief Executive Officer
(Principal Executive Officer)
(Duly Authorized Officer)
Date: August 13, 1999 By: /s/Charles Alessi
--------------------------------------------
Charles Alessi
Vice President, Secretary and Treasurer
(Principal Financial and Accounting Officer)
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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SUCH FINANCIAL INFORMATION.
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