SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number 01-13465
Falmouth Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Davis Straits, Falmouth, MA 02540
(Address of principal executive offices)
(Zip Code)
(508) 548-3500
(Registrant's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirement for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
Class December 31, 1998
----- -----------------
Common Stock, Par Value $.01 1,387,478
Transitional small business disclosure format:
Yes No X
----- -----
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION Page
Item 1 Financial Statements
Consolidated Statements of Financial Condition 1
December 31, 1998 and September 30, 1998
Consolidated Statements of Income 2
For Three Months Ended December 31, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity 3
For Three Months Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows 4-5
For Three Months Ended December 31, 1998 and 1997
Notes To Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial Condition 8-12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on 8-K
None
* Submitted only with filing in electronic format
FORWARD LOOKING STATEMENTS
This quarterly report contains certain forward looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company and the Bank that are subject to
various factors which could cause actual results to differ materially from
these estimates. These factors include: changes in general, economic and
market conditions, or the development of an adverse interest rate
environment that adversely affects the interest rate spread or other income
anticipated from the Bank's operations and investments; and the factors
described under "Management's Discussion and Analysis of Financial condition
and Results of Operations - Year 2000."
Part I. Item I. FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
December 31, 1998 and September 30, 1998
<TABLE>
<CAPTION>
December 31, September 30,
1998 1998
------------ -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
Cash and due from banks $ 1,333,116 $ 1,705,345
Federal funds sold 5,612,144 5,581,233
-----------------------------
Total cash and cash equivalents 6,945,260 7,286,578
Investments in available-for-sale securities
(at fair value) 17,359,536 16,923,523
Investments in held-to-maturity securities
(fair values of $6,940,866 as of December
31, 1998 and $7,078,556 as of September 30,
1998) 5,927,580 7,037,287
Federal Home Loan Bank stock, at cost 562,800 562,800
Loans, net 79,624,873 77,654,939
Premises and equipment 2,095,677 2,108,344
Accrued interest receivable 634,363 631,590
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 220,443 192,170
-----------------------------
Total Assets $113,765,927 $112,792,626
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Demand deposits $ 5,741,822 $ 5,334,868
Savings and NOW deposits 36,168,822 34,239,783
Time deposits 42,126,084 41,944,116
-----------------------------
Total deposits 84,036,728 81,518,767
Securities sold under agreements to repurchase 1,398,843 1,080,554
Advances from Federal Home Loan Bank of Boston 5,787,804 7,599,000
Other liabilities 304,023 352,815
-----------------------------
Total Liabilities 91,527,398 90,551,136
-----------------------------
Stockholders' equity:
Preferred stock, par value $.01 per share and
$.10 per share, authorized 500,000 shares; none issued
Common stock, par value $.01 per share and $.10 per share,
authorized 2,500,000 shares; issued 1,454,750 shares; outstanding
1,387,478 shares as of December 31, 1998 and 1,401,784 shares
as of September 30, 1998 14,547 14,547
Paid-in capital 13,935,703 13,899,014
Retained earnings 10,282,525 10,204,737
Unallocated Employee Stock Ownership Plan shares (631,991) (654,038)
Treasury stock (67,272 shares 12/31/98; 52,966 shares 9/30/98) (1,196,965) (952,668)
Unearned compensation (594,417) (594,417)
Accumulated other comprehensive income 429,127 324,315
-----------------------------
Total stockholders' equity 22,238,529 22,241,490
Total liabilities and stockholders's equity $113,765,927 $112,792,626
=============================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
Three Months Ended December 31, 1998 and 1997
---------------------------------------------
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(unaudited)
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,469,648 $1,130,735
Interest and dividends on securities:
Taxable 257,327 453,134
Dividends on marketable equity securities 25,881 41,429
Dividends on Cooperative Bank Investment and Liquidity Funds 42,622 59,331
Other interest 67,124 52,058
----------------------------
Total interest and dividend income 1,862,602 1,736,687
----------------------------
Interest expense:
Interest on deposits 773,059 710,036
Interest on securities sold under agreements to repurchase 12,288 1,703
Interest on FHLB advances 92,311 361
Interest on other borrowings - 14,893
----------------------------
Total interest expense 877,658 726,993
----------------------------
Net interest and dividend income 984,944 1,009,694
Provision for loan losses 6,000 -
----------------------------
Net interest income after provision for loan losses 978,944 1,009,694
----------------------------
Other income:
Service charges on deposit accounts 28,900 29,295
Securities gains, net 22,713 97,852
Other income 56,744 35,043
----------------------------
Total other income 108,357 162,190
Other expense:
Salaries and employee benefits 400,379 343,769
Occupancy expense 42,521 43,008
Equipment expense 39,143 32,267
Writedown on impairment of long lived assets - -
Data processing expense 61,524 44,513
Directors' fees 12,450 13,250
Legal and professional fees 53,946 44,808
Other expenses 112,752 113,995
----------------------------
Total other expenses 722,715 635,610
----------------------------
Income before income taxes 364,586 536,274
Income taxes 192,600 188,000
----------------------------
Net income $ 171,986 $ 348,274
============================
Comprehensive income $ 276,798 $ 534,460
============================
Earnings per common share $ 0.13 $ 0.25
============================
Earnings per common share, assuming dilution $ 0.13 $ 0.25
============================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
<TABLE>
<CAPTION>
Unallocated
Employee
Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income Total
------ ------- -------- ----------- -------- ------------ ------------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996 $ 145,475 $13,598,174 $ 8,856,291 ($829,208) $143,685 $21,914,417
Employee Stock Ownership Plan 41,103 41,103
Adjustment of costs incurred on
issuance of common stock 12,293 12,293
ESOP shares released 87,285 87,285
Dividends declared ($.20 per
share) (274,365) (274,365)
Comprehensive income:
Net income 752,085
Net change in unrealized
holding gain on available-
for-sale securities 272,698
Comprehensive income 1,024,783
-------------------------------------------------------------------------------------------------
Balance, September 30, 1997 145,475 13,651,570 9,334,011 (741,923) - - 416,383 22,805,516
Employee Stock Ownership Plan 94,566 94,566
ESOP shares released 87,885 87,885
Purchase of shares for
recognition and retention
plan (RRP) (751,433) (751,433)
Recognition and retention plan 158,760 158,760
Distribution of RRP shares (157,016) 157,016 0
Tax benefit from RRP 20,206 20,206
Formation of the Holding
Company, change in par value (130,928) 130,928 0
Dividends declared ($.23 per
share) (314,350) (314,350)
Purchase of treasury stock (952,668) (952,668)
Comprehensive income:
Net income 1,185,076
Net change in unrealized
holding gain on available-
for-sale securities (92,068)
Comprehensive income 1,093,008
-------------------------------------------------------------------------------------------------
Balance, September 30, 1998 14,547 13,899,014 10,204,737 (654,038) (952,668) (594,417) 324,315 22,241,490
Employee Stock Ownership Plan 12,344 12,344
ESOP shares released 22,047 22,047
Recognition and retention plan 27,216 27,216
Purchase of treasury stock (258,578) (258,578)
Sale of treasury stock (3,661) 14,281 10,620
Tax benefit on sale of treasury
stock 790 790
Dividends declared ($.07 per
share) (94,198) (94,198)
Comprehensive income:
Net income 171,986
Net change in unrealized
holding gain on available-
for-sale securities 104,812
Comprehensive income 276,798
-------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ 14,547 $13,935,703 $10,282,525 ($631,991) ($1,196,965) ($594,417) $429,127 $22,238,529
=================================================================================================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
<TABLE>
<CAPTION>
For the three months
ended December 31,
1998 1997
---- ----
(unaudited)
<S> <C> <C>
Cash flows from operating activities
Net income $ 171,986 $ 348,274
Adjustments to reconcile net income to net cash
provided by operating activities:
Recognition and retention plan (RRP) 27,216
Disposal of fixed assets
Writedown of impairment of long lived assets
Loss on sale of equipment
Loss on trade-in of equipment
Provision for loan loss 6,000
(Accretion) amortization of investment securities, net 7,442 6,886
Change in unearned income (3,882) (8,814)
Gain on sales of investment securities, net (22,958) (97,852)
Deferred tax (benefit) expense
Depreciation and amortization 40,157 36,612
(Increase) decrease in accrued interest receivable (2,773)
(Increase) decrease in other assets (28,273) 101,870
Increase (decrease) in other liabilities (85,881) (16,641)
---------------------------
Net cash provided by operating activities 109,034 370,335
---------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (3,635,000) (271,235)
Proceeds from sales of available-for-sale securities 580,247 2,866,454
Proceeds from maturities of available-for-sale securities 2,792,735 2,056,627
Purchase of held-to-maturity securities
Proceeds from maturities of held-to-maturity securities 1,094,640 2,241,944
Purchase of Federal Home Loan Bank stock
Increase in deposit with Cooperative Central Bank Reserve Fund
Net increase in loans (1,972,053) (5,675,189)
Capital expenditures (27,489) (1,424,599)
Proceeds from sale of equipment
---------------------------
Net cash used in investing activities (1,166,920) (205,998)
---------------------------
Cash flows from financing activities:
Dividends paid (94,918) (69,028)
Employee Stock Ownership Plan 12,344
Payment of Employee Stock Ownership Plan loan
Adjustment of costs incurred on issuance of common stock
Purchase of treasury stock (258,578)
Sale of treasury stock, net of tax benefit 10,620
Unallocated ESOP shares released 22,047 25,407
Purchase of company shares for RRP Trust 38,663
Net increase (decrease) in demand deposits, NOW and
savings accounts 2,335,993 (1,680,895)
Net increase (decrease) in time deposits 181,968 1,889,869
Net increase in securities sold under agreements to repurchase 318,289 341,157
Proceeds from Federal Home Loan Bank advances 1,268,000
Repayments of Federal Home Loan Bank advances (3,079,196)
---------------------------
Net cash provided by financing activities 716,569 545,173
---------------------------
Increase (decrease) in cash and cash equivalents (341,317) 709,510
Cash and cash equivalents at beginning of period 7,286,578 3,915,920
---------------------------
Cash and cash equivalents at end or period $ 6,945,261 $4,625,430
===========================
Supplemental disclosures
Interest paid $ 877,658 $ 726,993
===========================
Income taxes paid $ 310,947 $ 206,159
===========================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
The financial statements of Falmouth Bancorp, Inc. (the "Company") and
its subsidiaries presented herein are unaudited and should be read in
conjunction with the financial statements of the Falmouth Co-operative Bank
(the "Bank") as of December 31, 1998 and September 30, 1998. The results of
operations for the three month period ended December 31, 1998 are not
necessarily indicative of the results to be expected for the full year. All
material intercompany balances and transactions have been eliminated in
consolidation. In the opinion of management, the financial statements
reflect all adjustments (consisting solely of normal recurring adjustments)
necessary for a fair presentation of results for the interim periods.
Note 2 - Accounting Policies
The accounting and reporting policies of the Company conform to
generally accepted accounting principles and prevailing practices within the
banking industry. The interim financial information should be read in
conjunction with the Company's 1998 Annual Report contained on Form 10-KSB.
Management is required to make estimates and assumptions that affect amounts
reported in the financial statements. Actual results could differ
significantly from those estimates.
Note 3 - Earnings per Share
In February 1997, the FASB issued Statement 128 "Earnings Per Share."
Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share," and
specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with
the presentation of basic EPS, and replaces fully diluted EPS with diluted
EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital
structures, and requires a reconciliation of the numerator and denominator
of the basic EPS computation to the numerator and denominator of the diluted
EPS calculation. EPS for the quarter ended December 31, 1998 and 1997 have
been calculated according to the guidelines of Statement 128. ESOP shares
are only considered outstanding for earnings per share calculations when
they are committed to be released.
Reconciliation of the numerators and the denominators of the basic and
diluted per share comparisons for net income are as follows:
<TABLE>
<CAPTION>
(Numerator) (Denominator) Amount
<S> <C> <C> <C>
Quarter ended December 31, 1998
Basic EPS
- ---------
Net income and income available to
common shareholders $171,986 $1,333,561 $0.13
Effect of dilutive securities, options and warrants 22,424
--------------------------
Diluted EPS
- -----------
Income available to common stockholders $171,986 $1,355,985 $0.13
==========================
Quarter ended December 31, 1997
Basic EPS
- ---------
Net income and income available
to common stockholders $348,274 $1,380,557 $0.25
Effect of dilutive securities, options and warrants
--------------------------
Dilutive EPS
- ------------
Income available to stockholders $348,274 $1,417,944 $0.25
==========================
</TABLE>
Note 4 - Dividends
On November 17, 1998, the Board of Directors of the Company declared a
quarterly cash dividend of $0.07 per share of common stock which was paid on
December 21, 1998.
Note 5 - Recent Developments
On October 21, 1997, the Company announced a repurchase program which
authorizes the Company to repurchase into treasury stock up to 72,738
shares, or five percent, of its 1,454,750 outstanding shares of common
stock. During the quarter ended December 31, 1998, the Company repurchased
15,100 shares of the Company's common stock. At December 31, 1998 the
Company had 67,272 treasury shares.
Part I. Item 2. Management's Discussion and
Analysis of Financial Condition and Operating Results
General
Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank (the
"Bank" or "Falmouth"), a Massachusetts chartered stock co-operative bank. At
December 31, 1998, there were 1,387,478 shares outstanding. The Company's
stock trades on the American Stock Exchange under the symbol "FCB".
The Company's sole business activity is ownership of the Bank. The
Company also makes investments in long and short-term marketable securities
and other liquid investments. The business of the Bank consists of
attracting deposits from the general public and using these funds to
originate mortgage loans secured by one to four-family residences located
primarily in Falmouth, Massachusetts and surrounding areas and to invest in
United States Government and Agency securities. To a lesser extent, the
Bank engages in various forms of consumer and home equity lending. The
Bank's business strategy is to operate as a well-capitalized, profitable and
independent community bank dedicated to financing home ownership and
consumer needs in its market area and to provide quality service to its
customers. The Bank has one subsidiary, Falmouth Securities Corporation, a
Massachusetts corporation, which was established solely for the purpose of
acquiring and holding investments which are permissible for banks to hold
under Massachusetts law.
Comparison of Financial Condition at December 31, 1998 and September 30,
1998.
The Company's total assets increased by $1.0 million or .86% for the
three months ended December 31, 1998, from $112.8 million at September 30,
1998 to $113.8 million at December 31, 1998. Total deposits increased
3.09%, from $81.5 million at September 30, 1998 to $84.0 million at December
31, 1998. Deposit growth has come primarily from the two branch locations
opened in 1998. Total net loans were $79.6 million or 94.75% of total
deposits at December 31, 1998, as compared to $77.7 million or 95.26% of
total deposits at September 30, 1998, representing an increase of $1.9
million. The increase is due partly to the Bank's continued focus on
increasing its market share in residential mortgages and the continued
strong local real estate market. Investment securities were $23.8 million
or 20.96% of total assets at December 31, 1998, as compared to $24.5 million
or 21.74% of total assets at September 30, 1998. The proceeds from maturing
securities were primarily redeployed to fund loan production as well as to
repay short term borrowings maturing within the quarter.
Borrowings from the Federal Home Loan Bank of Boston have been reduced
from $7.6 million at September 30, 1998 to $5.8 million at December 31,
1998. The reduction of $1.8 million was repaid from maturing investment
securities.
Securities sold under an agreement to repurchase (sweep accounts for
commercial depositors) has risen to $1.4 million at December 31, 1998 from
$1.1 million at September 30, 1998. This increase is primarily due to the
increased retail commercial customer base.
Total deposits were $84.0 million at December 31, 1998, as compared to
$81.5 million at September 30, 1998. Total deposits have increased $2.5
million or 3.09% from September 30, 1998 through December 31, 1998.
Stockholders' equity was $22.2 million at December 31, 1998 as
compared to $22.2 million at September 30, 1998, a decrease of $3,000. This
change was primarily the result of an increase in earnings of $241,000 and
an increase in treasury shares purchased of $244,000 under the Company's
stock repurchase program. The ratio of stockholders equity to total assets
was 19.55% at December 31, 1998, and the book value per share of common
stock was $16.82, compared to 19.72% and $16.75 respectively, for the
quarter ended September 30, 1998.
The ratio of the allowance for loan losses to total loans was .67%.
Management believes the allowance will be adequate based upon, among other
things, past loss experience, prevailing economic conditions, and the level
of credit risk in the loan portfolio. Due to the substantial increase in
net loans, however, the Bank may periodically provide additional provisions
as deemed necessary to maintain a sufficient allowance for loan loss to
total loan ratio. The Bank has added $6,000 to the allowance during the past
quarter. Additionally, existing provisions may be allocated to address any
credit risks identified by our Year 2000 analysis. To that end, the Bank
has set aside additional specific reserves for commercial loans and large
residential mortgages.
Comparison of Operating Results
Three Months Ended December 31, 1998 and 1997.
Net Income. The Company's net income for the three months ended
December 31, 1998 was $172,000 as compared to $348,000 at December 31, 1997,
a decrease of 51% or $176,000. The quarter ended December 31, 1998 included
an increase in operating expenses and an increase in provisions for income
taxes which totaled approximately $92,000 more than the same period of the
prior year. At December 31, 1998 net securities gains were $23,000, as
compared to $98,000 for the three months ended December 31, 1997, a decrease
of $75,000. Securities gains were taken during all four fiscal quarters of
the year ended September 30, 1998, due to favorable market conditions.
Interest and Dividend Income. Total interest and dividend income for
the three months ended December 31, 1998 was $1.9 million, an increase of
$126,000, as compared to $1.7 million for the three months period ended
December 31, 1997. The increase in interest and dividend income is
attributable to continued growth in the loan portfolio which provided an
increase in interest and fee income of $339,000. This was partially offset
by a decrease in interest and dividend income on securities of $213,000.
These securities were used to fund the increase in loans, as well as to
repay maturing borrowings from the Federal Home Loan Bank of Boston.
Management expects income derived from loan assets and investment securities
assets to remain relatively constant as the Bank will try to maintain its
current securities portfolio while obtaining additional fee income from
originating loans for resale.
Interest Expense. Interest expense for the three months ended
December 31, 1998 was $878,000, which includes $92,000 interest on short and
long term borrowings, an increase of $150,000 over the three months ended
December 31, 1997. The increase was in both interest bearing deposit
liabilities and borrowings. Borrowings decreased $1.8 million during the
quarter ended December 31, 1998, while deposits have grown.
Net Interest and Dividend Income. Net interest and dividend income
for the three month period ended December 31, 1998 was $985,000, as compared
to $1.0 million for the three months ended December 31, 1997. The decrease
of $15,000 was the result of increased interest expense primarily due to the
cost of borrowed funds and the growth in deposits. The net interest margin
for the three months ended December 31, 1998 was 3.61%, a decrease of 69
basis points, as compared to 4.30% for the three months ended December 31,
1997. The decline in net interest margin was primarily the result of a
decrease in the yield on interest earning assets caused by the decline in
the general level of interest rates. The annualized return on average
assets (ROA) for the three month period ended December 31, 1998 was .61%, a
decrease of .83%, as compared to 1.44% for the same period of the prior
year. The primary reason for the decrease in ROA was the increase in
interest expense due to the $2.5 million growth in deposits and a $318,000
growth in securities sold under agreements to repurchase, which exceeded the
reduction of Federal Home Loan Bank borrowings by $1.0 million during the
quarter ended December 31, 1998.
Provision for Loan Losses. The Bank added $6,000 to its provision for
loan losses during the quarter ended December 31, 1998, to compensate for
the increase in the dollar amount of the loan portfolio. Management
believes that, although the provision is deemed adequate based on its
delinquency and loan loss record, additional provisions may be added from
time to time as the loan portfolio grows. As of the reporting date, the
bank has no loan assets classified as doubtful or loss.
Other Income. Other income for the three month period ending December
31, 1998 was $108,000, as compared to $162,000 for the three months ended
December 31, 1997. The $54,000 decrease is primarily the result of a
reduction in the gains realized from the sale of investment securities.
Operating Expenses. Operating expenses for the three months ended
December 31, 1998 were $723,000, as compared to $636,000 for the three
months ended December 31, 1997. The $87,000 increase was primarily due to
an increase in salaries and employee benefits $56,000, increases in data
processing expense of $17,000, legal and professional fees of $5,000, and
equipment expense of $7,000. The increase in expenses is due mainly to the
Company's overall growth. Annual salary increases and loan commissions
represent the major portion of the increase in salary costs. The increase
in data processing costs is due primarily to the expanded number of teller
terminals operating at our new branch locations and the implementation of On
Call, a "bank by phone" system which is now fully operational. The ratio of
operating expenses to average total assets for the three months ending
December 31, 1998 is 2.56%, as compared to 2.64% for the three months period
ending December 31, 1997, a 3.0% decrease.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment and
prepayment of loans and mortgaged-backed securities, maturities of
investments and interest-bearing deposits, 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, to fund net deposit outflows, to invest in other interest-
earning assets, to maintain liquidity, and to meet operating expenses.
The Bank is required to maintain adequate levels of liquid assets.
This guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Bank has historically maintained a level of liquid assets
in excess of regulatory requirements. The Bank's liquidity ratio at
December 31, 1998 was 26.78%.
A major portion of the Bank's liquidity consists of short-term U.S.
Government obligations. The level of these assets is dependent on the
Bank's operating, investing, lending and financing activities during any
given period. At December 31, 1998, regulatory liquidity totaled $87.3
million. The primary investing activities of the Bank include origination
of loans and the purchase of investment securities.
Liquidity management is both a daily and long-term function of
management. If the Bank requires funds beyond its ability to generate them
internally, the Bank believes that it could borrow additional funds form the
FHLB of Boston. At December 31, 1998, the Bank had outstanding advances
from the FHLB of Boston in the amount of $5.8 million in short and long term
borrowings. As these advances mature they will be repaid or re-written as
longer term matched borrowings which will assist the match of rate sensitive
assets to rate sensitive liabilities.
At December 31, 1998, the Bank had $11.2 million in outstanding
commitments to fund and originate loans. If the Bank anticipates that it
may not have sufficient funds available to meet its current loan commitments
it may commence further matched borrowing from the Federal Home Loan Bank of
Boston. Certificates of deposit which are scheduled to mature in one year
or less totaled $33.4 million at December 31, 1998. Based on historical
experience, management believes that a significant portion of such deposits
will remain with the Bank.
At December 31, the Bank exceeded all of its regulatory capital
requirements.
Year 2000
The following is a "Year 2000 Readiness Disclosure" made in accordance with
the Federal Year 2000 Information and Readiness Disclosure Act. Pub. L.
No.105-271.
The "Year 2000" problem is very pervasive and complex. Virtually
every organization will have its computing operations affected in some way
by the rollover of the two digit year value to 00. Many computer systems
will recognize this as the year 1900. The potential impact is that date
sensitive calculations would be based on erroneous data and could cause a
system failure. This computation affects all forms of financial accounting
(including interest computation, due dates, pensions, personnel benefits,
investments, and legal commitments). It can also affect record keeping,
such as inventory, maintenance, and file retention. Reliable information is
necessary for financial institutions to conduct business.
The Bank, through its Year 2000 Steering Committee, has created a Year
2000 Plan which includes five phases of review, testing and implementation.
These phases of Awareness, Assessment, Renovation, Validation, and
Implementation are well under way or have been substantially completed. The
Steering Committee adopted its formal Year 2000 Plan in March 1998. This
Plan has been followed, reviewed and updated as progress has been made on
year 2000 issues. In June 1998 the Bank adopted its Year 2000 Test Plan.
The goal of the Test Plan is to provide testing guidance on all critical
applications. It is necessary to provide reasonable assurance that the
applications identified will function normally in the next millennium.
Testing time and resources have been, and will continue to be, allocated to
successfully complete the entire testing project. It is anticipated that
this phase of the Year 2000 readiness plan will require the most extensive
application of Bank resources.
The Awareness Phase, where problems have been defined and overall
strategies developed, has been completed.
The Assessment Phase, where the Steering Committee assesses the size
and complexity of the problems, identifying all systems that will be
affected by the Year 2000 date change has been completed.
The Renovation Phase, where the Bank undertakes hardware and software
changes to systems it controls and obtains vendor certifications of their
Year 2000 readiness has been completed. The Steering Committee will
continue to follow critical vendor readiness programs as they develop and
change. Hardware within the Bank has been upgraded or replaced where
necessary. Vendors have been contacted and their readiness plans requested.
Critical vendors, such as the Bank's on-line service provider, check
clearing and statement rendering servicer, and in-house general ledger
software provider, have been identified and currently have their testing
plans well underway.
The Validation Phase, which includes testing and verification of
changes to systems, and the coordination with outside parties, has been
completed in all areas except with the on-line service provider and the in-
house general ledger software. A test bank has been established in both
cases, for testing. Transaction scripts have been developed and posting to
the test banks has begun. The test scripts consist of an extensive list of
transaction types which will fully test the software. Each test script will
be re-posted on each critical date recognized, such as 1/1/2000, 2/29/2000,
9/9/1999, and others.
The Implementation Phase, provides for critical dates for full
certification of Year 2000 readiness on each application. A predetermined
date for compliance or replacement, known as the "drop dead date" has been
determined and reviewed regularly by the Steering Committee and at least
quarterly by the full Board of Directors. These dates may be changed
slightly as applications are reviewed, but ultimately, all applications must
be compliant or be replaced.
The Bank's on-line service provider provided on-line access to its
test bank beginning November 2, 1998, and will continue to do so at varying
intervals going forward. We expect to have completed testing and reviewing,
with the on-line provider no later than March 31, 1999. We have begun
testing our general ledger software and expect the validation phase to also
be completed by March 31, 1999. All other applications are in the
implementation phase and are deemed by the Steering Committee to be
substantially compliant.
As of December 31, 1998, the Company had incurred costs of
approximately $61,000 related to its Y2K project, of which $36,000 has been
capitalized. The estimated additional cost to complete the project is
currently expected to be approximately $75,000. A significant portion of
these costs have been incremental and do not reflect the redeployment of
internal resources from other activities. The Company does not expect the
costs or redeployment of assets to have a material adverse effect on other
ongoing business operations of the Company. All costs of the Y2K project
have been borne out of the Company's operating cash flow.
The Bank's Contingency Plan, in connection with the year 2000, was
adopted by the Board of Directors at their regularly scheduled meeting July
21, 1998. Organizational planning provides for the establishment of a
continuity project work group and the assignment of roles and
responsibilities. It assesses the potential impact of mission critical
system failures on the core business process. The plan evaluates options
and provides guidance for selecting reasonable contingency strategies and
the remediation of contingency plans and year 2000 issues.
There has been limited litigation filed against corporations regarding
the "Year 2000 Problem" and such corporations' compliance efforts. To date
no such litigation has resulted in a decided case imposing liability on the
corporate entity. However, should the Company experience a Year 2000
failure, exposure of the Company could be significant and material, unless
there is further legislative action to limit such liability.
The Bank believes that it is substantially compliant at this time.
The Board of Directors, officers, employees and the public in general are
being kept informed of the issues regarding the Year 2000. With the support
of the Directors and Senior management, the Committee has mailed letters to
business relationships informing them of the Bank's commitment to Year 2000
issues and requesting information regarding theirs. Newsletters, stuffers,
general and personal mailings, statement messages and other means of
communications have been utilized to increase awareness and obtain
information.
OTHER INFORMATION
Part II.
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on 8-K
None
* Submitted only with filing in electronic format.
Falmouth Bancorp, Inc. is a publicly owned bank holding company and
the parent corporation of Falmouth Co-operative Bank, a Massachusetts
chartered stock co-operative bank offering traditional products and
services. The Bank conducts business through its main office located at 20
Davis Straits, Falmouth, Massachusetts 02540, and its two branch locations
in North and East Falmouth. The telephone number is (508) 548-3500.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FALMOUTH BANCORP, INC.
(Registrant)
Date: February 11, 1999 By: /s/ Santo P. Pasqualucci
------------------- ------------------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: February 11, 1999 By: /s/ George E. Young, III
------------------- ------------------------------------------
George E. Young, III
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statement of financial condition and the consolidated
statements of income and is qulaified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> DEC-31-1998
<CASH> 1,333,116
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 5,612,144
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<SHORT-TERM> 1,300,000
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<LONG-TERM> 4,487,804
0
0
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<EXTRAORDINARY> 0
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