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, 2000
------------------
[X] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to .
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Commission File No. 0-24621
Farnsworth Bancorp, Inc.
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(Name of Small Business Issuer in Its Charter)
New Jersey 22-3591051
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(State or Other Jurisdiction of Incorporation (I.R.S. Employer
or Organization) Identification No.)
789 Farnsworth Avenue, Bordentown, New Jersey 08505
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (609) 298-0723
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Securities registered under Section 12(b) of the Exchange Act: None
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $0.10 per share
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(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. [X]
The issuer's revenues for its most recent fiscal year were $4,135,843.
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 19, 2000, was $2.96 million.
As of December 19, 2000, there were issued and outstanding 360,866
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 Registrant's Annual Report to Stockholders for the fiscal
year ended September 30, 2000. (Part II)
2. Portions of the Registrant's Proxy Statement for the 2001 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, originally founded in 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:
At September 30,
----------------------------------------------
2000 1999
----------------- -------------------
$ % $ %
------- ----- ------- ------
(Dollars in thousands)
Type of Loans:
-------------
Residential.................... $27,305 67.2% $27,443 68.6%
Construction................... 861 2.1 1,886 4.7
Commercial real estate......... 4,004 9.9 3,743 9.4
Commercial Business............ 71 0.2 271 0.7
Consumer loans:
Home equity.................. 7,897 19.4 6,261 15.6
Savings account loans........ 161 0.4 172 0.4
Automobile loans ............ 56 0.1 50 0.1
Other........................ 254 0.7 205 0.5
------- ----- ------- -----
40,609 100.0% 40,031 100.0%
------- ===== ------- =====
Less:
Loans in process............... 377 830
Deferred loan origination fees
and costs............... 196 193
Allowance for loan losses...... 186 176
------- -------
Total loans, net................. $39,850 $38,832
======= =======
Loan Maturity. The following table sets forth the estimated maturity of
the Bank's loan portfolio at September 30, 2000. The table does not include
prepayments or scheduled principal repayments.
3
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Prepayments and scheduled principal repayments on loans totaled $7.4 million for
the year ended September 30, 2000. Adjustable-rate mortgage loans are shown as
maturing based on contractual maturities.
Due Due after
within 1 through Due after
1 year 5 years 5 years Total
------ ------- ------- -----
(In thousands)
1-4 family mortgage...... $1,470 $5,966 $19,071 $26,507
Construction............. 861 -- -- 861
Commercial real estate... -- 1,069 3,733 4,802
Commercial business...... 20 51 -- 71
Consumer................. 844 294 7,230 8,368
------ ------ ------- -------
Total............... $3,195 $7,380 $30,034 $40,609
====== ====== ======= =======
The following table sets forth the dollar amount of all loans due after
September 30, 2001, which have pre-determined interest rates and which have
floating or adjustable interest rates.
Floating or
Fixed Rates Adjustable Rates Total
----------- ---------------- -----
(In thousands)
Residential................... $24,647 $390 $25,037
Construction.................. -- -- --
Commercial real estate........ 4,622 180 4,802
Commercial business........... 51 -- 51
Consumer...................... 7,118 406 7,524
------- --- -------
Total..................... $36,438 $976 $37,414
======= ==== ======
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, 2000, the Bank had $546,000 in ARM loans.
The Bank's fixed-rate loans generally have terms from 10 to 30 years
with principal and interest payments calculated using up to a 30-year
amortization period. Some of these fixed-rate loans are balloon loans with terms
of 5 or 7 years, with principal and interest payments calculated using up to a
30-year 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.
4
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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 $807,000. 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 limits 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
paid from the borrower's own funds. These loans are made at 1% to 2% above prime
and have terms of up to 12 months. The maximum loan-to-value ratio is 75% of the
appraised value of the completed project. Upon completion of construction the
loan converts to a permanent loan and regular principal and interest payments
commence. The Bank does not finance any speculative projects.
Construction lending is generally considered to involve a higher degree
of credit risk than long- term financing of residential properties. The Bank's
risk of loss on a construction loan is dependent largely upon the accuracy of
the initial estimate of the property's value at completion of construction and
the estimated cost of construction. If the estimate of construction cost and the
marketability of the property upon completion of the project prove to be
inaccurate, the Bank may be compelled to advance additional funds to complete
the construction. Furthermore, if the final value of the completed property is
less than the estimated amount, the value of the property might not be
sufficient to assure the repayment of the loan.
Commercial Business Loans. The Bank's commercial loans generally
constitute lines of credit to local businesses. These loans are primarily
secured by real estate and generally do not have terms greater than one year.
The Bank offers commercial business loans to benefit from the higher fees and
interest rates and the shorter terms to maturity.
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
5
<PAGE>
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, 2000, commitments to cover
originations of mortgage loans totaled $488,000. 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 $807,000 at September 30, 2000. At September 30, 2000, the
aggregate loans of the Bank's five largest borrowers had outstanding balances of
between $292,000 and $670,000.
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, 2000, interest income that would have been
recorded on loans accounted for on a non-accrual basis under the original terms
of such loans was $10,097.
<TABLE>
<CAPTION>
At September 30,
-----------------------
2000 1999
------- -------
(Dollars in thousands)
<S> <C> <C>
Loans accounted for on a non-accrual basis:
Mortgage loans:
Permanent loans secured by 1-4 family units.......................... $ 125 $ 404
All other mortgage loans............................................... 8 --
------- -------
Total.................................................................. $ 133 $ 404
======= =======
Accruing loans which are contractually past due 90 days or more:
Mortgage loans:
Permanent loans secured by 1-4 family units.......................... $ 87 $ 120
Total.................................................................. 87 120
Total non-accrual and accrual loans.................................... 220 524
Real estate owned...................................................... -- 88
Total nonperforming assets............................................. 220 612
Total non-accrual and accrual loans to net loans....................... 0.55% 1.35%
Total non-accrual and accrual loans to total assets.................... 0.38% 0.94%
Total non performing assets to total assets............................ 0.38% 1.09%
</TABLE>
Classified Assets. OTS regulations provide for a classification system
for problem assets of savings associations which covers all problem assets.
Under this classification system, problem assets of savings institutions such as
the Bank are classified as "substandard," "doubtful," or "loss." An asset is
considered substandard if it is inadequately protected by the current net worth
and paying capacity of the borrower or of the collateral pledged, if any.
Substandard assets include those characterized by the "distinct possibility"
that the savings institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as doubtful have all of the weaknesses inherent
in those classified substandard, with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions, and values, "highly questionable and
improbable." Assets classified as loss are those considered "uncollectible" and
of such little value that their continuance as assets without the establishment
of a specific loss reserve is not warranted. Assets may be designated "special
mention" because of potential weakness that do not currently warrant
classification in one of the aforementioned categories.
7
<PAGE>
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, 2000, the Bank had $220,000 of loans classified as
special mention. No loans were classified as substandard, doubtful or as loss at
September 30, 2000.
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>
At September 30,
---------------------------------------------------------
2000 1999
------------------------------ -------------------------
Percent of Percent of
Allowance in Allowance in
Each Category Each Category
to Total to Total
Amount Allowance Amount Allowance
------ --------- ------ ---------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Residential......................... $118 63.44% $110 62.50%
Commercial real estate.............. 17 9.14 17 9.66
Commercial Business................. 41 22.04 41 23.29
Consumer ........................... 10 5.38 8 4.55
---- ------ ---- ------
Total allowance for
loan losses................... $186 100.00% $176 100.00%
==== ====== ==== ======
</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:
<TABLE>
<CAPTION>
At September 30,
------------------------
2000 1999
------ ------
(Dollars in thousands)
<S> <C> <C>
Total loans outstanding (1)................................... $40,233 $39,201
======= =======
Average loans outstanding(1).................................. $39,951 $35,122
======= =======
Allowance balances (at beginning of period)................... $176 $135
Provision:
Residential.................................................. 8 26
Commercial real estate....................................... -- 13
Commercial Business.......................................... -- --
Consumer..................................................... 2 7
Net recoveries (charge offs).................................. -- (5)
---- ----
Allowance balance (at end of period).......................... $186 $176
==== ====
Allowance for loan losses as a percent of
total loans outstanding..................................... .46% .45%
Net loans charged off as a percent of average
loans outstanding........................................... 0% .01%
</TABLE>
------------
(1) Excludes allowance for loan losses and deferred loan origination fees and
costs.
Investment Activities
Investment Securities. The Bank is required under federal regulations
to maintain a minimum amount of liquid assets which may be invested in specified
short-term securities and certain other investments. The Bank classifies its
investment securities as "available-for-sale" or "held-to-maturity" in
accordance with SFAS No. 115.
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<PAGE>
The Bank's investment securities "available-for-sale" and
"held-to-maturity" portfolios at September 30, 2000 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, 2000, which is filed as Exhibit 13 to this
Form 10-KSB.
<TABLE>
<CAPTION>
At September 30,
-----------------------
2000 1999
------- -------
(In thousands)
<S> <C> <C>
Investments securities held-to-maturity:
U.S. agency securities.................................. $ 2,174 $ 2,168
State and local government.............................. 99 99
------- -------
Total investment securities held-to-maturity......... 2,273 2,267
Investment securities available-for-sale:
FHLMC stock............................................. 146 141
Corporate bonds......................................... 386 391
U.S. agency securities.................................. 8,228 8,141
------- -------
Total investment securities available-for-sale...... 8,760 8,673
Interest-bearing deposits................................. 2,903 1,347
FHLB stock................................................ 458 419
Mortgage-backed securities held-to-maturity............... 1,468 1,755
------- -------
Total investments................................... 4,829 3,521
------- -------
$15,862 $14,461
======= =======
</TABLE>
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, 2000 by contractual maturity.
The following table does not take into consideration the effects of scheduled
repayments or the effects of possible prepayments.
<TABLE>
<CAPTION>
More than Total
One Year or Less One to Five Years Five to Ten Years 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
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. agency securities -
Held to Maturity............ $ -- --% $1,977 4.88% $ 197 2.68% -- --% $ 2,174 4.68% $ 2,021
State and local government -
Held to Maturity............ -- -- -- -- -- -- 99 6.04 99 6.04 108
U.S. agency securities -
Available-for-Sale.......... -- -- 4,391 5.84 2,940 6.77 897 5.52 8,228 6.14 8,228
Corporate bonds -
Available-for-Sale........... -- -- -- -- -- -- 386 7.01 386 7.01 386
FHLMC stock.................... 146 1.22 -- -- -- -- -- -- 146 1.22 146
Interest-bearing deposits...... 2,903 6.01 -- -- -- -- -- -- 2,903 6.01 2,903
FHLB stock..................... -- -- -- -- -- -- 458 8.01 458 8.01 458
Mortgage-backed securities..... -- -- 144 6.63 -- -- 1,324 6.40 1,468 4.95 1 ,443
------ ---- ------ ---- ------ ---- ------ ---- ------- ---- -------
Total investments............ $3,049 5.78% $6,512 5.57% $3,137 6.51% $3,164 6.45% $15,862 5.97% $15,693
===== ==== ====== ==== ====== ==== ====== ==== ======= ==== =======
</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, 2000.
Certificates
Maturity Period of Deposit
--------------- ----------
(In thousands)
Within three months............... $1,999
Three through six months.......... --
Six through twelve months......... 1,385
Over twelve months................ 356
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,
--------------------
2000 1999
---- ----
(Dollars in thousands)
Balance at period end................................ $5,750 $6,368
Average balance outstanding during the period........ 6,663 3,962
Maximum amount outstanding
at any month-end during the period.............. 7,750 7,972
Weighted average interest rate during the period..... 5.79% 5.48%
Subsidiary Activity
In addition to the Bank, the Company has one subsidiary, Peoples
Financial Services, Inc., a New Jersey corporation which was incorporated on
November 27, 2000. Peoples Financial Services, Inc. was organized for the
purpose of providing securities brokerage and investment advisory services and
products
12
<PAGE>
to customers of the Bank and the general public. Peoples Financial Services,
Inc. has entered into a networking agreement with a third party, which began
offering such products and services from the Bank's main and branch offices in
December 2000.
Personnel
At September 30, 2000 the Bank had 20 full-time employees and 1
part-time employee. None of the Bank's employees are represented by a collective
bargaining group.
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.
Financial Modernization. On November 12, 1999, the President signed
into law the Gramm-Leach-Bliley Financial Services Modernization Act of 1999
(the "GLB Act"), which repealed the prohibitions against bank affiliations with
securities and insurance firms. The GLB Act authorizes qualifying bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. The GLB Act defines financial in nature to include
securities underwriting, dealing and market making; sponsoring mutual funds and
investment companies; insurance underwriting and agency; merchant banking
activities, and activities that the Federal Reserve Board has determined to be
closely related to banking. A qualifying national bank also may engage, subject
to limitations on investment, in activities that are financial in nature, other
than insurance underwriting, insurance company portfolio investment, real estate
development, and real estate investment, through a financial subsidiary of the
bank.
The GLB Act repeals the "unitary savings and loan holding company
exemption" from the restrictions imposed by the Home Owners' Loan Act on the
business activities of savings and loan holding companies. However, the GLB Act
grandfathers from this provision companies that were already unitary savings and
loan holding companies before May 4, 1999 or that result from an internal
reorganization of such preexisting unitary holding companies. Since the Company
was a unitary savings and loan holding company before May 4, 1999, it qualifies
as a grandfathered unitary savings and loan holding company. Grandfathered
unitary savings and loan holding companies have no restrictions on their
activities at the holding company level. However, non-grandfathered unitary
savings and loan holding companies may engage only in activities authorized for
savings and loan holding companies under the Home Owners' Loan Act and in
banking, securities, insurance and merchant banking activities permitted for
financial holding companies under the GLB Act.
The GLB Act imposes significant new financial privacy obligations and
reporting requirements on all financial institutions, including federal savings
associations. Specifically, the statute, among other things, will require
financial institutions (a) to establish privacy policies and disclose them to
customers both at the commencement of a customer relationship and on an annual
basis and (b) to permit customers to opt out of
13
<PAGE>
a financial institution's disclosure of financial
information to nonaffiliated third parties. The federal financial regulators
have promulgated final regulations implementing these provisions, which will
become effective July 1, 2001.
The GLB Act also enacts significant changes to the Federal Home Loan
Bank System. The GLB Act expands the permissible uses of Federal Home Loan Bank
advances by community financial institutions (under $500 million in assets) to
include funding loans to small businesses, small farms and small agri-
businesses. In addition, the GLB Act makes membership in a regional Federal Home
Loan Bank voluntary for federal savings associations.
Activities Restrictions. As a grandfathered unitary savings and loan
holding company under the GLB Act, the Company is generally not subject to any
restrictions on its business activities or those of its non-savings institution
subsidiaries. However, if the Company were to fail to meet the Qualified Thrift
Lender Test, then it would become subject to the activities restrictions of the
Home Owners' Loan Act applicable to multiple holding companies. See "Regulation
of the Bank -- Qualified Thrift Lender Test."
If the Company were to acquire control of another savings association,
it would lose its grandfathered status under the GLB Act and its business
activities would be restricted to certain activities specified by OTS
regulation, which include performing services and holding properties used by a
savings institution subsidiary, certain activities authorized for savings and
loan holding companies as of March 5, 1987, and nonbanking activities
permissible for bank holding companies pursuant to the Bank Holding Company Act
of 1956 (the "BHC Act") or authorized for financial holding companies pursuant
to the GLB Act. Furthermore, no company may acquire control of the Company
unless the acquiring company was a unitary savings and loan holding company on
May 4, 1999 (or became a unitary savings and loan holding company pursuant to an
application pending as of that date) or the acquiring company is only engaged in
activities that are permitted for multiple savings and loan holding companies or
for financial holding companies under the BHC Act as amended by the GLB Act.
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 FDIC administers two separate
deposit insurance funds. Generally, the Bank Insurance Fund (the "BIF") insures
the deposits of commercial banks and the SAIF insures the deposits of savings
institutions. The FDIC is authorized to increase deposit insurance premiums if
it determines such increases are appropriate to maintain the reserves of either
the SAIF or BIF or to fund the administration of the FDIC. In addition, the FDIC
is authorized to levy emergency special assessments on BIF and SAIF members. The
FDIC has set the deposit insurance assessment rates for SAIF-member institutions
for the first six months of 2000 at 0% to .027% of insured deposits on an
annualized basis, with the assessment rate for most savings institutions set at
0%.
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, 2000.
14
<PAGE>
Dividend and Other Capital Distribution Limitations. The OTS imposes
various restrictions or requirements on the ability of savings institutions to
capital distributions including cash dividends.
A savings association that is a subsidiary of a savings and loan
holding company, such as the Bank, must file an application or a notice with the
OTS at least 30 days before making a capital distribution. Savings associations
are not required to file an application for permission to make a capital
distribution and need only file a notice if the following conditions are met:
(1) they are eligible for expedited treatment under OTS regulations, (2) they
would remain adequately capitalized after the distribution, (3) the annual
amount of capital distribution does not exceed net income for that year to date
added to retained net income for the two preceding years, and (4) the capital
distribution would not violate any agreements between the OTS and the savings
association or any OTS regulations. Any other situation would require an
application to the OTS.
In addition, the OTS could prohibit a proposed capital distribution if,
after making the distribution, by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that the distribution would
constitute an unsafe or unsound practice.
A federal savings institutions is prohibited from making a capital
distribution if, after making the distribution the savings institution would be
unable to meet any one of its minimum regulatory capital requirements. Further,
a federal savings institution cannot distribute regulatory capital that is
needed for its liquidation account.
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, 2000, 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.
15
<PAGE>
Item 2. Description of Property
-------------------------------
(a) Properties.
The Bank operates from its main office and two branch offices.
Leased or
Location Owned
-------- -----
MAIN OFFICE:
Bordentown, New Jersey Owned
BRANCH OFFICES:
Florence, New Jersey Owned
Mount Laurel, New Jersey 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.
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.
16
<PAGE>
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 Registrant's Annual Report to Stockholders for the fiscal
year ended September 30, 2000 (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
--------------------------------------------------------------------------------
None.
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 the Registrant's 2001 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.
17
<PAGE>
(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 the Registrant knows of no arrangements, including
any pledge by any person of securities of the Registrant, the operation of which
may at a subsequent date result in a change in control of the Registrant.
Item 12. Certain Relationships and Related Transactions
--------------------------------------------------------
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 independent auditor's
report included in the Annual Report are incorporated herein by reference.
<TABLE>
<CAPTION>
<S> <C>
Independent Auditor's Report
Consolidated Statements of Financial Condition as of September 30, 2000 and 1999
Consolidated Statements of Income and Comprehensive Income for the Years Ended
September 30, 2000 and 1999
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended September 30, 2000 and 1999
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, 2000
21 Subsidiaries of the Registrant
23 Consent of Kronick Kalada Berdy & Co.
27 Financial Data Schedule (electronic filing only)
</TABLE>
18
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------------------
* Incorporated by reference to the Registration Statement on Form
SB-2 (File No. 333-56689) declared effective by the SEC on August
10, 1998.
** 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) During the quarter ended September 30, 2000, the Registrant filed a
Current Report on Form 8-K to report the completion of the repurchase of 5%, or
18,992 shares, of its outstanding common stock in the open market.
19
<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 28, 2000.
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 28, 2000.
<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>