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, 1999
[ ] 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. 0-24621
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. [ ]
The issuer's revenues for its most recent fiscal year were $3,598,793.
The aggregate market value of the voting common equity held by
non-affiliates, based on the average bid and asked price of the common equity on
December 1, 1999, was $3.4 million.
As of December 1, 1999, there were issued and outstanding 379,858
shares of the issuer's Common Stock.
Transitional Small Business Disclosure Format (check one): YES NO X
-- --
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the issuers Annual Report to Stockholders for the fiscal year
ended September 30, 1999. (Part II)
2. Portions of the issuers Proxy Statement for the 2000 Annual Meeting of
Stockholders. (Part III)
<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 traces its origins to 1880, is a federally chartered
stock savings bank headquartered in Bordentown, New Jersey. The Bank is subject
to examination and comprehensive regulation by the Office of Thrift Supervision
("OTS") and its deposits are federally insured by the Savings Association
Insurance Fund ("SAIF") of the Federal Deposit Insurance Corporation ("FDIC").
2
<PAGE>
The Bank is a member of, and owns capital stock in, the Federal Home Loan Bank
("FHLB") of New York, which is one of the 12 regional banks in the FHLB System.
The Bank operates a traditional savings bank business, attracting
deposit accounts from the general public and using those deposits, together with
other funds, primarily to originate and invest in loans secured by one- to
four-family residential real estate.
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,
---------------------------------------------------------
1999 1998
-------------------------- -----------------------------
$ % $ %
---------- -------- ---------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Type of Loans:
--------------
Residential.................................. $ 27,443 68.6% $ 24,736 77.6%
Construction................................. 1,886 4.7 2,435 7.6
Commercial real estate....................... 3,743 9.4 1,019 3.2
Commercial Business.......................... 271 0.7 181 0.6
Consumer loans:..............................
Home equity................................ 6,261 15.6 3,197 10.0
Savings account loans...................... 172 0.4 157 0.5
Automobile loans .......................... 50 0.1 37 0.1
Other...................................... 205 0.5 114 0.4
---------- ---------- ---------- --------
40,031 100.0% 31,876 100.0%
---------- ========== ---------- ========
Less:
Loans in process............................. 830 500
Deferred loan origination fees and costs..... 193 199
Allowance for loan losses.................... 176 135
---------- ----------
Total loans, net............................... $ 38,832 $ 31,042
========== =========
</TABLE>
3
<PAGE>
Loan Maturity Tables
The following table sets forth the estimated maturity of the Bank's
loan portfolio at September 30, 1999. The table does not include prepayments or
scheduled principal repayments. Prepayments and scheduled principal repayments
on loans totalled $5.5 million for the year ended September 30, 1999.
Adjustable-rate mortgage loans are shown as maturing based on contractual
maturities.
<TABLE>
<CAPTION>
Due after
Due within 1 through Due after
1 year 5 years 5 years Total
------------ ------------ -------------- -------------
(In thousands)
<S> <C> <C> <C> <C>
1-4 family mortgage............................ 1,833 2,514 23,096 27,443
Construction................................... 1,886 0 0 1,886
Commercial real estate......................... 154 295 3,294 3,743
Commercial business............................ 0 271 0 271
Consumer....................................... 627 2,650 3,411 6,688
--- ------ ------ ------
Total..................................... 4,500 5,730 29,801 40,031
======= ====== ======= ======
</TABLE>
The following table sets forth the dollar amount of all loans due after
September 30, 2000, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Residential ....................... 25,342 268 25,610
Construction ...................... 0 0 0
Commercial real estate ............ 3,589 0 3,589
Commercial business ............... 271 0 271
Consumer .......................... 5,716 345 6,061
------- ------- -------
Total ......................... $34,918 $ 613 $35,531
======= ======= =======
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, 1999, the Bank had $ 268,000 in ARM loans.
4
<PAGE>
The Bank's fixed-rate loans generally have terms from 10 to 30 years
with principal and interest payments calculated using up to a 30-year
amortization period. Some of these fixed-rate loans are balloon loans with terms
of 5 or 7 years, with principal and interest payments calculated using up to a
30-year amortization period. The maximum loan-to-value ratio on residential
mortgage loans is 95%. Loans originated with a loan-to-value ratio in excess of
80% require private mortgage insurance.
The Bank's mortgage loans generally include due-on-sale clauses. This
gives the Bank the right to deem the loan immediately due and payable in the
event the borrower transfers ownership of the property securing the mortgage
loan without the Bank's consent.
Commercial Real Estate Loans. The Bank's commercial real estate loans
are secured by office buildings, retail establishments and other commercial
properties. These loans 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 $ 793,000. 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.
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 longterm 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
5
<PAGE>
greater than one year. The Bank offers commercial business loans to benefit from
the higher fees and interest rates and the shorter terms to maturity.
Unlike residential mortgage loans, which generally are made on the
basis of the borrower's ability to make repayment from his or her employment and
other income and which are secured by real property whose value tends to be more
easily ascertainable, commercial business loans typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself and the general economic environment. Commercial loans, therefore, have
greater credit risk than residential mortgage loans.
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 $10,000 in order to provide a wider range of financial
services to its customers and because these loans provide higher interest rates
and shorter terms (12 to 36 months) than many of its other loans. The Bank also
offers loans with savings pledged as additional security. The Bank's consumer
loans consist of home equity, savings account, automobile and personal loans.
The home equity loans the Bank originates are secured by one- to
four-family residences. These loans have terms of 3 to 15 years, generally will
not exceed $100,000 and have loan-to-value ratios of 80% or less. Home equity
lines of credit have interest rates set at prime and are subject to a 75%
loan-to-value ratio, which includes a first mortgage balance.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly. Repossessed collateral for a defaulted consumer
loan may not be sufficient for repayment of the outstanding loan, and the
remaining deficiency may not be collectible.
Loan Approval Authority and Underwriting. The Bank's loan committee,
which is comprised of President Pelehaty, Vice President Alessi, and the Bank's
Senior Loan Officer and the Bank's Loan Servicing Manager, approves one- to
four-family mortgage loans up to the conforming loan limit and 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, 1999, commitments to cover
originations of mortgage loans totaled $ 1,325,000. 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 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 $793,000 at September 30, 1999. At September 30, 1999, the
aggregate loans of the Bank's five largest borrowers had outstanding balances of
between $346,000 and $522,000.
6
<PAGE>
Non-performing and Problem Assets
Loan Delinquencies. Loans are reviewed on a monthly basis and are
placed on a non-accrual status when, in the Bank's opinion, the collection of
additional interest is doubtful. Interest accrued and unpaid at the time a loan
is placed on nonaccrual status is charged against interest income. Subsequent
interest payments, if any, are either applied to the outstanding principal
balance or recorded as interest income, depending on the assessment of the
ultimate collectibility of the loan.
Non-performing Assets. The following table sets forth information
regarding non-accrual loans and real estate owned, as of the dates indicated.
For the year ended September 30, 1999, interest income that would have been
recorded on loans accounted for on a non-accrual basis under the original terms
of such loans was $46,127.
<TABLE>
<CAPTION>
At September 30,
1999 1998
------ -------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family units .................. $404 $195
All other mortgage loans ..................................... -- 95
---- ----
Total .......................................................... $404 $290
==== ====
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 family units .................. $120 $--
Total .......................................................... 120 --
Total non-accrual and accrual loans ............................ 524 290
Real estate owned .............................................. 88 --
Total non-performing assets .................................... 612 290
Total non-accrual and accrual loans to net loans ............... 1.35% 0.93%
Total non-accrual and accrual loans to total assets ............ 0.94% 0.69%
Total non-performing assets to total assets .................... 1.09% 0.69%
</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
7
<PAGE>
may be designated "special mention" because of potential weakness that do not
currently warrant classification in one of the aforementioned categories.
When a savings association classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings association classifies
problem assets as loss, it is required either to establish a specific allowance
for losses equal to 100% of that portion of the asset so classified or to charge
off such amount. A savings association's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the OTS, which may order the establishment of additional general or specific
loss allowances. A portion of general loss allowances established to cover
possible losses related to assets classified as substandard or doubtful may be
included in determining a savings association's regulatory capital. Specific
valuation allowances for loan losses generally do not qualify as regulatory
capital. At September 30, 1999, the Bank had $524,000 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 its
allowance for loan losses at a level that it considers adequate for the inherent
risk of loss in its loan portfolio, future losses could exceed estimated amounts
and additional provisions for loan losses could be required. In addition, the
Bank's determination as to the amount of allowance for loan losses is subject to
review by the OTS, as part of its examination process. After a review of the
information available, the OTS might require the establishment of an additional
allowance.
The following table illustrates the allocation of the allowance for
loan losses for each category of loans. The allocation of the allowance to each
category is not necessarily indicative of future loss in any particular category
and does not restrict the Bank's use of the allowance to absorb losses in other
loan categories.
8
<PAGE>
<TABLE>
<CAPTION>
September 30,
------------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Percent of Percent of
Allowance in Allowance in
Each Each
Category Category
to Total To Total
Amount Allowance Amount Allowance
------------- ----------------- -------------- -------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential ........... $110 62.50% $ 84 62.22%
Commercial real estate 17 9.66 4 2.96
Commercial business ... 41 23.29 41 30.37
Consumer .............. 8 4.55 6 4.45
---- ------ ---- ------
Total allowance for
loan losses ..... $176 100.00% $135 100.00%
==== ====== ==== ======
</TABLE>
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,
----------------
1999 1998
---- ----
(Dollars in thousands)
Total loans outstanding (1) ................. $ 39,201 $ 31,042
======== ========
Average loans outstanding(1) ................ $ 35,536 $ 28,940
======== ========
Allowance balances (at beginning of period) . 135 66
Provision:
Residential ............................... 26 18
Commercial real estate .................... 13 4
Commercial Business ....................... 0 41
Consumer .................................. 7 9
Net recoveries (charge offs) ................ (5) (3)
-------- --------
Allowance balance (at end of period) ........ $ 176 $ 135
======== ========
Allowance for loan losses as a percent of
total loans outstanding ................... .45% .43%
Net loans charged off as a percent of average
loans outstanding ......................... .01% .01%
(1) Excludes allowance for loan losses and deferred loan origination fees and
costs.
9
<PAGE>
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, 1999 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.
Investment Portfolio. The following table sets forth the carrying value
of the Bank's investments. See Notes 3 and 4 to the Company's consolidated
financial statements included in the Company's Annual Report to Stockholders for
the fiscal year ended September 30, 1999, which is filed as Exhibit 13 to this
document.
At September 30,
----------------
1999 1998
------- -------
(In thousands)
Investments securities held-to-maturity:
U.S. Agency Securities ............................. $ 2,168 $ 2,662
State and local government ......................... 99 99
------- -------
Total investment securities held-to-maturity . 2,267 2,761
Investment securities available for sale:
FHLMC Stock ........................................ 141 134
Corporate Bonds .................................... 391 --
U.S. Agency Securities ............................. 8,141 --
------- -------
Total investment securities available-for-sale 8,673 134
Interest-bearing deposits .......................... 1,347 3,400
FHLB stock ......................................... 419 261
Mortgage-backed securities held-to-maturity ........ 1,755 1,891
------- -------
Total investments ............................ $14,461 $ 8,447
======= =======
10
<PAGE>
The following table sets forth certain information regarding scheduled
maturities, carrying values, approximate fair values, and weighted average
yields for the Bank's investments at September 30, 1999 by contractual maturity.
The following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
Total
One Year or Less One to Five Years Five to Ten Years More than Ten Years Investment Securities
---------------- ----------------- ----------------- ------------------- ---------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average Market
Value Yield Value Yield Value Yield Value Yield Value Yield Value
----- ----- ----- ----- ----- ----- ---------- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Agency Securities - Held
to Maturity $ -- -- % $ 1,249 6.15% $ 919 2.78% $ -- -- % $ 2,168 5.00% $ 2,071
State and local government -
Held to Maturity 99 6.04 99 6.04 107
U. S. Agency Securities
- Available-for-Sale 3,420 5.80 3,855 6.64 866 5.25 8,141 6.10 8,141
Corporate Bonds -
Available-for-Sale 391 7.01 391 7.01 391
FHLMC stock 141 1.09 141 1.09 141
Interest-bearing deposits 1,347 4.27 1,347 4.27 1,347
FHLB stock 419 5.01 419 5.01 419
Mortgage-backed securities 58 5.50 211 6.00 1,486 6.50 1,755 6.41 1,728
------- ---- ------- ---- ------ ---- ------- ---- ------- ---- -------
Total investments $ 1,546 4.03% $ 4,880 5.90% $4,774 5.91% $ 3,261 6.01% $14,461 5.73% $14,345
======= ==== ======= ==== ====== ==== ======= ==== ======= ==== =======
</TABLE>
11
<PAGE>
Sources of Funds
General. Deposits are the Bank's major external source of funds for
lending and other investment purposes. Funds are also derived from the receipt
of payments on loans and prepayment of loans and maturities of investment
securities and 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, 1999.
Certificates
Maturity Period of Deposit
- --------------- --------------
(In thousands)
Within three months............ $100
Three through six months....... --
Six through twelve months...... 986
Over twelve months............. 476
--------
$ 1,562
========
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,
-----------------------------------
1999 1998
---- ----
(Dollars in thousands)
Balance at period end .......................... $6,368 $--
Average balance outstanding during the period .. 3,962 --
Maximum amount outstanding at any month-end
During the period ............................ 7,972 --
Weighted average interest rate during the period 5.48% --%
12
<PAGE>
Personnel
At September 30, 1999 the Bank had 17 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 employees is
good.
Regulation
Set forth below is a brief description of certain laws that relate to
the Company and the Bank. 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
13
<PAGE>
same. It is expected that these continuing assessments for both SAIF and BIF
members will be used to repay outstanding Financing Corporation bond
obligations.
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. The Bank was in compliance with all of its capital requirements as of
September 30, 1999.
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, 1999, the Bank was in compliance with its QTL requirement.
Federal Reserve. The Federal Reserve requires all depository
institutions to maintain noninterest-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.
14
<PAGE>
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
(b) Investment Policies.
See "Item 1. Description of Business" above for a general description
of the Bank's investment policies and any regulatory or Board of Directors'
percentage of assets limitations regarding certain investments. The Bank's
investments are primarily acquired to produce income, and to a lesser extent,
possible capital gain.
(1) Investments in Real Estate or Interests in Real Estate. See "Item 1.
Description of Business - Lending Activities," and "Item 2. Description of
Property."
(2) Investments in Real Estate Mortgages. See "Item 1. Description of
Business - Lending Activities."
(3) Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities. See "Item 1. Description of Business - Lending Activities."
(c) Description of Real Estate and Operating Data.
Not applicable.
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.
15
<PAGE>
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" in the Company's Annual Report to Stockholders for the fiscal year
ended September 30, 1999 (the "Annual Report"), is incorporated herein by
reference.
(b) Not applicable.
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 for the fiscal year ended September 30, 1998 and providing an
independent auditors' report thereon. The Registrant did not consult Kronick
Kalada Berdy & Co. of the matters set forth in Item 304(a)(2) of Regulation S-B
prior to that date. Prior to becoming a public company in September 1998, the
financial statements of the Registrant's wholly-owned subsidiary, Peoples
Savings Bank, were audited by Lewis W. Parker, III, independent certified public
accountant. Mr.
Parker is still actively engaged by the Registrant for accounting and related
services.
In connection with the audits of the Banks fiscal years ended September
30, 1997 and 1996, the last two years audited by Lewis W. Parker, III, and
through October 20, 1998, there were no disagreements with Mr. Parker 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 an adverse opinion or disclaimer of opinion, and were not qualified or
modified as to uncertainty, audit scope or accounting principles.
16
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
- --------------------------------------------------------------------------------
With Section 16(a) of the Exchange Act
--------------------------------------
The information contained under the section captioned "Proposal I --
Election of Directors" and "Voting Securities and Principal Holders Thereof --
Security Ownership of Certain Beneficial Owners" in Registrant's definitive
proxy statement for Registrant's Annual Meeting of Stockholders (the "Proxy
Statement") is incorporated herein by reference.
Item 10. Executive Compensation
- --------------------------------
The information contained under the section captioned "Director and
Executive Compensation" in the Proxy Statement is incorporated herein by
reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" in the Proxy Statement.
(b) Security Ownership of Management
Information required by this item is incorporated herein by
reference to the section captioned "Voting Securities and
Principal Holders Thereof" and to the first table under
"Proposal I -- Election of Directors" in the Proxy Statement.
(c) Management of Registrant knows of no arrangements, including
any pledge by any person of securities of Registrant, the
operation of which may at a subsequent date result in a change
in control of Registrant.
Item 12. Certain Relationships and Related Transactions
- --------------------------------------------------------
The information required by this item is incorporated herein by
reference to the section captioned "Certain Relationships and Related
Transactions" in the Proxy Statement.
Item 13. Exhibits, List, and Reports on Form 8-K
- --------------------------------------------------
(a) The following documents are filed as a part of this report.
1. The following financial statements and the report of
independent accountants of the Registrant included in
the Registrants Annual Report to Stockholders are
incorporated herein by reference.
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Independent Auditors' Report
Consolidated Statements of Financial Condition as of
September 30, 1999 and 1998.
Consolidated Statements of Income for the Years Ended September 30, 1999 and
1998
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the Years
Ended September 30, 1999 and 1998.
Notes to Consolidated Financial Statements
2. Schedules omitted as they are not applicable.
3. The following exhibits are included in this Report or
incorporated herein by reference:
(a) List of Exhibits:
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 *
10.4 Farnsworth Bancorp, Inc. 1999 Stock Option Plan**
10.5 Peoples Savings Bank Restricted Stock Plan**
13 Annual Report to Stockholders for the
fiscal year ended September 30, 1999
21 Subsidiaries of the Registrant (See "Item 1 - Description of Business")
23 Consent of Kronick Kalada Berdy & Co.
27 Financial Data Schedule (electronic filing only)
</TABLE>
- ------------------
* Incorporated by reference to the Registration Statement on Form SB-2 (File
No. 333-56689) declared effective by the SEC on August 10, 1999.
** Incorporated by reference to the exhibits to the Proxy Statement for the
Annual Meeting of Stockholders held on April 6, 1999 and filed with the SEC
on February 22, 1999 (File No. 0-24621).
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
<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 27, 1999.
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 27, 1999.
<TABLE>
<CAPTION>
<S> <C>
/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
</TABLE>
EXHIBIT 13
<PAGE>
FARNSWORTH BANCORP, INC.
1999 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
FARNSWORTH BANCORP, INC.
1999 ANNUAL REPORT
TABLE OF CONTENTS
Page
----
Letter to Stockholders..................................................3
Corporate Profile and Stock Price Information...........................4
Selected Financial Ratios and Other Data................................4
Management's Discussion and Analysis....................................5 - 10
Independent Auditor's Report............................................11
Consolidated Statements of Financial Condition..........................12 - 15
Notes to Consolidated Financial Statements..............................16 - 31
Corporate Information...................................................32
<PAGE>
FARNSWORTH BANCORP, INC.
Gary N. Pelehaty
President
Chief Executive Officer
To Our Stockholders:
On behalf of our Board of Directors and employees, we are pleased to
present our second Annual Report to Stockholders of Farnsworth Bancorp, Inc.
(the "Company"). As you will see from the Annual Report, our first full year as
a public company was a good year for the Company and its wholly-owned
subsidiary, Peoples Savings Bank (the "Bank").
For the fiscal year ended September 30, 1999, the Company earned $224,191
or $.66 per share, as compared to net income of $198,187 or $.57 per share for
the fiscal year ended September 30, 1998. At September 30, 1999, the Company's
assets totaled $56.0 million, as compared to $41.7 million at September 30,
1998. Stockholders' equity was $5.3 million or $13.92 per share at September 30,
1999, as compared to stockholders' equity of $5.4 million or $$14.33 per share
at September 30, 1998.
In December 1999, we received regulatory approval to open a new branch
office in Mount Laurel, New Jersey. This new office will provide a full range of
banking products and services to the local community, including ATM and drive-up
tellers. We expect to open the branch office in the first quarter of 2000.
We have also recently entered into an agreement with NCR Corporation to
design and implement Internet banking for the Bank. Under the agreement, NCR
will assist us in creating a transactional web site for Peoples Savings Bank.
Customers of the Bank will be able to transact most business over the Internet
once this site is operational. We expect this to occur in the third quarter of
2000.
As you can see, the Year 2000 promises to be an exciting time for your
Company. Please know that we remain committed to the goal of enhancing your
investment in our Company.
Sincerely,
/s/Gary N. Pelehaty
-------------------------------------
Gary N. Pelehaty
President and Chief Executive Officer
789 Farnsworth Avenue - Bordentown, NJ 08505 - 609-298-0723 FAX 609-298-5321
<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 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.
Stock Price Information
The Company's common stock has been traded on the OTC-Bulletin Board 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, 1999,
was approximately 440. This does not reflect the number of persons or entities
who held stock in nominee or "street" name through various brokerage firms. At
December 1, 1999, there were 379,858 shares outstanding. There were no dividends
paid by the Company during the fiscal year ended September 30, 1999. The
Company's ability to pay dividends to stockholders is largely dependent upon the
dividends it receives from the Bank. The Bank may not declare or pay a cash
dividend on any of its stock if the effect thereof would cause the Bank's
regulatory capital to be reduced below (1) the amount required for the
liquidation account established in connection with the Conversion, or (2) the
regulatory requirements imposed by the OTS.
Selected Financial Ratios and Other Data
At or For the Years Ended
September 30,
-------------------------
1999 1998
---- ----
Return on average assets....................... .45% .51%
Return on average equity....................... 4.11 8.19
Average equity to average assets............... 10.96 6.19
Equity to assets at period end................. 9.44 13.03
Net interest rate spread....................... 3.08 3.26
Net yield on average interest-earning assets... 3.65 3.65
Non-performing loans to total assets........... 1.09 .69
Allowance for loan loss to total loans......... .45 .43
4
<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 following discussion relates only to the Bank's financial condition
and results of operations.
The Bank's results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest the
Bank earns on its interest-earning assets and the rates the Bank pays on
interest-bearing liabilities (interest rate spread), and (ii) the relative
amounts of interest-earning assets and interest-bearing liabilities. The Bank's
results of operations are also affected by non-interest income, including,
primarily, income from customer deposit account service charges, gains and
losses from the sale of investments and mortgage-backed securities and
non-interest expense, including, primarily, compensation and employee benefits,
federal deposit insurance premiums, office occupancy cost, and data processing
cost. The Bank's results of operations are also affected significantly by
general and economic and competitive conditions, particularly changes in market
interest rates, government policies and actions of regulatory authorities, all
of which are beyond the Bank's control.
Market Risk Analysis
Qualitative Analysis. The Bank's assets and liabilities may be analyzed
by examining the extent to which they are interest rate sensitive and by
monitoring the expected effects of interest rate changes on the Bank's net
portfolio value.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or re-price within that time period. If the Bank's
assets mature or re-price more quickly or to a greater extent than its
liabilities, the Bank's net portfolio value and net interest income would tend
to increase during periods of rising interest rates but decrease during periods
of falling interest rates. Conversely, if the Bank's assets mature or re-price
more slowly or to a lesser extent than its liabilities, the Bank's net portfolio
value and net interest income would tend to decrease during periods of rising
interest rates but increase during periods of falling interest rates. The Bank's
policy has been to address the interest rate risk inherent in the 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.
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, 1999,
as calculated by the OTS, based on quarterly information voluntarily provided to
the OTS.
5
<PAGE>
Changes Net Portfolio Value
In Market --------------------------------------
Interest Rates $ Amount $ Change % Change NPV Ratio(1)
-------------- ----------- ----------- ----------- -------------
(basis points) (Dollars in Thousands)
+300 2,054 -3,338 -62% 3.95%
+200 3,172 -2,219 -41% 5.95%
+100 4,317 -1,075 -20% 7.88%
0 5,392 9.60%
-100 6,261 869 +16% 10.91%
-200 7,035 1,643 +30% 12.02%
-300 7,827 2,435 +45% 13.10%
- ----------------
(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 re-pricing, they may react at different times and in
different degrees to changes in market rates of interest. The interest rates on
certain types of assets and liabilities may fluctuate in advance of changes in
market interest rates, while rates on other types of assets and liabilities may
lag behind changes in market interest rates. In the event of a change in
interest rates, prepayments and early withdrawal levels could deviate
significantly from those assumed in making the calculations set forth above.
Additionally, an increased credit risk may result as many borrowers may be
unable to service their debt in the event of an interest rate increase.
The Bank's Board of Directors review the Bank's asset and liability
policies on 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 $14.2 million or 33.0% to $56.0 million at
September 30, 1999 from $41.8 million at September 30, 1998. The increase was
primarily attributable to a $7.8 million increase in the Bank's loans
receivable, net, and a $8.6 million increase in available for sale securities,
partially offset by a decrease in securities held-to-maturity of $500,000, a
decrease in cash and due from banks of $2.0 million, as well as a decrease in
mortgage-backed securities of $100,000. The Bank's total liabilities increased
$14.4 million or 39.7%, to $50.7 million at September 30, 1999 from $36.3
million at September 30, 1998. The increase was primarily attributable to a $6.6
million increase in deposits, and a $7.7 million increase in FHLB advances.
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.
Retained earnings increased $224,000 to $2.4 million or 4.4% of total
assets at September 30, 1999, as compared to $2.2 million or 5.3% of total
assets at September 30, 1998. 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,
----------------------------------------------------------------------------------
1999 1998
----------------------------------------------------------------------------------
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)....................... $35,051 $ 2,809 8.00% $28,699 $2,295 8.00%
Mortgage-backed securities................ 1,785 113 6.33 2,531 159 6.27
Investment securities(2).................. 8,565 355 4.14 3,082 167 5.43
Other interest-earning assets............. 1,901 86 4.52 2,502 103 4.10
------ ----- ---- ------ ----- ----
Total interest-earning assets.......... 47,302 3,363 7.11 36,814 2,724 7.40
---- ----- ----
Noninterest-earning assets.................. 2,436 -- 2,252 --
------ ----- ------ -----
Total assets........................... $49,738 $ 3,363 $39,066 $2,724
====== ===== ====== =====
Interest-bearing liabilities:
NOW accounts.............................. $5,093 $99 1.94 $ 4,220 $102 2.41
Savings accounts.......................... 7,277 178 2.45 6,940 170 2.45
Money market accounts..................... 2,582 69 2.67 2,423 66 2.71
Certificates of deposit................... 21,652 1,096 5.06 19,769 1,042 5.27
FHLB - Advances........................... 3,962 193 4.87 -- -- --
------ ----- ---- ------ ------ ----
Total interest-bearing liabilities..... 40,566 1,635 4.03 33,352 1,380 4.14
---- ----
Noninterest-bearing liabilities............. 3,720 3,294
------ ------
Total liabilities...................... 44,286 36,646
------ ------
Stockholders' equity........................ 5,452 -- 2,420 --
------ ------ ------ -----
Total liabilities and retained earnings $49,738 $ 1,635 $39,066 $1,380
====== ====== ====== =====
Net interest income......................... $ 1,728 $1,344
====== =====
Interest rate spread(3)..................... 3.08% 3.26%
====== ======
Net yield on interest-earning assets(4)..... 3.65% 3.65%
====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities...... 116.61% 101.38%
====== ======
</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,
1999 vs. 1998
------------------------
Increase (Decrease)
Due to
------------------------
Rate/
Volume Rate Volume Net
-------- ------ -------- -----
(In thousands)
Interest income:
Loans receivable............. $508 $ 6 $ 1 $515
Mortgage-backed securities... (47) 2 (1) (46)
Investment securities........ 298 (39) (70) 189
Other interest-earning assets (25) 10 (2) (17)
--- ---- ---- ---
Total interest income........ $734 $(21) $(72) $641
=== ==== ==== ===
Interest expense:
NOW accounts ................ $ 21 $(19) $ (5) $ (3)
Savings account.............. 8 0 0 8
Money market accounts........ 4 (1) 0 3
Certificates of deposit...... 99 (41) (4) 54
FHLB - Advances.............. 0 0 193 193
--- --- --- ---
Total interest expense....... 132 (61) 184 255
=== === === ===
Change in net interest income $602 $40 $(256) $386
=== == ==== ===
Results of Operations
Net Income. The Bank's net income increased $26,000 for the year ended
September 30, 1999, to $224,000 from $198,000 for the year ended September 30,
1998. This increase was primarily attributable to a $396,000 increase in the
Bank's net interest income after provisions for loan losses, partially offset by
an increase in noninterest expense of $342,000 and an increase in income taxes
of $20,000.
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 $396,000
or 31.1%, to $1,668,000 for the year ended September 30, 1999, as compared to
the year ended September 30, 1998. The increase was primarily due to the growth
in average interest-earning assets to $47.3 million in 1999 from $36.8 million
in 1998.
The increase in average interest-earning assets of $10.5 million
primarily reflects increases of $6.3 million in the Bank's balance of average
loans and $5.5 million in investment securities, partially offset by a decrease
of $1.3 million in mortgage backed securities and other assets. The increase in
interest-earning assets was funded by the increase in deposits and advances from
the FHLB-NY.
8
<PAGE>
Net yield on interest-earning assets did not change during the year
ended September 30, 1999 compared to the same period in 1998. 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 $7.2 million
reflects increases of $870,000 in the Bank's average interest-bearing NOW
accounts and $2.4 million in average savings and certificates of deposit and an
increase of $3.9 million in average FHLB borrowings.
Provision for Loan Losses. Provision for loan losses was $60,600 for
the year ended September 30, 1999, as compared to $72,000 for the year ended
September 30, 1998. The current provision is required to keep the balance of the
allowance for loan losses at a level management feels is sufficient based on the
current loan portfolio.
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 $2,000. Both the Bank's
commercial and residential real estate portfolios also increased significantly
during the year ended September 30, 1999, as compared to the year ended
September 30, 1998. Accordingly, the Bank increased its provision for loan
losses attributable to these portfolios by $39,000.
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 decreased $8,000 or 3.3% from
$243,000 for the year ended September 30, 1998 to $235,000 for the same period
in 1999. This decrease in the Bank's noninterest income was due to the
collection during the year ended September 30, 1998 of a $54,000 deficiency
judgment and decreases in income on REO and gain on sale of securities offset by
an increase in fees and other service charges of $44,000. The deficiency
judgment in 1998 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 $342,000 or 27.8%
from $1.2 million for the year ended September 30, 1998, to $1.6 million for the
same period in 1999. The increase in the Bank's noninterest expense was due to a
$75,000 increase in the Bank's occupancy and equipment expense, an $82,000
increase in other noninterest expense and an increase of $198,000 in the Bank's
compensation and benefits partially offset by a decrease of $13,000 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 $80,000 for
bank processing fees.
Income Tax Expense. Income tax expense increased $20,000 from $89,000
for the year ended September 30, 1998 to $109,000 for the same period in 1999.
This increase in income tax expense is due to the increase in the Bank's pretax
income of $46,000 from $287,000 in 1998 to $333,000 in 1999. The Bank's
effective tax rate was 33% and 31% for the years ended September 30, 1999 and
1998 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 borrowings. The required ratio currently
is 4.0% and the Bank's regulatory liquidity ratio average was 17.9% and 17.9% at
September 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.
9
<PAGE>
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, 1999 was $150,000, a decrease of $373,000, as
compared to the same period in 1998. The decrease in 1998 was primarily due to a
$26,000 increase in the Bank's net income an increase in accrued interest
receivable of $216,000 and a decrease in the non-deposit liabilities of
$158,000.
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, 1999, totaled $16.4 million, an increase of $13.8
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 $7.9 million in 1999 as compared to
$4.7 million in 1998 as well as investment purchases of $10.8 million as
compared to $1.5 million in 1998. The decrease in cash was partially offset by
paydowns and maturities of investment and mortgage-backed securities of $2.5
million in 1999 as compared to $3.6 million in 1998.
Net cash provided in the Bank's financing activities (i.e., cash
receipts primarily from net proceeds from stock issuance and from net increases
in deposits and net increases in FHLB advances) for the year ended September 30,
1999, totaled $14.3 million, an increase of $10.6 million as compared to the
year ended September 30, 1998. This increase in cash was primarily attributable
to increased deposits of $6.7 million and an increase in FHLB advances of $7.7
million.
Approximately $16.2 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 Readiness Disclosure
Rapid and accurate data processing is essential to the Company's
operations. Many computer programs that can only distinguish the final two
digits of the year entered (a common programming practice in the past) are
expected to read entries for the year 2000 as the year 1900 or as zero and
incorrectly attempt to compute interest, payment, delinquency, maturity dates or
other data.
The following discussion of the implications of the Year 2000 for the
Company contains numerous forward-looking statements based on inherently
uncertain information. Successful and timely preparation for the Year 2000 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. Moreover, failure of these third parties to have
successfully modified their systems could have a material adverse affect on the
Company.
The Company has been advised by its data processing service bureau that
their computer services will function properly on and after January 1, 2000. 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, is
unable to function properly, 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.
All costs to replace certain non-compliant software and hardware have
been expended as of September 30,1999. The Company has upgraded all of its
teller equipment to be year 2000 compliant. All other PCs have been tested and
replaced, if necessary, as of September 30, 1999.
Despite the best efforts of management to address the Year 2000 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 institutions and governmental institutions, 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.
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
[LOGO] Kronick
Kalada
Berdy & Co.
A Professional Corporation
Certified Public Accountants
To the Board of Directors
Farnsworth Bancorp, Inc. and Subsidiary
We have audited the accompanying consolidated statements of financial condition
of Farnsworth Bancorp, Inc. and Subsidiary as of September 30, 1999 and 1998,
and the related consolidated statements of income and comprehensive income,
changes in stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with 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 audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Farnsworth Bancorp,
Inc. and Subsidiary at September 30, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
Kingston, Pennsylvania
November 15, 1999
/s/ Kronick Kalada Berdy & Co.
190 Lathrop Street - Kingston, PA 18704 - (717)283-2727 - (717)283-1670 Telefax
- --------------------------------------------------------------------------------
301 Market Street 101 West Broad Street 24 N. Seventh Street
Berwick, PA 18603 Hazelton, PA 18201 Stroudsburg, PA 18360
(717) 759-8625 (717) 459-1373 (717 420-9500
- --------------------------------------------------------------------------------
<PAGE>
FARNSWORTH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONS
September 30, 1999 and 1998
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1999 1998
-------------------- --------------------
ASSETS
------
<S> <C> <C>
Cash and due from banks $ 1,883,104 $ 3,928,077
Securities available for sale 8,672,614 134,187
Securities held to maturity 2,267,216 2,761,367
Mortgage backed securites held to maturity 1,755,110 1,890,642
Loans receivable, net 38,832,141 31,041,552
Accrued interest receivable 423,706 227,318
Federal Home Loan Bank of New York stock at
cost, substantially restricted 418,700 261,300
Premises and equipment 1,516,252 1,468,846
Deferred income taxes 99,359
Real estate owned 88,013
Other assets 72,236 60,458
-------------------- --------------------
Total assets $ 56,028,451 $ 41,773,747
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits $ 42,490,162 $ 35,777,855
Federal Home Loan Bank advances 7,712,940
Advances by borrowers for taxes and insurance 213,653 214,884
Accrued and deferred income taxes 78,160 183,698
Accrued interest payable 97,119 38,692
Accounts payable and other accrued expenses 149,254 115,890
-------------------- --------------------
Total liabilities 50,741,288 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 2,451,554 2,227,363
Common stock acquired by employee stock
ownership plan (ESOP) (303,880) (303,880)
Common stock acquired by restricted stock
plan (RSP) (159,364)
Accumulated other comprehensive income,
unrealized (depreciation) appreciation on
available for sale securities, net of taxes (135,394) 84,998
-------------------- --------------------
Total stockholders' equity 5,287,163 5,442,728
-------------------- --------------------
Total liabilities and stockholders' equity $ 56,028,451 $ 41,773,747
==================== ====================
</TABLE>
The accompanying notes are an integral part of these consoldiated financial
statements.
12
<PAGE>
FARNSWORTH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------------- -----------------
<S> <C> <C>
Interest income:
Loans receivable $ 2,809,244 $ 2,295,219
Securities 500,293 375,951
Federal funds sold 53,774 52,670
----------------- -----------------
Total interest income 3,363,311 2,723,840
----------------- -----------------
Interest expense:
Deposits 1,441,946 1,380,112
Federal Home Loan Bank advances 192,962 -
----------------- -----------------
Total interest expense 1,634,908 1,380,112
----------------- -----------------
Net interest income 1,728,403 1,343,728
Provision for loan losses 60,579 72,000
----------------- -----------------
Net interest income after provision
for loan losses 1,667,824 1,271,728
----------------- -----------------
Noninterest income:
Fees and other service charges 232,123 188,367
Collection on deficiency judgement - 54,024
Net realized gains on sale of available for sale
securities 3,359 933
----------------- -----------------
Total noninterest income 235,482 243,324
----------------- -----------------
Noninterest expense:
Compensation and benefits 752,890 554,956
Occupancy and equipment 307,337 232,385
Federal insurance premiums and assessments 21,897 34,790
Other 488,302 405,657
----------------- -----------------
Total noninterest expense 1,570,426 1,227,788
----------------- -----------------
Income before provision for income taxes 332,880 287,264
Provision for income taxes 108,689 89,077
----------------- -----------------
Net income 224,191 198,187
Other comprehensive income, net of taxes:
Unrealized holding gain (loss) on securities available
for sale arising during the period (217,033) 26,616
Reclassification adjustment for gains included in
net income (3,359) (933)
----------------- -----------------
Total comprehensive income $ 3,799 $ 223,870
================= =================
Net income per common shares: Basic $ 0.66 $ 0.57
================= =================
Weighted average number of shares outstanding during the year 337,314 349,470
================= =================
</TABLE>
The accompanying notes are an integral part of these consoldiated financial
statements.
13
<PAGE>
FARNSWORTH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
Unrealized
Appreciation
Retained Common Common (Depreciation)
Additional Earnings Stock Stock on Securities Total
Common Paid in Substantially Acquired Acquired Available for Retained
Stock Capital Restricted By RSP By ESOP Sale, Net of Tax Earnings
--------- ----------- ------------ ---------- ---------- ---------------- -----------
<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
(depreciation) 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
Net income for the year ended
September 30, 1999 - - 224,191 - - 224,191
Acquisition of common stock by RSP - - - (159,364) - - (159,364)
Change in unrealized appreciation
(depreciation) on securities
available for sale, net of tax - - - - - (220,392) (220,392)
--------- ----------- ------------ ---------- ---------- ------------ -----------
Balance at September 30, 1999 $ 37,985 $3,396,262 $ 2,451,554 $(159,364) $(303,880) $ (135,394) $5,287,163
========= =========== ============ ========== ========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consoldiated financial
statements.
14
<PAGE>
FARNSWORTH BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended September 30, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 224,191 $ 198,187
------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 78,468 55,717
Provision for loan losses 45,579 72,000
Net gain on sale of assets (3,359) (933)
(Increase)decrease in accrued interest receivable (196,388) 19,946
Increase in other assets (6,541) (28,195)
(Decrease)increase in advances from borrowers (1,231) 57,041
(Decrease)increase in accrued income taxes
and deferred income taxes (82,954) 85,872
Increase(decrease) in accrued interest payable 58,427 (12,097)
Increase in other accrued liabilities 33,363 75,577
------------ ------------
Total adjustments (74,636) 324,928
------------ ------------
Net cash provided by operations 149,555 523,115
------------ ------------
Cash flows from investing activities:
Net increase in loans receivable (7,924,181) (4,704,839)
Redemption of securities, to be held to maturity 1,133,776 2,619,859
Purchase of securities, to be held to maturity (503,574) (500,000)
Purchase of securities, available for sale (10,342,453) (996,156)
Proceeds from sale and redemptions of securities, available for sale 1,464,532 997,808
Purchase of Federal Home Loan Bank stock (157,400) (27,200)
Purchase of premises and equipment (131,111) (60,697)
------------ ------------
Net cash used in investing activities (16,460,411) (2,671,225)
------------ ------------
Cash flows from financing activities:
Increase in savings accounts and demand deposits 6,712,307 581,279
Federal Home Loan Bank advances 7,712,940 --
Purchase of RSP shares (159,364)
Net proceeds from issuance of stock 3,130,367
------------ ------------
Net cash provided by financing activities 14,265,883 3,711,646
------------ ------------
Net (decrease)increase in cash and due from banks (2,044,973) 1,563,536
Cash and due from banks at beginning of year 3,928,077 2,364,541
------------ ------------
Cash and due from banks at end of year $ 1,883,104 $ 3,928,077
============ ============
Supplement disclosure:
Cash paid during the period for:
Interest $ 1,576,481 $ 1,392,209
============ ============
Income taxes $ 64,000 $ --
============ ============
Non cash items:
Unrealized gain(loss) on securities available for
sale, net of deferred income taxes $ (220,392) $ 25,683
============ ============
Acquistion of real estate in settlement of loans $ 88,013 $ --
============ ============
</TABLE>
The accompanying notes are an integral part of these consoldiated financial
statements.
15
<PAGE>
FARNSWORTH BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
1. Summary of Significant Accounting Policies:
------------------------------------------
Nature of Operations
--------------------
Farnsworth Bancorp, Inc. and Subsidiary (together the "Company") operate
two branches in Burlington County, New Jersey. The Bank offers customary
banking services, including accepting of checking, savings and time
deposits and the making of commercial, real estate and consumer loans, to
customers who are predominantly small and middle-market 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 (the "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 and the disclosure of
contingent assets and liabilities as of the date of the statement of
financial position and revenues and expenses for the period then ended.
Actual results could differ significantly from those estimates. Material
estimates that are particularly susceptible to significant changes in the
near term relate to the determination of the allowance for loan losses,
the valuation of foreclosed real estate and the assessment of prepayment
risks associated with mortgage-backed securities. Management believes that
the allowance for loan losses is adequate, foreclosed real estate is
appropriately valued and prepayment risks associated with mortgage-backed
securities are properly recognized. While management uses available
information to recognize losses on loans and foreclosed real estate,
future additions to the allowance for loan losses or further writedowns of
foreclosed real estate may be necessary based on changes in economic
conditions in the market area. Additionally, assessments of prepayment
risks related to mortgage-backed securities are based upon current market
conditions, which are subject to frequent change.
In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan
losses and foreclosed real estate. Such agencies may require the Bank to
recognize additions to the allowance for loan losses or additional
writedowns on foreclosed real estate based on their judgements about
information available to them at the time of their examination.
Concentration of Risk
---------------------
The Bank's lending activity is concentrated in loans secured by real
estate located in the State of New Jersey. The Bank's loan portfolio is
predominantly made up 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. In addition,
the Bank had cash balances at the Federal Home Loan Bank (FHLB)
aggregating $1,824,000 at September 30, 1999.
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 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.
16
<PAGE>
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.
Investment and Mortgaged-backed 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 which are recognized in interest income using
the interest method over the period to maturity.
o Securities Available for Sale. Securities available for sale consist
of certain 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.
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.
The Bank follows the provisions of FASB Statements No. 114, "Accounting by
Creditors for Impairment of a Loan," and No. 118, "Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures." The
provisions of these statements are applicable to all loans,
uncollateralized as well as collateralized, except large groups of
smaller-balance homogeneous loans that are collectively evaluated for
impairment and loans that are measured at fair value or at the lower of
cost or fair value. Loans classified as impaired are to be measured based
on the present value of expected future cash flows discounted at the
loan's effective interest rate, or as a practical expedient, at the loan's
observable market price or the fair value of the collateral if the loan is
collateral dependent. A loan evaluated for impairment is deemed to be
impaired when based on current information and events, it is probable that
the Bank will be unable to collect all amounts due according to the
contractual terms of the loan agreement. All loans identified as impaired
are evaluated independently. No loans were identified as impaired as of
September 30, 1999 and 1998, respectively.
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.
17
<PAGE>
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.
Premises and Equipment
----------------------
Land is carried at cost. Bank premises and equipment 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. The Bank
computes depreciation 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
Foreclosed Real Estate
----------------------
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.
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.
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. ("Farnsworth"), 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 Farnsworth's common stock, par value $.10 per share.
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 account in an amount proportionate to
their current adjusted qualifying balances. The balance of the liquidation
account on September 30, 1999 has not been determined.
The ability of Farnsworth 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").
18
<PAGE>
3. Held to Maturity and Available for Sale Securities
--------------------------------------------------
The carrying amounts and fair values of investments in held to maturity
and available for sale securities at September 30, 1999 and 1998 are
summarized as follows:
<TABLE>
<CAPTION>
1999
Amortized Gross Unrealized Fair
---------------------------------------
Held to maturity: Cost Gains Losses Value
------------------ ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 2,167,944 $ 14,442 $ 111,974 $ 2,070,412
Municipal securities 99,272 7,707 - 106,979
------------------ ---------------- ------------------ -----------------
$ 2,267,216 $ 22,149 $ 111,974 $ 2,177,391
================== ================ ================== =================
</TABLE>
<TABLE>
<CAPTION>
1998
Amortized Gross Unrealized Fair
---------------------------------------
Held to maturity: Cost Gains Losses Value
------------------ ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
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
================== ================ ================== =================
</TABLE>
<TABLE>
<CAPTION>
1999
Amortized Gross Unrealized Fair
---------------------------------------
Available for sale securities: Cost Gains Losses Value
------------------ ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
U.S. Government and
agency securities $ 8,880,762 $ 348,756 $ 8,532,006
Equity securities 3,339 $ 137,269 140,608
------------------ ---------------- ------------------ -----------------
$ 8,884,101 $ 137,269 $ 348,756 $ 8,672,614
================== ================ ================== =================
</TABLE>
<TABLE>
<CAPTION>
1998
Gross Unrealized Fair
---------------------------------------
Available for sale securities: Cost Gains Losses Value
------------------ ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Equity securities $ 3,339 $ 130,848 $ - $ 134,187
================== ================ ================== =================
</TABLE>
The schedule of maturities of available for sale and held to maturity
securities at September 30, 1999 are as follows:
Available for Sale Securities: Amortized Fair
Costs Value
----------------------------------------
Due in one year or less $ - $ -
Due from one to five years 1,999,479 1,959,500
Due from five to ten years 5,000,000 4,834,500
Due after ten years 1,881,283 1,738,006
------------------ -----------------
$ 8,880,762 $ 8,532,006
================== =================
Held to Maturity Securities: Amortized Fair
Costs Value
---------------------------------
Due in one year or less $ - $ -
Due from one to five years 1,248,708 1,228,863
Due from five to ten years 919,236 841,549
Due after ten years 99,272 106,979
----------- -----------
$ 2,267,216 $ 2,177,391
=========== ===========
19
<PAGE>
4. Mortgage Backed Securities, Held to Maturity:
--------------------------------------------
Investments in mortgage-backed securities are stated at cost, adjusted for
amortization of premiums and accretion of fees and discounts. The carrying
values and fair values of mortgage-backed and related securities are
summarized as follows:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------------
Principal Unamortized Unearned Carrying
Balance Premiums Discounts Value
------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
GNMA Certificates $ 586,416 $ 8,697 $ - $ 595,113
FHLMC and FNMA Certificates 1,161,508 3,563 5,074 1,159,997
------------------- ---------------- ----------------- -----------------
$ 1,747,924 $ 12,260 $ 5,074 $ 1,755,110
=================== ================ ================= =================
</TABLE>
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------------
Carrying Gross Unrealized Fair
--------------------------------------
Value Gains Losses Value
------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
GNMA Certificates $ 595,113 $ 2,240 $ 1,756 $ 595,597
FHLMC and FNMA Certificates 1,159,997 - 27,528 1,132,469
------------------- ---------------- ----------------- -----------------
$ 1,755,110 $ 2,240 $ 29,284 $ 1,728,066
=================== ================ ================= =================
</TABLE>
<TABLE>
<CAPTION>
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
=================== ================ ================= =================
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------------
Carrying Gross Unrealized Fair
--------------------------------------
Value Gains Losses Value
------------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
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
=================== ================ ================= =================
</TABLE>
Mortgage-backed securities with a carrying value and fair value of
$412,303 and $419,064 at September 30, 1999 and $548,540 and $419,064 at
September 30, 1998 are pledged as security for deposits of governmental
entities under the provisions of Governmental Unit Deposit Protection Act
(GUDPA).
20
<PAGE>
5. Loans Receivable:
----------------
Loans receivable at September 30, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
First mortgage loans
Principal balance:
Secured by one to four family residence $ 27,443,330 $ 24,736,226
Construction loans 1,885,900 2,434,619
Commercial real estate 3,742,753 1,019,284
--------------------- ---------------------
33,071,983 28,190,129
--------------------- ---------------------
Less:
Loans in process - real estate (829,891) (500,262)
Unearned discounts (12,466) (12,466)
Deferred loan origination fees net of
costs of $104,234 and $80,387, respectivley (180,497) (187,000)
--------------------- ---------------------
Total first mortgage loans 32,049,129 27,490,401
--------------------- ---------------------
Consumer and other loans
Principal balances:
Home equity 6,261,368 3,196,534
Personal loans 255,224 151,720
Loans secured by savings 171,908 157,248
Commercial business loans 270,512 180,649
--------------------- ---------------------
Total consumer and other loans 6,959,012 3,686,151
--------------------- ---------------------
Total loans 39,008,141 31,176,552
Less allowance for loan losses (176,000) (135,000)
--------------------- ---------------------
$ 38,832,141 $ 31,041,552
===================== =====================
</TABLE>
At September 30, 1999 and 1998, nonaccrual loans for which interest had
been discontinued totaled $404,916 and $290,714, respectively. Interest
income foregone on these loans is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Interest income that would have
been recorded $ 46,127 $ 27,162
Interest income recognized 1,099 10,065
--------------------- ---------------------
Interest income foregone $ 45,028 $ 17,097
===================== =====================
</TABLE>
An analysis of the change in the allowance for loan losses:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Allowance for loan losses:
General valuation allowance:
Beginning of year $ 135,000 $ 66,000
Additional provisions 45,579 72,000
Charge offs (4,579) (3,000)
--------------------- ---------------------
End of year $ 176,000 $ 135,000
===================== =====================
</TABLE>
21
<PAGE>
The activity with respect to loans to directors, officers and associates
of such persons, is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
---------------- ----------------
<S> <C> <C>
Beginning of period $ 217,274 $ 291,218
Loans originated
402,682 -
Collection of principal
(16,025) (73,944)
---------------- ----------------
End of period $ 603,931 $ 217,274
================ ================
</TABLE>
All loans to directors, officers and associates of such persons are
collateralized by deposits and/or real estate.
6. Accrued Interest Receivable:
---------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Loans receivable $ 242,138 $ 196,729
Mortgage backed securities 9,330 9,467
Other Securities 172,238 21,122
--------------------- ---------------------
$ 423,706 $ 227,318
===================== =====================
</TABLE>
7. Premises and Equipment:
----------------------
Premises and equipment are summarized by major classification as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------------
1999 1998
--------------------- ---------------------
<S> <C> <C>
Land $ 126,435 $ 126,435
Land improvements 14,017 13,608
Office building and improvements (Bordentown) 1,352,051 1,350,262
Office building and improvements (Florence) 39,015 38,299
Furniture, fixtures and equipment 438,288 331,532
Future branch 15,060 -
--------------------- ---------------------
1,984,866 1,860,136
Less accumulated depreciation 468,614 391,290
--------------------- ---------------------
$ 1,516,252 $ 1,468,846
===================== =====================
</TABLE>
Depreciation charged to operations was $77,324 and $55,717 for the years
ended 1999 and 1998, respectively. Useful lives used in the calculation of
depreciation are as follows:
Buildings 25 to 40 years
Buildings improvements and land improvements 7 to 40 years
Furniture and equipment 5 to 7 years
22
<PAGE>
8. Deposits:
--------
Deposits as of September 30, are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Now accounts $ 5,192,051 $ 4,230,556
Money market accounts 3,045,330 2,206,431
Passbook and club accounts 7,481,882 6,631,263
Non interest bearing 3,989,352 2,813,028
--------------------- ---------------------
Subtotal 19,708,615 15,881,278
--------------------- ---------------------
Certificates of deposit:
3.01% to 4.0% 1,016,360 485,579
4.01% to 5.0% 11,198,720 3,287,304
5.01% to 6.0% 9,919,282 15,360,755
6.01% to 7.0% 647,185 762,939
--------------------- ---------------------
Subtotal 22,781,547 19,896,577
--------------------- ---------------------
$ 42,490,162 $ 35,777,855
===================== =====================
</TABLE>
Deposits of officers and directors totaled $249,488 in 1999. The aggregate
amount of jumbo certificates of deposit with a minimum denomination of
$100,000 was approximately $1,562,000 and $1,499,000 at September 30, 1999
and 1998. 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, 1999 and 1998, scheduled maturities of certificates of
deposit (rounded to the nearest $1,000) are summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
3 months or less $ 4,444,000 $ 3,874,000
from 3 months to 1 year 11,812,000 10,341,000
from 1 year to 3 years 5,748,000 3,726,000
from 3 years to 5 years 778,000 1,956,000
--------------------- ---------------------
$ 22,782,000 $ 19,897,000
===================== =====================
</TABLE>
Interest expense on deposits for the years ended September 30, 1999 and
1998 is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
NOW accounts $ 98,793 $ 101,832
Money market accounts 69,057 65,745
Passbook and club accounts 178,418 170,102
Certificates of deposit 1,095,678 1,042,433
--------------------- ---------------------
$ 1,441,946 $ 1,380,112
===================== =====================
</TABLE>
23
<PAGE>
9. Other Borrowed Funds:
--------------------
This debt consists of various advances from FHLB which bear fixed interest
rates ranging from 5.1% to 5.9%. These advances are collateralized by FHLB
stock, investment securities and mortgages. The Bank has $9,404,651
available for borrowing as of September 30, 1999.
Principal payments are as follows:
2000 $ 6,368,000
2001 123,000
2002 130,000
2003 138,000
2004 146,000
Thereafter 807,940
----------------
Total $ 7,712,940
================
10. Gains on Sale of Interest Earning Assets:
----------------------------------------
Realized gain on sales of available-for-sale securities was $ 3,359 and
$933 for the years ended September 30, 1999 and 1998, respectively.
11. Income Taxes:
------------
The provision for federal and state income taxes differs from that computed at
the statutory graduated rates as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Federal statutory tax rates 34% 34%
Tax at statutory rates $ 113,179 $ 97,670
New Jersey savings institution tax 3,395 5,688
Decrease in tax:
Low tax bracket savings - (2,390)
Tax exempt income (2,000) (2,000)
Miscellaneous (5,885) (9,891)
--------------------- ---------------------
$ 108,689 $ 89,077
===================== =====================
Effective tax rate 30% 31%
===================== =====================
</TABLE>
The tax provision is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Current federal $ 128,567 $ 120,145
Deferred federal (31,927) (38,478)
Current state 15,000 10,800
Deferred state (2,951) (3,390)
--------------------- ---------------------
$ 108,689 $ 89,077
===================== =====================
</TABLE>
24
<PAGE>
The following temporary differences gave rise to deferred tax assets and
liabilities:
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 67,640 $ 47,490
Deferred loan origination fees, net 17,580 22,010
Accrued compensation 18,426 10,150
Unrecorded depreciation on investments 76,093 -
--------------------- ---------------------
Total deferred tax assets 179,739 79,650
--------------------- ---------------------
Deferred tax liabilities:
Premises and equipment 27,930 23,050
Unrecorded appreciation on investments - 47,070
Tax reserve for loan losses 52,450 68,212
--------------------- ---------------------
Total deferred tax liabilities 80,380 138,332
--------------------- ---------------------
Net deferred tax asset (liability) $ 99,359 $ (58,682)
===================== =====================
</TABLE>
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 8% of
taxable income. Retained earnings at September 30, 1999 and 1998 included
untaxed earnings of approximately $381,491 and $407,133, representing such
bad debt deductions.
Retained earnings at September 30, 1999 and 1998 includes approximately
$278,925 of tax bad debt deductions which are considered a permanent
difference between the book and income tax basis of loans receivable, and
for which income taxes have not been provided. If such amount is used for
purposes other than bad debt losses, including distributions in
liquidation, it will be subject to income tax at the then current rate.
12. Commitments:
-----------
At September 30, 1999 the Bank had the following commitments outstanding.
Mortgage commitments are for 45 days. Home equity commitments are for 60
days. The commitments are summarized as follows:
<TABLE>
<CAPTION>
Amounts Rate Term
------------------- -------------------- --------------------
<S> <C> <C> <C>
Mortgages (fixed rate) $ 877,600 7.00% to 8.125% 15 to 30 years
0 to 3 points
Home Equity loans 447,300 6.825% to 8.75% 3 to 15 years
------------------- 0 points
$ 1,324,900
===================
</TABLE>
There are two 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 the two letters totals
$25,000. The Bank also has lines of credit with undrawn balances of
$230,948.
Subsequent to September 30, 1999, the Bank entered into a lease agreement
for a new branch. The term of the agreement is for 10 years with monthly
payments ranging from $4,500 to $5,871. This project is expected to be
funded through normal operations with approximately $100,000 of cost to be
incurred.
25
<PAGE>
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 approximate their fair
value.
Available-for-Sale and Held-to-Maturity Securities and FHLB stock
-----------------------------------------------------------------
Fair values for securities, excluding FHLB securities, are based on quoted
market prices. The carrying values of FHLB securities approximate fair
values.
Loans Receivable
----------------
For variable-rate loans that reprice frequently and have no significant
change in credit risk, fair values are based on carrying values. Fair
values for fixed rate mortgage loans and other consumer loans are based
on quoted market prices of similar loans sold in conjunction with
securitization transactions, adjusted for differences in loan
characteristics. Fair values for fixed rate commercial real estate and
commercial loans are estimated using discounted cash flow analyses,
using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Accrued Interest
----------------
The carrying amounts of accrued interest approximate their fair values.
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.
FHLB Advances
-------------
The fair value of FHLB advances is estimated based on rates currently
available to the Bank for debt with similar terms.
Off-Balance-Sheet Instruments and credit risk
---------------------------------------------
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing need of
its customers. These financial instruments consist of commitments to
extend credit. Commitments to extend credit are agreements to lend to
a customer as long as there is no violation of any condition
established in the loan agreement. These commitments are comprised of
the undisbursed portion of loans and letters of credit. The Bank's
exposure to credit loss from nonperformance by the other party to the
financial instruments for commitments to extend credit is represented
by the contractual amount of those instruments. The Bank uses the same
credit policies in making commitments as it does for on-balance-sheet
instruments. Generally, collateral, usually in the form of real
estate, is required to support financial instruments with credit risk.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the
commitments are expected to expire without being drawn upon by
customers, the total commitment amounts do not necessarily represent
future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained,
if it is deemed necessary by the Bank upon extension of credit, is
based on management's credit evaluation of the counter party. The fair
value of commitments is not considered significant.
26
<PAGE>
The estimated fair values of the Bank's financial instruments were as
follows at: (000's omitted)
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
--------------------------------- --------------------------------------
Carrying Fair Carrying Fair
Financial Assets Amount Value Amount Value
------------------------------------ -------------- -------------- ---------------- ------------------
<S> <C> <C> <C> <C> <C>
Cash and due from banks $ 1,883 $ 1,883 $ 3,928 $ 3,928
Securities held to maturity 4,022 3,905 4,652 4,808
Securities available for sale 8,673 8,673 134 134
FHLB stock 419 419 261 261
Loans receivable 38,832 38,116 31,042 31,293
Accrued interest receivable 424 424 227 227
Financial Liabilities
------------------------------------
Deposit liabilities 42,491 42,323 35,778 35,981
FHLB advances 7,713 7,583
Accrued interest payable 97 97 39 39
</TABLE>
14. Benefit Plans:
-------------
Defined Contribution Plan
-------------------------
Employer contributions under a salary reduction thrift plan were $12,882
and $6,767 for 1999 and 1998, respectively.
ESOP
----
Effective upon conversion, an ESOP was established for all eligible
employees. The ESOP used $303,880 of proceeds from a term loan from the
Company to purchase 30,388 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 rate at September 30, 1999 was 8.25%. The Bank 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 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 common stock acquired by ESOP in the consolidated statements of
financial condition. As shares are committed to be released from
collateral, the Company reports compensation and interest 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. ESOP shares are as follows:
<TABLE>
<CAPTION>
1999 1998
-------------------- --------------------
<S> <C> <C>
Allocated shares, released 3,038 -
==================== ====================
Unallocated shares, unreleased 27,350 30,388
==================== ====================
Fair Value of unreleased shares $ 276,915 $ 303,880
==================== ====================
Compensation cost $ 30,388
====================
</TABLE>
27
<PAGE>
Restricted Stock Plan (RSP)
---------------------------
On April 16, 1999 the Company established a RSP to provide both key
employees and outside directors with a proprietary interest in the Company
in a manner designed to encourage such person to remain with the Bank. A
total of 15,194 restricted shares were purchased by the RSP at an average
market value of $10.48. Initially the total market value of the shares is
treated as unearned compensation and is charged to expense over the
vesting period. A total of 10,631 shares were issued to the board of
directors and two executive officers. Unearned compensation from these
shares will be charged to expense over the five year vesting period.
The awards become fully vested upon termination of employment due to death
or disability.
15. Net Income per Common Share:
----------------------------
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 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 years ended September 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>
1999 1998
------------------------------------------------- -------------------------------------------
Weighted Per- Weighted Per-
Average Share Average Share
Income Shares Amount Income Shares Amount
------------------------------------------------- -------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income available to
Common Shareholders $ 224,191 379,858 $ 198,187 379,858
ESOP shares (27,350) (30,388)
RSP shares (15,194)
------------------------------------ -----------------------------------------
$ 224,191 337,314 $ 0.66 $ 198,187 349,470 $ 0.57
------------------------------------ -----------------------------------------
</TABLE>
There were no diluted effects as of September 30, 1999 or 1998.
16. Comprehensive Income:
--------------------
On 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 reports
comprehensive income in accordance with the new statement.
28
<PAGE>
17. Regulatory Capital Requirement:
------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The Office of Thrift Supervision ("OTS") has prescribed capital
requirements which include three separate measurements of capital
adequacy: a leverage-ratio capital standard ("core"), a tangible capital
standard and a risk-based capital standard (collectively known as the
"Capital Rule"). The Capital Rule requires each savings institution to
maintain tangible capital equal to at least 1.5% of its adjusted total
assets and core capital equal to at least 4.0% of its adjusted total
assets. The Capital Rule further requires the Bank to maintain total
capital equal to at least 8.0% of its risk-weighted assets.
The Bank at September 30, 1999 and 1998 meets the regulatory core
capital, tangible capital, and risk based capital requirements as
summarized:
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------- ----------------------- --------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ----------- ---------- ---------- ------------ ------------
(000's omitted for amounts)
<S> <C> <C> <C> <C> <C> <C>
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
As of September 30, 1999:
Risk-based capital 4,571 16.84 2,255 8.00 2,819 10.00
Tier 1 capital 4,571 16.22 N/A N/A 1,691 6.00
Core capital 4,571 8.22 2,226 4.00 2,783 5.00
Tangible capital 4,571 8.22 835 1.50 N/A N/A
</TABLE>
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") imposes increased requirements on the operations of financial
institutions and mandated the development of regulations designed to
empower regulators to take prompt corrective action with respect to
institutions that fall below certain capital standards. FDICIA stipulates
that an institution with less than 4% core capital is deemed to be
undercapitalized. Quantitative measures established by FDICIA to ensure
capital adequacy require the Bank to maintain minimum amounts and ratios
of total and Tier I capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). Management believes, as of September 30, 1999, that the Bank
meets all capital adequacy requirements to which it is subject.
As of March 1999, 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 total, risk-based, and Tier I leverage 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.
29
<PAGE>
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.
18. 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 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 totaled $191,615.
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 FICO 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 FICO 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 FICO
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.
19. Parent Only Financial Information:
---------------------------------
Farnsworth operates one wholly owned subsidiary, the Bank. The earnings of
the Bank are recognized by Farnsworth using the equity method of
accounting. Accordingly, the earnings of the Bank are recorded as
increases in Farnsworth's investment in the subsidiary. The following are
the condensed financial statements for Farnsworth (parent company only) as
of September 30, 1999 and 1998 and for the year ended September 30, 1999.
Farnsworth had no operations prior to the Bank's conversion to stock form
on September 29, 1998.
<TABLE>
<CAPTION>
Statement of Financial Condition 1999 1998
------------------ ------------------
<S> <C> <C>
Assets
Cash $ 70,679 $ 638,692
Securities available for sale 480,938 -
ESOP loan receivable 281,089 303,880
Investment in subsidiary 2,807,322 2,548,435
Other assets 20,521 -
------------------ ------------------
Total assets $3,660,549 $3,491,007
================== ==================
Liabilities $ 173,678 $ 56,760
Stockholder's equity 3,486,891 3,434,247
------------------ ------------------
Liabilities and stockholder's equity $3,660,569 $3,491,007
================== ==================
</TABLE>
30
<PAGE>
Statement of Income
For the year
ended
September 30,
1999
------------------
Income from subsidiary $ 258,887
Interest Income 56,311
------------------
Total Income 315,198
------------------
Meeting expenses 21,939
Stock transfer fees 2,206
Professional Fees 66,522
Other Expenses 340
------------------
Total Expenses 91,007
------------------
Net Income $ 224,191
==================
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------
September 30, September 30,
Statement of Cash Flows 1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operations activities:
Net Income $ 224,191 $ -
------------------ ------------------
Adjustments to reconcile net income
provided by operations:
Increase(decrease)in accrued expenses (42,446) 56,760
Equity in undistributed earnings of
subsidiary (258,887)
Increase in other assets (13,662) -
------------------ ------------------
Net cash provided by (used in) operating
activities (90,804) 56,760
------------------ ------------------
Cash flows from investing activities:
Investment in Bank - (2,548,435)
Purchase of investment (500,000) -
Repayment of ESOP loan 22,791 -
------------------ ------------------
Net cash used in
investing activities (477,209) (2,548,435)
------------------ ------------------
Cash flows from financing activities:
Net proceeds from issuance of common
stock - 3,130,367
------------------ ------------------
Net cash provided by financing
activities - 3,130,367
------------------ ------------------
Net increase in cash and cash equivalents (568,013) 638,692
Cash and cash equivalents - beginning 638,692 -
------------------ ------------------
Cash and cash equivalents - ending $ 70,679 $ 638,692
================== ==================
Supplement disclosure:
Non cash items:
Unrealized loss on securities available for
sale, net of deferred income taxes $ (12,203) $ -
================== ==================
Loan to ESOP $ - $ 303,880
================== ==================
Loan to RSP $ 159,364 $ -
================== ==================
</TABLE>
31
<PAGE>
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
<TABLE>
<CAPTION>
BOARD OF DIRECTORS
<S> <C>
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. AARONSTON, JR. EDGAR N. PEPPLER
Realtor - Falconer & Bell President - Peppler Funeral Home
CHARLES E. ADAMS GARY N. PELEHATY
Retired - Florence Township Administrator President and Chief Executive Officer
</TABLE>
WILLIAM H. WAINWRIGHT, JR.
Retired - Loan Officer
EXECUTIVE OFFICERS
GARY N. PELEHATY CHARLES ALESSI
President and Chief Executive Officer Vice President, Chief Financial
Officer, Secretary and Treasurer
OFFICER
ELAINE C. DENELSBECK
Assistant Secretary
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
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 & Fisch, PC 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
</TABLE>
--------------------------
The Company's Annual Report on Form 10-KSB for the fiscal year ended September
30, 1999 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 January 25,
2000 at 10:00 a.m. at the Days Inn, 1073 Route 206, Bordentown, New Jersey
08505.
EXHIBIT 23
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
As independent auditors, we hereby consent to the incorporation by reference in
Registration Statement File No. 333-80441 of Farnsworth Bancorp, Inc. and
Subsidiary on Form S-8 of our report dated November 15, 1999 incorporated by
reference in the 10-KSB for the year ended September 30, 1999.
/s/Kronick Kalada Berdy & Co.
Kronick Kalada Berdy & Co.
Kingston, Pennsylvania
December 27, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED 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> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,883
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,673
<INVESTMENTS-CARRYING> 4,022
<INVESTMENTS-MARKET> 0
<LOANS> 38,832
<ALLOWANCE> 176
<TOTAL-ASSETS> 56,028
<DEPOSITS> 42,490
<SHORT-TERM> 6,368
<LIABILITIES-OTHER> 538
<LONG-TERM> 1,345
0
0
<COMMON> 38
<OTHER-SE> 5,249
<TOTAL-LIABILITIES-AND-EQUITY> 56,028
<INTEREST-LOAN> 2,809
<INTEREST-INVEST> 554
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 3,363
<INTEREST-DEPOSIT> 1,442
<INTEREST-EXPENSE> 193
<INTEREST-INCOME-NET> 1,668
<LOAN-LOSSES> 61
<SECURITIES-GAINS> 3
<EXPENSE-OTHER> 1,570
<INCOME-PRETAX> 333
<INCOME-PRE-EXTRAORDINARY> 333
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 224
<EPS-BASIC> .66
<EPS-DILUTED> .66
<YIELD-ACTUAL> 3.65
<LOANS-NON> 404
<LOANS-PAST> 120
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 135
<CHARGE-OFFS> 5
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 176
<ALLOWANCE-DOMESTIC> 176
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
