UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-QSB
(Mark One)
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X QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2005
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OR
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
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For the transition period from __________to__________
Commission File No. 0-24621
Farnsworth Bancorp, Inc.
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(Exact name of Small Business Issuer as Specified in Its Charter)
New Jersey 22-3591051
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
789 Farnsworth Avenue, Bordentown, New Jersey 08505
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(Address of Principal Executive Offices)
(609) 298-0723
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Issuer's Telephone Number, Including Area Code
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES X NO
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
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Number of shares of Common Stock outstanding as of February 2, 2006: 650,530
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Transitional Small Business Disclosure Format (check one)
YES NO X
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Contents
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PART 1 - FINANCIAL INFORMATION Page(s)
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Item 1. Financial Statements
Consolidated Statements of Financial Condition at December 31, 2005
(unaudited) and September 30, 2005 (audited)............................................ 1
Consolidated Statements of Income and Comprehensive Income for the three
months ended December 31, 2005, and 2004 (unaudited).................................... 2
Consolidated Statements of Cash Flows for the three months ended
December 31, 2005 and 2004 (unaudited).................................................. 3
Notes to Financial Statements........................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................... 6
Item 3. Controls and Procedures................................................................. 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 9
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 9
Item 3. Defaults upon Senior Securities......................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders..................................... 9
Item 5. Other Information....................................................................... 9
Item 6. Exhibits ............................................................................... 9
Signatures ........................................................................................ 10
Certifications..................................................................................... 11
i
FARNSWORTH BANCORP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, SEPTEMBER 30,
2005 2005
------------- -------------
(UNAUDITED) (AUDITED)
ASSETS
Cash and due from banks $ 7,097,569 $ 10,278,409
Securities available for sale 20,965,704 19,418,925
Securities held to maturity 771,415 969,864
Loans receivable, net 71,808,157 70,005,215
Accrued interest receivable 423,067 438,935
Federal Home Loan Bank of New York (FHLB) stock
at cost substantially restricted 171,400 520,200
Deferred income taxes 537,714 216,990
Premises and equipment 2,182,211 2,211,706
Other assets 112,477 85,247
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Total assets $ 104,069,714 $ 104,145,491
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 93,532,421 $ 93,583,060
Borrowings from FHLB 614,413 654,696
Advances by borrowers for taxes and insurance 285,084 404,956
Accrued income taxes 174,875 26,586
Accrued interest payable 102,869 84,606
Accounts payable and other accrued
expenses 163,528 154,816
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Total liabilities 94,873,190 94,908,720
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Preferred stock $.10 par value, 1,000,000
shares authorized; none issued and
outstanding
Common stock $.10 par value, 5,000,000 shares authorized;
662,698 shares issued, at December 31 2005 and September
30, 2005; shares outstanding 650,535 and 650,316 at
December 31, 2005 and September 30, 2005 respectively 66,270 66,270
Additional paid in capital 8,483,529 8,481,669
Retained earnings substantially restricted 1,397,227 1,339,579
Treasury stock at cost 12,163 shares at December 31, 2005
and 12,382 shares at September 30, 2005 (118,521) (120,658)
Common stock aquired by
employee stock ownership plan (ESOP) (230,774) (240,021)
Accumulated other comprehensive income , unrealized
depreciation on available for sale securities,
net of taxes (401,207) (290,068)
------------- -------------
Total stockholders' equity 9,196,524 9,236,771
------------- -------------
Total liabilities and
stockholders' equity $ 104,069,714 $ 104,145,491
============= =============
SEE NOTES TO FINANCIAL STATEMENTS
1
FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME( LOSS)
(Unaudited)
THREE MONTHS ENDED
DECEMBER 31,
2005 2004
----------- -----------
Interest income:
Loans receivable $ 1,260,569 $ 1,143,621
Securities 228,917 206,043
Federal funds sold 63,807 35,029
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Total interest income 1,553,293 1,384,693
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Interest expense:
Deposits 576,395 426,305
Federal Home Loan Bank advances 9,280 11,599
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Total interest expense 585,675 437,904
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Net interest income 967,618 946,789
Provision for loan losses 30,000 21,801
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Net interest income after
provision for loan losses 937,618 924,988
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Noninterest income:
Fees and other service charges 70,057 77,451
Net realized gain on available for sale:
Loans - 7,537
Securities 5,156 3,217
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Total noninterest income 75,213 88,205
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Noninterest expense:
Compensation and benefits 465,748 469,038
Occupancy and equipment 126,860 132,070
Professional fees 77,033 54,825
Service fees 66,257 41,951
Other 112,259 121,086
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Total noninterest expense 848,157 818,970
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Income before provision for income
tax expense 164,674 194,223
Provision for income tax expense 74,500 81,800
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Net income 90,174 112,423
Other Comprehensive Income (loss), net of taxes
Unrealized loss on Securities
Available for Sale (108,045) (99,626)
Reclassification adjustments for gains
included in net income (3,094) (1,930)
----------- -----------
Comprehensive Income (loss) $ (20,965) $ 10,867
=========== ===========
Net income per common share:
Basic $ 0.14 $ 0.20
Diluted $ 0.14 $ 0.18
Weighted average number of shares
outstanding during the period:
Basic 627,732 575,655
Diluted 667,179 611,667
SEE NOTES TO FINANCIAL STATEMENTS
2
FARNSWORTH BANCORP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
THREE MONTHS ENDED DECEMBER 31
2005 2004
------------ ------------
Cash flows from operating activities:
Net income $ 90,174 $ 112,423
------------ ------------
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 36,903 48,022
Stock compensation 13,244 26,965
Provision for loan losses 30,000 21,801
Net gain on sale of AFS securities (5,156) (3,217)
Change in:
Accrued interest receivable 15,868 38,511
Other assets (27,230) 68,333
Advances from borrowers (117,083) (45,744)
Accrued and deferred income taxes (103,602) (4,331)
Accrued interest payable 18,263 8,068
Other accrued liabilities 8,712 (25,640)
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Total adjustments (130,081) 132,768
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Net cash provided by (used in) operating
activities (39,907) 245,191
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Cash flows from investing activities:
Net change in loans receivable (1,832,942) 122,609
Redemption of securities, held to maturity 198,449 15,309
Redemption of securities, available for sale 250,624 207,785
Purchase of securities, held to maturity - (672,288)
Proceeds from sale of securities available for sale 3,931,562 4,593,051
Purchase of securities, available for sale net (5,906,570) (7,478,648)
Redemption of FHLB stock 348,800
Purchase of premises and equipment (7,408) (4,595)
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Net cash used in investing activities (3,017,485) (3,216,777)
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Cash flows from financing activities:
Net change in deposits (50,639) 3,929,896
Repayment of Federal Home Loan Bank Borrowings (40,283) (37,985)
Proceeds from sale of stock, net - 1,785,691
Dividends paid (32,526) (32,515)
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Net cash provided by (used in) financing activities (123,448) 5,645,087
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Net change in cash (3,180,840) 2,673,501
Cash at beginning of period 10,278,409 6,009,330
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Cash at end of period $ 7,097,569 $ 8,682,831
============ ============
Supplemental disclosure:
Cash paid during the period for:
Interest $ 567,412 $ 429,836
============ ============
Income taxes $ 125,750 $ 86,000
============ ============
Non cash items:
Unrealized loss on securities available
for sale, net of deferred income taxes $ (111,139) $ (101,556)
============ ============
Loan to ESOP $ - $ 172,500
============ ============
Restricted stock plan shares purchased $ - $ 20,131
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SEE NOTES TO FINANCIAL STATEMENTS
3
FARNSWORTH BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
NOTE 1. Presentation of Financial Information
-------------------------------------
The accompanying unaudited consolidated interim financial statements include the
accounts of Farnsworth Bancorp, Inc. (the "Company") and its subsidiaries;
Peoples Savings Bank (the "Bank") and Peoples Financial Services, Inc. The
accompanying unaudited consolidated interim financial statements have been
prepared in accordance with the instructions to Form 10-QSB. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. The accounting
and reporting policies of the Company conform in all material respects to
generally accepted accounting principles and to general practice within the
thrift industry. It is the opinion of management that the accompanying unaudited
consolidated interim financial statements reflect all adjustments, which are
considered necessary to report fairly the financial position as of December 31,
2005, the Consolidated Statements of Income and Comprehensive Income (loss) for
the three months ended December 31, 2005 and 2004, and the Consolidated
Statements of Cash Flows for the three months ended December 31, 2005 and 2004.
The results of operations for the three months ended December 31, 2005 are not
necessarily indicative of results that may be expected for the entire year
ending September 30, 2006, or for any other period. The accompanying unaudited
consolidated interim financial statements should be read in conjunction with the
Company's September 30, 2005 consolidated financial statements, including the
notes thereto, which are included in the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 2005.
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amount of assets and liabilities, the
disclosure of contingent assets and liabilities and the reported revenues and
expenses. Actual results could differ significantly from those estimates. In
addition, various regulatory agencies, as an integral part of their examination
process, periodically review the Bank's allowance for loan losses and foreclosed
real estate. Such agencies may require the Bank to recognize additions to the
allowance for loan losses or additional write-downs on foreclosed real estate
based on their judgments about information available to them at the time of
their examination.
Nature of Operations
- --------------------
The Company is a unitary savings and loan holding company. The Bank operates
four branches in Burlington County, New Jersey. The Bank offers customary
banking services, including accepting checking, savings and time deposits and
the making of commercial, real-estate and consumer loans, to customers who are
predominantly small and middle-market businesses and middle-income individuals.
The Company also offers brokerage, investment advisory services and insurance
services to the general public through Peoples Financial Services, Inc., a
subsidiary organized for the sale of mutual funds and insurance through a third
party networking agreement.
4
NOTE 2. 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 Bank's Employee Stock Ownership Plan ("ESOP") and
the Bank's restricted stock plan ("RSP"). 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.
For the three months ended December 31
--------------------------------------
2005 2004
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Weighted Per- Weighted Per-
Net Average Share Net Average Share
Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------
Net income available
to common shareholders $90,174 650,535 $112,423 604,649
ESOP Shares, not
committed to be released (22,803) (27,508)
RSP Shares (1,486)
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Basic net income
Net income per share 90,174 627,732 $ 0.14 $112,423 575,655 $ 0.20
Common Stock equivalents 39,447 36,012
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Diluted
Net income per share $90,174 667,179 $ 0.14 $112,423 611,667 $ 0.18
===============================================================
NOTE 3. Investment Securities
---------------------
The Bank's investments in securities are classified in two categories and
accounted for as follows:
Securities Held to Maturity. Mortgage backed securities 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.
Securities Available for Sale. Securities available for sale are reported at
market value and consist of certain debt and equity securities not classified as
trading or securities to be held to maturity.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary will result in
write-downs of the individual securities to their fair value. The related
write-downs will be included in earnings as realized losses.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of equity until
realized.
Gains and losses on the sale of securities available for sale are determined
using the specific-identification method.
5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company 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 (including this Quarterly Report of Form
10-QSB), 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 economy 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 rate, market and monetary fluctuations; the
impact of changes in financial services' laws and regulations (including laws
concerning taxes, banking securities and insurance); technological changes; and
the success of the Company at managing the risks involved in the foregoing.
The Company cautions that the foregoing list of important factors is
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.
Financial Condition
Total assets were virtually unchanged at $104 million at December 31,
2005 and September 30, 2005. However, there was an increase in available for
sale securities of $1.5 million and an increase in loans receivable, net of $1.8
million partially offset by a decrease in cash and due from banks of $3.2
million. The Company's total liabilities were also virtually unchanged at $94.9
million at December 31, 2005 and September 30, 2005.
Stockholders' equity was $9.2 million or 8.8% of total assets at
December 31, 2005, as compared to $9.2 million or 8.9% of total assets at
September 30, 2005. The change in stockholders' equity is primarily attributable
to an increase in the unrealized depreciation on available for sale securities
net of taxes of $111,000, net income of $90,000 and dividends paid of $33,000.
Results of Operations
Net Income. The Company's net income decreased $22,000 for the quarter
ended December 31, 2005 to $90,000 from $112,000 for the quarter ended December
31, 2004. The decrease in net income was mostly attributable to a decrease in
non-interest income of $13,000 and increases in non-interest expenses of $29,000
partially offset by a decrease in income taxes of $7,000.
Net Interest Income. Net interest income is the most significant
component of the Company's income from operations. Net interest income is the
difference between interest the Company receives on its interest earning assets,
primarily loans and investments, and interest the Company pays on its
interest-
6
bearing liabilities, primarily deposits and borrowings. Net interest income
depends on the volume of and rates earned on interest-earning assets and the
volume of and rates paid on interest-bearing liabilities.
Net interest income after provision for loan losses increased $13,000,
or 1.40%, to $938,000 for the quarter ended December 31, 2005 as compared to
$925,000 for the quarter ended December 31, 2004. The increase was primarily due
to an increase of interest income of $168,000 partially offset by an increase in
interest expense of $148,000 and an increase in provision for loan losses of
$8,000. The increase in interest income was partially due to the increase in the
loan and investment portfolios. The Company's cost of funds increased as a
result of higher market interest rates.
Provision for Loan Losses. Provision for loan losses was $30,000 for
the three months ended December 31, 2005, compared to $22,000 for the three
months ended December 31, 2004.
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.
Non-Interest Income. Non-interest income decreased $13,000 or 14.7% to
$75,000 for the quarter ended December 31, 2005 from $88,000 for the same
quarter in 2004. The decrease was due to a decrease in gain on sale of $8,000
and a decrease in fees of $7,000, partially offset by an increase sale of
securities available for sale of $2,000.
Non-Interest Expense. Non-interest expense increased $29,000 or 3.50%
to $848,000 for the quarter ended December 31, 2005 compared to $819,000 for the
same quarter in 2004. The increase in the Company's non-interest expense was
primarily due to an increase of $46,000 in the Company's service and
professional fees.
Income Tax Expense. Income tax expense decreased by $7,000 for the
quarter ended December 31, 2005 to $74,000 compared to $81,000 for the same
period in 2004. This change was due to the decrease in net income for the
quarter ended December 31, 2005.
7
Liquidity and Capital Resources
The Company'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 Company uses its liquidity resources principally to fund
existing and future loan commitments, maturing certificates of deposit and
demand deposit withdrawals, to invest in other interest-earning assets, to
maintain liquidity, and meet operating expenses.
Net cash used by the Company's operating activities (the cash effects
of transactions that enter into the Company's determination of net income e.g.,
non-cash items, amortization and depreciation, provision for loan losses) for
the three months ended December 31, 2005 was $40,000, a decrease of $285,000
compared to the same period in 2004. The decrease in 2005 was primarily
attributable to a decrease in advances from borrowers, accrued and deferred
income taxes and a change in other assets.
Net cash used by the Company's investing activities (i.e., cash
disbursements, primarily for the purchase of the Company's investment securities
and mortgage-backed securities portfolios and the Company's loan portfolio) for
the three months ended December 31, 2005, totaled $3.0 million. This was a
decrease of $200,000 from the quarter ended December 31, 2004. The use is
attributable to funding loans receivable net of $1.8 million and purchase of
available for sale securities of $5.9 million net, partially offset by
redemptions and proceeds from sale of securities available for sale of $4.2
million and redemption of FHLB stock of $349,000.
Net cash used by the Company's financing activities (i.e., cash
receipts primarily from net increases in deposits and net decreases in FHLB
advances) for the three months ended December 31, 2005, totaled $123,000,
compared to cash provided by financing activities of $5.6 million for the same
period in 2004. The decrease is attributable to a minimal change in deposits for
2005. The quarter ended December 31, 2004 included net proceeds from sale of
common stock of $1.8 million.
Office of Thrift Supervision ("OTS") capital regulations applicable to
the Bank require savings institutions to meet three capital standards: (1)
tangible capital equal to 1.5% of total adjusted assets, (2) a leverage ratio
(core capital) equal to at least 3% of total adjusted assets, and (3) a
risk-based capital requirement equal to 8.0% of total risk-weighted assets. In
addition, the OTS prompt corrective action regulation provides that a savings
institution that has a leverage capital ratio of less than 4% (3% for
institutions receiving the highest examination rating) will be deemed to be
"undercapitalized" and may be subject to certain restrictions. The Bank was in
compliance with these requirements at December 31, 2005, with tangible, core and
risk based capital ratios, respectively.
Item 3. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. Based on their
evaluation of the Company's disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")),
the Company's principal executive officer and principal financial officer have
concluded that as of the end of the period covered by this Quarterly Report on
Form 10-QSB such disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in reports that it files or
submits under the Exchange Act is recorded,
8
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms.
(b) Changes in internal control over financial reporting. During the
quarter under report, there was no change in the Company's internal control over
financial reporting that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- -------------------------
The Registrant was not engaged in any material legal proceedings during
the quarter ended December 31, 2005. From time to time, the Bank is a party to
legal proceedings within the normal course of business wherein it enforces its
security interests in loans made by it, and other similar matters.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
- -------------------------------------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
None.
Item 5. Other Information
- -------------------------
(a) Not applicable.
(b) Not applicable.
Item 6. Exhibits
- ----------------
31 Certifications pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
10
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
FARNSWORTH BANCORP, INC.
Date: February 2, 2006 By: /s/Gary N. Pelehaty
--------------------------------------------
Gary N. Pelehaty
President and Chief Executive Officer
(Principal Executive Officer)
Date: February 2, 2006 By: /s/Charles Alessi
--------------------------------------------
Charles Alessi
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Financial and Accounting Officer)
11