U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
Commission File No.: 01-13465
FALMOUTH BANCORP, INC.
(Name of small business issuer in its charter)
Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Davis Straits, Falmouth, Massachusetts 02540
(Address of principal executive offices)
(508) 548-3500
(Issuer's Telephone Number)
Securities registered pursuant to section 12(b) of the Exchange Act:
Name of Each Exchange
Title of each class on Which Registered:
------------------- ---------------------
Common Stock, par value $0.01 per share American Stock
Exchange
Check whether the issuer (1) has 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 is not 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 revenues for the issuer's fiscal year ended September 30, 2000
were $9,062,666.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, as of a specified date within the last 60 days.
On December 1, 2000: $16,357,785.
State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date. The Company
had 1,026,338 shares outstanding as of December 1, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement pursuant to Regulation
14A, which was delivered to the Commission for filing on December 15, 2000,
and the 2000 Annual Report to Stockholders for the fiscal year ended
September 30, 2000, are incorporated by reference into Part II and III of
this report.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
TABLE OF CONTENTS
Page
----
PART I
ITEM 1. BUSINESS 1
ITEM 2. DESCRIPTION OF PROPERTY 32
ITEM 3. LEGAL PROCEEDINGS 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 32
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS 32
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 32
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS 33
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 33
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY 33
ITEM 10. EXECUTIVE COMPENSATION 33
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 33
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 33
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K 33
SIGNATURES 35
EXHIBITS 36
PART I
ITEM 1. BUSINESS
General
Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank (the
"Bank"), a Massachusetts-chartered stock co-operative bank. The Bank
converted to stock form on March 28, 1996, and issued 1,454,750 shares of
common stock at $10.00 per share. On October 14, 1997, the Company
acquired all of the capital stock of the Bank and stockholders of the Bank
became stockholders of the Company in a share for share exchange pursuant
to a plan of reorganization approved by the Bank's stockholders on January
21, 1997 (the "Reorganization") whereby the Bank became the wholly-owned
subsidiary of the Company. At September 30, 2000, there were 1,035,838
shares outstanding. 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 Company's common
stock trades on the American Stock Exchange under the symbol "FCB." Unless
otherwise disclosed, the information presented in this Report on Form 10-
KSB represents the activity of the Bank for fiscal 1997 and the period
prior to the Reorganization, and the consolidated activity of Falmouth
Bancorp, Inc. and subsidiaries thereafter. The Company had total assets of
$135.5 million as of September 30, 2000.
The Bank conducts its business through an office located in Falmouth,
Massachusetts, where it was originally founded in 1925 as a Massachusetts
chartered mutual co-operative Bank, and two branches located in East
Falmouth and North Falmouth, Massachusetts. The Bank's deposits are
currently insured up to applicable limits by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC") and the Share Insurance Fund
of the Co-operative Central Bank of Massachusetts. The Bank has two
subsidiaries, Falmouth Capital Corporation, a real estate investment trust,
and Falmouth Securities Corporation, a Massachusetts securities
corporation.
The Bank's principal business 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.
Business Strategy
The Bank's business strategy is to operate as a profitable and
independent community bank dedicated primarily to financing home ownership
and consumer needs in its market area and to provide quality service to its
customers. The Bank has implemented this strategy by: (i) closely
monitoring the needs of customers and providing quality service; (ii)
emphasizing consumer-oriented banking by originating residential mortgage
loans and consumer loans, and by offering checking accounts and other
financial services and products; (iii) focusing on expanding lending
activities to produce moderate increases in loan originations; (iv)
maintaining asset quality; (v) maintaining capital in excess of regulatory
requirements; and (vi) producing stable earnings.
The Bank serves its primary market area, the Massachusetts
communities of Falmouth and Mashpee located in the Cape Cod region of
Massachusetts, through its three offices in Falmouth, North Falmouth and
East Falmouth, Massachusetts. The Bank continues to offer traditional
retail and commercial banking services as well as electronics services such
as its toll free Voice Response System "ON CALL," which enables its
customers to access current balance information and transfer funds between
accounts by telephone, its web site at www.falmouthbank.com, and three on-
site, as well as three off-site ATMs. The newest ATMs are located at the
Woods Hole, Martha's Vineyard and Nantucket Steamship Authority's terminals
located at Vineyard Haven on Martha's Vineyard and Woods Hole. The Bank
competes with fifteen branches of financial institutions (including
national banks, savings banks, savings and loans and credit unions), which
are headquartered outside its market area. The Bank is the only independent
financial institution headquartered in Falmouth.
To a lesser extent, the Bank also makes commercial real estate loans,
commercial and industrial, and consumer loans, including passbook loans,
automobile, home equity and other consumer loans. The Bank originates both
fixed-rate and adjustable-rate loans and emphasizes the origination of
residential real estate mortgage loans with adjustable interest rates, and
makes other investments which allow the Bank to more closely match the
interest rate and maturities of its assets and liabilities.
Market Area
The Bank considers its primary market area to be the communities of
Falmouth and Mashpee in Barnstable County, which is located in the Cape Cod
region of Massachusetts, approximately 72 miles south of Boston. The year-
round population of Barnstable County is over 200,000. The majority of the
Bank's lending has been in Falmouth and Mashpee. The Cape Cod region is a
major recreational resort/retirement community, with seasonal tourism being
the most significant economic activity. Falmouth's year-round population of
29,585 (1996 census) increases to a summer population of approximately
70,000. Falmouth is the second most populous and second largest town on
the Cape. Visitors find accommodations in the many motels, hotels and inns
in the area. Falmouth has approximately 44 miles of ocean and lake
shoreline. There are nine harbors and inlets, some with docking and most
with mooring facilities. Two major harbors offer access, via ferry, to the
island of Martha's Vineyard with service to the island of Nantucket during
the summer months from Woods Hole. In addition to swimming, boating,
fishing and other forms of water recreation, Falmouth also has four public
and two private golf courses.
The major employers in the Falmouth area are the Woods Hole
Oceanographic Institute, with approximately 800 employees, Falmouth
Hospital, with 750 employees and Woods Hole, Martha's Vineyard and
Nantucket Steamship Authority, with 500 employees. Other major employers
include Marine Biological Laboratories.
Employees
At September 30, 2000, the Bank employed 31 full-time and 5 part-time
employees. The Bank's employees are not represented by a collective
bargaining agreement, and the Bank considers its relationship with its
employees to be good.
Lending Activities
General. The principal lending activity of the Bank is the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential properties in
its designated community reinvestment area of the Massachusetts towns of
Falmouth and Mashpee. To a lesser extent, the Bank also originates consumer
loans including home equity and passbook loans and commercial loans. The
Bank also originates and retains in its loan portfolio adjustable-rate
loans and fixed-rate loans with maturities of up to 30 years.
Traditionally, fixed-rate loans with terms in excess of 30 years are
originated and sold in the secondary market. Loan originations for the
year ended September 30, 2000, achieved the level of $46.8 million and were
primarily single-family residential loans. During this period, the Bank
was ranked as one of the largest producers of residential mortgage loans.
The mortgage market in the Falmouth area was vigorous in both the purchase
money and refinance categories during fiscal 2000. The Bank is a qualified
seller/servicer for Federal National Mortgage Corporation ("FNMA") and was
servicing $3.5 million in loans for FNMA and $2.8 million for other
investors at September 30, 2000.
Loan Portfolio. The following table presents selected data relating
to the composition of the Bank's loan portfolio by type of loan on the
dates indicated.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------- ---------------- ---------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Residential mortgage loans $ 88,647 79.50% $67,709 81.02% $69,967 87.56% $48,367 87.14% $33,993 82.57%
Commercial real estate loans 11,865 10.64 8,488 10.16 4,054 5.07 2,425 4.37 4,347 10.56
Consumer loans 527 .47 577 .69 566 .71 877 1.58 771 1.87
Home equity loans 7,143 6.41 4,621 5.53 3,897 4.88 2,756 4.96 1,683 4.09
Commercial loans 3,331 2.98 2,175 2.60 1,422 1.78 1,079 1.95 373 .91
--------------------------------------------------------------------------------------------------
Total loans 111,513 100.00% 83,570 100.00% 79,906 100.00% 55,504 100.00% 41,167 100.00%
=================================================================================================
Less:
Unearned income (cost), net (190) (19) 45 97 143
Unadvanced principal 5,216 2,533 1,679 1,025 289
Allowance for loan losses 755 569 527 501 498
-------- ------- ------- ------- -------
Loans, net $105,732 $80,487 $77,655 $53,881 $40,237
======== ======= ======= ======= =======
</TABLE>
One- to Four-Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity is the origination of conventional
mortgage loans secured by one- to four-family residential dwellings located
in the Bank's primary market area. As of September 30, 2000, loans on one-
to four-family residential properties accounted for 79.5% of the Bank's
loan portfolio.
The Bank's mortgage loan originations are for terms of up to 30
years, amortized on a monthly basis with interest and principal due each
month. Residential real estate loans often remain outstanding for
significantly shorter periods than their contractual terms as borrowers may
refinance or prepay loans at their option, without penalty. Conventional
residential mortgage loans granted by the Bank customarily contain "due-on-
sale" clauses that permit the Bank to accelerate the indebtedness of the
loan upon transfer of ownership of the mortgaged property.
The Bank makes conventional mortgage loans and it uses standard FNMA
documents to allow for the sale of loans in the secondary mortgage market.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on mortgage loans secured by owner-occupied properties to 95% of the lesser
of the appraised value or purchase price of the property, with the
condition that private mortgage insurance is required on loans with a loan-
to-value ratio in excess of 80%.
The Bank, since the early 1980s, has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by the
Bank include loans which reprice every one, three, five and seven years and
provide for an interest rate which is based on the interest rate paid on
United States Treasury securities of a corresponding term, plus a margin of
2.75%. The Bank currently offers adjustable-rate loans with initial rates
below those that would prevail under the foregoing computations, based upon
the Bank's determination of market factors and competitive rates for
adjustable-rate loans in its market area. For adjustable-rate loans,
borrowers are qualified at the initial rate plus an anticipated upward
adjustment of 200 basis points.
The Bank retains all adjustable-rate mortgages it originates. The
Bank's adjustable-rate mortgages include caps on increases or decreases of
2% per year, and 6% over the life of the loan (2% per adjustment, and 5%
over the life of the loan for five-year adjustable-rate loans). The
retention of adjustable-rate mortgage loans in the Bank's loan portfolio
helps reduce the Bank's exposure to increases in interest rates. However,
there are unquantifiable credit risks resulting from potential increased
costs to the borrower as a result of repricing of adjustable-rate mortgage
loans. It is possible that during periods of rising interest rates, the
risk of default on adjustable-rate mortgage loans may increase due to the
upward adjustment of interest cost to the borrower.
During the year ended September 30, 2000, the Bank originated $20.7
million in adjustable-rate mortgage loans and $12.2 million in fixed-rate
mortgage loans for portfolio. Approximately 6.5% of all loan originations
during fiscal 2000 were the refinancing of loans already in the Bank's loan
portfolio. At September 30, 2000, the Bank's loan portfolio included $31.2
million in adjustable-rate one- to four-family residential mortgage loans,
or 28.0% of the Bank's total loan portfolio, and $51.8 million in fixed-
rate one- to four-family residential mortgage loans, or 46.5% of the Bank's
total loan portfolio.
The Bank engages in a limited amount of construction lending
generally for the construction of single-family residences. Most are
construction/permanent loans structured to become permanent loans upon the
completion of construction. All construction loans are secured by first
liens on the property. Loan proceeds are disbursed as construction
progresses and inspections warrant. Loans involving construction financing
present a greater risk than loans for the purchase of existing homes, since
collateral values and construction costs can only be estimated at the time
the loan is approved. Due to the small amount of construction loans in the
Bank's portfolio, the risk in this area is limited.
Commercial Real Estate Loans. At September 30, 2000, the Bank's
commercial real estate loan portfolio totaled $11.9 million, or 10.6% of
total loans. The Bank's largest loan is a commercial loan with an
outstanding balance of $885,000 at September 30, 2000 secured by a motel
located in Hyannis, Massachusetts.
Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. For example, commercial real
estate loans typically involve large loan balances to single borrowers or
groups of related borrowers and the payment experience on such loans is
typically dependent on the successful operation of a real estate project
and/or the collateral value of the commercial real estate securing the
loan. At September 30, 2000, all of the Bank's commercial real estate loans
were performing.
Home Equity Loans. The Bank also originates home equity loans, which
are loans, secured by available equity based on the appraised value of one-
to four-family residential property. Home equity loans will be made for up
to 80% of the tax assessed or appraised value of the property (less the
amount of the first mortgage). Home equity loans have an adjustable
interest rate which ranges from 0% to 1% above the prime rate as reported
in The Wall Street Journal and have terms of twenty years or less. At
September 30, 2000, the Bank had $14.4 million in home equity loans with
unused credit available to existing borrowers of $7.3 million.
Consumer Loans. The Bank's consumer loans consist of passbook loans,
and other consumer loans, including automobile loans. At September 30,
2000, the consumer loan portfolio totaled $527,000 or .47% of total loans.
Consumer loans generally are offered for terms of up to five years at fixed
interest rates. Consumer loans do not exceed $15,000 individually.
Management expects to continue to promote consumer loans as part of its
strategy to provide a wide range of personal financial services to its
customers and as a means to increase the yield on the Bank's diversified
loan portfolio.
The Bank makes loans up to 90% of the amount of the depositor's
savings account balance. The interest rate on the loan is 4.0% higher than
the rate being paid on regular savings accounts and 3% higher than the rate
being paid on certificates of deposit. The Bank also makes other consumer
loans, which may or may not be secured. The terms of such loans usually
depend on the collateral. At September 30, 2000, the total amount of
passbook and other consumer loans was $371,000.
The Bank makes loans for automobiles, both new and used, directly to
the borrowers. The loans are generally limited to 80% of the purchase price
or the retail value listed by the National Automobile Dealers Book. The
terms of the loans are determined by the age and condition of the
collateral. Collision insurance policies are required on all these loans.
At September 30, 2000, the total amount of automobile loans was $156,000.
Consumer loans generally are originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite this risk, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however,
that the Bank's delinquency rate on consumer loans will continue to remain
low in the future, or that the Bank will not incur future losses on these
activities.
Commercial Loans. The Bank employs a commercial loan officer with
over 20 years of experience in commercial lending in the Falmouth market.
The Bank is pursuing on a selective basis the origination of commercial
loans to meet the working capital and short-term financing needs of
established local businesses. Unless otherwise structured as a mortgage on
commercial real estate, such loans are generally being limited to terms of
five years or less. Substantially all such commercial loans have variable
interest rates tied to the prime rate as reported in The Wall Street
Journal. Whenever possible, the Bank collateralizes these loans with a
lien on commercial real estate, or alternatively, with a lien on business
assets and equipment and the personal guarantees from principals of the
borrower. Commercial loans do not presently comprise a significant portion
of the Bank's loan portfolio. At September 30, 2000 the Bank's non-real
estate commercial loan portfolio totaled $3.3 million.
Commercial business loans generally are considered to involve a
higher degree of risk than residential mortgage loans because the
collateral may be in the form of intangible assets and/or inventory subject
to market obsolescence. Commercial loans also may involve relatively large
loan balances to single borrowers or groups of related borrowers, with the
repayment of such loans typically dependent on the successful operation and
income stream of the borrower. Such risks can be affected significantly by
economic conditions. In addition, commercial business lending generally
requires substantially greater oversight efforts compared to residential
real estate lending.
Loan Commitments. The Bank makes a 60-day loan commitment to
borrowers. At September 30, 2000, the Bank had $2.1 million in loan
commitments outstanding, for the origination of one- to four-family
residential real estate loans.
Loan Solicitation Origination and Loan Fees. The Bank originates
loans through its main office located in Falmouth, Massachusetts and two
branch offices located in East and North Falmouth. Loan originations are
derived from a number of sources, including the Bank's existing customers,
referrals, realtors, advertising and "walk-in" customers at the Bank's
offices.
The Bank has one full-time residential loan originator who is
compensated by salary and commission. The originator meets with applicants
at their convenience and location and is in regular contact with real
estate brokers, attorneys, accountants, building contractors, developers
and others in the Bank's local market area. The Bank increased its
advertising in locally distributed newspapers and has utilized local radio
advertising to increase market share of residential loan originations.
Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing.
For all mortgage loans, an appraisal of real estate intended to secure the
proposed loan is obtained from an independent fee appraiser who has been
approved by the Bank's Board of Directors. Fire, casualty and sometimes
flood insurance are required on all loans secured by improved real estate.
Insurance on other collateral is required unless waived by the loan
committee. The Board of Directors of the Bank has the responsibility and
authority for the general supervision over the loan policies of the Bank.
The Board has established written lending policies for the Bank. All
applications for residential and commercial real estate mortgages and
commercial business loans must be ratified by the Bank's Board of
Directors. In addition, certain designated officers of the Bank have
limited authority to approve consumer loans.
Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and the
Bank generally charges an origination fee on new mortgage loans. The
origination fees, net of direct origination costs, are deferred and
amortized into income over the life of the loan.
Loan Maturities. The following table sets forth certain information
at September 30, 2000 regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported
as due in one year or less.
At September 30, 2000(1)
----------------------------------
Real Consumer Total
Estate and Other Loans
------ --------- -----
(In thousands)
Total loans scheduled to mature:
In one year or less $ 5,344 $1,249 $ 6,593
After one year through five years 3,593 1,453 5,046
Beyond five years 93,684 1,164 94,848
----------------------------------
Total $102,621 $3,866 $106,487
==================================
Loan balance by type scheduled to
mature after one year:
Fixed $ 58,419 $2,524 $ 60,943
Adjustable $ 38,858 $ 93 $ 38,951
___________________
(1) Net of unearned income and unadvanced principal.
Originations and Sales of Loans. The following table sets forth
information with respect to originations and sales of loans during the
periods indicated. In recent years, the Bank has been retaining more of
its fixed-rate residential loans in excess of 15-year term with the intent
of selling such loans service retained.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Beginning balance(1) $ 81,056 $ 78,182 $ 54,382 $ 40,735 $ 32,948
----------------------------------------------------------------
Mortgage loan originations(2) 39,853 28,279 41,356 18,712 13,090
Consumer loan originations 5,318 4,323 2,015 3,145 1,844
Commercial loan originations 1,619 2,249 1,752 1,710 1,321
Less:
Amortization and payoffs(3) (21,299) (24,193) (14,286) (9,920) (8,468)
Transfers to OREO - - - - -
----------------------------------------------------------------
Net loans originated 25,491 10,658 30,837 13,647 7,787
----------------------------------------------------------------
Total loans sold (60) (7,784) (7,037) - -
----------------------------------------------------------------
Ending balance(1) $106,487 $81,056 $78,182 $54,382 $40,735
================================================================
___________________
<FN>
<F1> Net of unearned income and unadvanced principal.
<F2> Includes residential and commercial real estate loans.
<F3> Includes unadvanced principal.
</FN>
</TABLE>
Non-Performing Assets, Asset Classification and Allowances for
Losses. Loans are reviewed on a regular basis and are placed on a non-
accrual status when, in the opinion of management, the collection of
principal and interest are doubtful.
Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair value. Any required write-down of the loan to its fair
value is charged to the allowance for loan losses.
<TABLE>
<CAPTION>
At September 30,
--------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Loans 30-89 days past due
(not included in non-
performing loans) $ - $ 57 $ 65 $290 $ 81
Loans 30-89 days past due as a
percent of total loans -% .07% .08% .53% .20%
Non-performing loans:
(90 days past due) $ - $ - $ - $ 30 $ 14
OREO $ - $ - $ - $ - $ -
Total non-performing assets $ - $ - $ - $ 30 $ 14
Non-performing loans as a
percent of total loans -% -% -% .06% .03%
Non-performing assets as a
percent of total assets -% -% -% 03% .02%
</TABLE>
During the year ended September 30, 2000, no gross interest income
would have been recorded on loans accounted for on a non-accrual basis if
the loans had been current throughout the period. No interest on such loans
was included in income during the respective periods. At September 30,
2000, management was not aware of any loans not currently classified as
non-accrual, 90 days past due or restructured but which may be so
classified in the near future because of concerns over the borrower's
ability to comply with repayment terms.
Federal and state regulations require each banking institution to
classify its asset quality on a regular basis. In addition, in connection
with examinations of such banking institutions, federal and state examiners
have authority to identify problem assets and, if appropriate, classify
them. An asset is classified substandard if it is determined to be
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. As a general rule, the Bank
will classify a loan as substandard if the Bank can no longer rely on the
borrower's income as the primary source for repayment of the indebtedness
and must look to secondary sources such as guarantors or collateral. An
asset is classified as doubtful if full collection is highly questionable
or improbable. An asset is classified as loss if it is considered
uncollectible, even if a partial recovery could be expected in the future.
The regulations also provide for a special mention designation, described
as assets which do not currently expose a banking institution to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving management's close
attention. Assets classified as substandard or doubtful require a banking
institution to establish general allowances for loan losses. If an asset or
portion thereof is classified loss, a banking institution must either
establish specific allowances for loan losses in the amount of the portion
of the asset classified loss, or charge off such amount. Examiners may
disagree with a banking institution's classifications and amounts reserved.
If a banking institution does not agree with an examiner's classification
of an asset, it may appeal this determination to the FDIC Regional
Director. At September 30, 2000, the Bank had no assets classified as
special mention or doubtful, no assets designated as substandard, and none
classified as loss.
In originating loans, the Bank recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the
type of loan being made, the creditworthiness of the borrower over the term
of the loan, general economic conditions and, in the case of a secured
loan, the quality of the security for the loan. It is management's policy
to maintain an adequate general allowance for loan losses based on, among
other things, the Bank's and the industry's historical loan loss
experience, evaluation of economic conditions and regular reviews of
delinquencies and loan portfolio quality. Further, after properties are
acquired following loan defaults, additional losses may occur with respect
to such properties while the Bank is holding them for sale. The Bank
increases its allowances for loan losses and losses on real estate owned by
charging provisions for losses against the Bank's income. Specific reserves
also are recognized against specific assets when warranted.
Results of recent examinations by bank regulators indicate that these
regulators may be applying more conservative criteria in evaluating real
estate market values, requiring significantly increased provisions for
potential loan losses. While Falmouth believes it has established its
existing allowances for loan losses in accordance with generally accepted
accounting principles, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to increase
its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings.
The banking regulatory agencies, including the FDIC, have a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of
the industry as a whole. Examiners will review an institution's allowance
for loan losses and compare it against the sum of (i) 50% of the portfolio
that is classified doubtful; (ii) 15% of the portfolio that is classified
as substandard; and (iii) for the portions of the portfolio that have not
been classified (including those loans designated as special mention),
estimated credit losses over the upcoming twelve months given the facts and
circumstances as of the evaluation date. This amount is considered neither
a "floor" nor a "safe harbor" of the level of allowance for loan losses an
institution should maintain, but examiners will view a shortfall relative
to the amount as an indication that they should review management's policy
on allocating these allowances to determine whether it is reasonable based
on all relevant factors.
The following table analyzes activity the Bank's allowance for loan
losses for the periods indicated.
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Average loans, net $ 94,315 $77,657 $69,258 $47,288 $36,387
==============================================================
Period-end total loans(1) $106,487 $81,056 $78,182 $54,382 $40,735
==============================================================
Allowance for loan losses at
beginning of period $ 569 $ 527 $ 501 $ 498 $ 445
Loans charged-off 4 - - - -
Recoveries 1 - - 3 2
Provision charged to operations 189 42 26 - 51
--------------------------------------------------------------
Allowance for loan losses at
end of period $ 755 $ 569 $ 527 $ 501 $ 498
==============================================================
Ratios:
Allowance for loan losses as a
percentage of period end total
loans .71% .70% .68% .92% 1.22%
Allowance for loan losses as a
percentage of non-performing
loans -% -% -% 1,670.00% 3,557.14%
Net charge-offs to average loans,
net - - - - -
Net charge-offs to allowance for
loan losses .40% - - - -
___________________
<FN>
<F1> Net of unearned income and unadvanced principal.
</FN>
</TABLE>
The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that
the allowance can be allocated by category only on an approximate basis.
These allocations are not necessarily indicative of future losses and do
not restrict the use of the allowance to absorb losses in any loan
category.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
------------------ ------------------- ------------------- ------------------- --------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real estate
mortgage:
Residential $436 78.53% $282 80.42% $315 87.28% $363 86.88% $428 82.57%
Commercial 181 11.14 171 10.47 113 5.19 64 4.46 32 10.56
Commercial loans, other 76 3.13 62 2.70 44 1.82 38 1.98 8 0.91
Consumer, including home
equity loans 62 7.20 54 6.41 55 5.71 36 6.68 30 5.96
---------------------------------------------------------------------------------------------------
Total allowance
for loan losses $755 100.00% $569 100.00% $527 100.00% $501 100.00% $498 100.00%
==================================================================================================
</TABLE>
Investment Activities
General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net withdrawals from savings accounts and
current borrowings. It has been generally the Bank's policy to maintain a
liquidity portfolio in excess of regulatory requirements. At September 30,
2000, the Bank's liquidity ratio was 21.29%. Liquidity levels may be
increased or decreased depending upon the yields on investment
alternatives, management's judgment as to the attractiveness of the yields
then available in relation to other opportunities, management's
expectations of the level of yield that will be available in the future and
management's projections as to the short-term demand for funds to be used
in Falmouth's loan origination and other activities.
Interest income from investments in various types of liquid assets
provides a significant source of revenue for the Bank. In the late 1980s,
the Bank maintained its conservative underwriting standards in an effort to
avoid asset quality problems and chose instead to invest excess liquidity
in its investment portfolio. The Bank's short-term investments include
United States Treasury securities and United States Agency securities,
commercial paper, equity securities, short-term corporate debt securities
and overnight federal funds. The balance of the securities investments
maintained by the Bank in excess of regulatory requirements reflects
management's historical objective of maintaining liquidity at a level that
assures the availability of adequate funds, taking into account anticipated
cash flows and available sources of credit, for meeting withdrawal requests
and loan commitments and making other investments.
The Bank purchases securities through a primary dealer of United
States Government obligations or such other securities dealers authorized
by the Board of Directors and requires that the securities be delivered to
the safekeeping agent (Investors Bank & Trust Company) before the funds are
transferred to the broker or dealer. The Bank purchases investment
securities pursuant to an investment policy established by the Board of
Directors.
All securities and investments are recorded on the books of the Bank
in accordance with generally accepted accounting principles. The Bank does
not purchase securities and investments for trading. Effective October 1,
1994, the Bank implemented SFAS 115. Available-for-sale securities are
reported at fair value with unrealized gains or losses reported as a
separate component of net worth. All purchases of securities and
investments conform to the Bank's interest rate risk policy.
The following table sets forth the scheduled maturities, average
yields, amortized cost and market value for the Bank's investment
securities at September 30, 2000.
<TABLE>
<CAPTION>
September 30, 2000
-----------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
------------------ ------------------ ------------------ ------------------- ---------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Amount
--------- ------- --------- ------- --------- ------- --------- ------- --------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government
Obligations $ 1,999 5.93% $1,000 7.27% $ - -% $ - -% $ 2,999 6.38% $ 2,995
Mortgage-backed
Securities - - 4 8.50 95 7.22 1,578 7.28 1,677 7.28 1,695
Corporate Notes
and Bonds 8,502 6.71 1,526 7.10 - - - - 10,028 6.77 10,029
------- ------ --- ------ ------- --------
Total $10,501 6.56% $2,530 7.17% $95 7.22% $1,578 7.28% $14,704 6.75 $14,719
======= ====== === ======
Marketable Equity
Securities 3,837 2.54 3,870
FHLB Stock 721 6.79 721
------- -------
Total Investment
Portfolio $19,262 5.91% $19,310
======= =======
</TABLE>
The following tables set forth information regarding the investment
portfolio at the dates indicated.
<TABLE>
<CAPTION>
September 30, 2000
--------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
---------------------------------- -----------------------------------
Amortized Market Amortized Market
Cost Value Percent(1) Cost Value Percent(2)
--------- ------ ---------- --------- ------ ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities(3):
U.S. government obligations $ 499 $ 499 6.4% $ 2,500 $ 2,496 23.2%
Other bonds and obligations 2,047 2,045 26.2% 7,981 7,984 74.1%
Marketable equity securities 3,837 3,870 49.6% - - -
Mortgage-backed securities(4) 1,382 1,394 17.8% 295 301 2.7%
---------------------------------------------------------------------
Total Investment Portfolio $7,765 $7,808 100.0% $10,776 $10,781 100.0%
=====================================================================
<CAPTION>
September 30,
---------------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities(3):
U.S. government obligations $ 2,999 16.1% $10,254 38.3% $ 4,913 20.5%
Other bonds and obligations 10,026 54.0% 10,478 39.1% 10,415 43.5%
Marketable equity securities 3,870 20.8% 4,070 15.2% 5,854 24.4%
Mortgage-backed securities(4) 1,689 9.1% 1,984 7.4% 2,779 11.6%
--------------------------------------------------------------------
Total Investment Portfolio $18,584 100.0% $26,786 100.0% $23,961 100.0%
====================================================================
___________________
<FN>
<F1> As a percentage of total market value.
<F2> As a percentage of total amortized cost.
<F3> Includes $1.1 million invested in Bank Investment Fund One, a mutual
bond fund offered by the Co-operative Central Bank, a quasi-
governmental agency, and does not include interest-earning overnight
deposits of $3,380,176 or Federal Home Loan Bank Stock of $720,700.
<F4> Consists of GNMA, FHLMC and FNMA certificates.
</FN>
</TABLE>
Deposit Activity and Other Sources of Funds
General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank
derives funds from principal repayments and interest payments on loans and
investments as well as other sources arising from operations in the
production of net earnings. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources, or on a longer-
term basis for general business purposes.
Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including passbook savings, NOW accounts, demand deposits,
money market accounts and certificates of deposit. Deposit account terms
vary, with the principal differences being the minimum balance required,
the time periods the funds must remain on deposit and the interest rate.
The Bank's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established
by the Bank on a periodic basis. Determination of rates and terms are
predicated upon funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.
The following table sets forth the various types of deposit accounts
at the Bank and the balances in these accounts at the dates indicated.
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------- ---------------- ---------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Savings deposits $ 19,380 17.2% $17,782 19.1% $16,583 20.3% $15,828 21.9% $13,986 21.1%
NOW accounts 10,095 9.0 9,389 10.1 6,601 8.1 6,983 9.7 5,674 8.5
Money market deposits 16,462 14.7 14,188 15.3 11,056 13.6 9,111 12.6 7,770 11.7
------------------------------------------------------------------------------------------------------
Total 45,937 40.9 41,359 44.5 34,240 42.0 31,922 44.2 27,430 41.3
Demand deposits 14,243 12.6 8,091 8.7 5,335 6.5 3,136 4.4 947 1.4
Certificates of deposit 52,194 46.5 43,436 46.8 41,944 51.5 37,133 51.4 38,066 57.3
------------------------------------------------------------------------------------------------------
Total deposits $112,374 100.0% $92,886 100.0% $81,519 100.0% $72,191 100.0% $66,443 100.0%
=====================================================================================================
</TABLE>
For more information on the Bank's deposit accounts, see Note 6 of
Notes to Financial Statements.
The following table indicates the amount of the Bank's certificates
of deposit of $100,000 or more by time remaining until maturity at
September 30, 2000.
<TABLE>
<CAPTION>
Certificates of
Maturity Period Deposit
--------------- ---------------
(In thousands)
<S> <C>
Within three months $ 3,211
After three but within six months 2,245
After six but within twelve months 4,382
After twelve months 1,187
-------
Total $11,025
=======
</TABLE>
The following table sets forth the deposit activity of the Bank for
the periods indicated.
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Deposits $448,303 $344,310 $306,288 $179,923 $153,704
Withdrawals 432,244 335,933 299,905 176,904 155,067
----------------------------------------------------------------
Net increase (decrease)
before interest credited 16,059 8,377 6,383 3,019 (1,363)
Interest credited 3,429 2,990 2,945 2,728 2,786
----------------------------------------------------------------
Net increase
in deposits $ 19,488 $ 11,367 $ 9,328 $ 5,747 $ 1,423
================================================================
</TABLE>
Borrowings. Savings deposits historically have been the primary
source of funds for the Bank's lending and investment activities and for
its general business activities. The Bank is authorized, however, to use
advances from the FHLB of Boston to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB are
secured by the Bank's stock in the FHLB and a portion of the Bank's
mortgage loans. The Bank had $3.9 million of FHLB advances outstanding at
September 30, 2000.
The FHLB of Boston functions as a central reserve bank providing
credit for savings institutions and certain other financial institutions.
As a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain
of its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by the United States) provided certain
standards related to creditworthiness have been met.
Competition
The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits primarily comes from larger
commercial banks and other savings institutions located in or near the
Bank's primary market area that generally have significantly greater
financial and technological resources than the Bank. Additional significant
competition for savings deposits comes from credit unions, money market
funds and brokerage firms. The primary factors in competing for loans are
interest rates and loan origination fees and the range of services offered
by the various financial institutions. Competition for origination of real
estate loans normally comes from commercial banks, other thrift
institutions, mortgage bankers, mortgage brokers and insurance companies.
Management considers the Bank's competitors in its market area to consist
of 15 branches of financial institutions headquartered outside of its
market area. The Bank is the only independent financial institution
headquartered in Falmouth.
FEDERAL AND STATE TAXATION
Federal Taxation
General. The following is intended only as a discussion of material
federal income tax matters and does not purport to be a comprehensive
description of the federal income tax rules applicable to the Bank or the
Company. The Bank's federal income tax return was last audited for the tax
year ended September 30, 1975. For federal income tax purposes, the
Company and the Bank, as members of the same affiliated group, file
consolidated income tax returns on a September 30 fiscal year basis using
the accrual method of accounting and are subject to federal income taxation
in the same manner as other corporations with some exceptions, including
particularly the Bank's tax reserve for bad debts, discussed below.
Bad Debt Reserves. The Bank, as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to
maintain a reserve for bad debts with respect to "qualifying loans," which,
in general, are loans secured by certain interests in real property, and
to make, within specified formula limits, annual additions to the reserve
which are deductible for purposes of computing the Bank's taxable income.
Pursuant to the Small Business Job Protection Act of 1996, the Bank is now
recapturing (taking into income) over a multi-year period a portion of the
balance of its bad debt reserve as of September 30, 1996. See Note 9 to the
consolidated financial statements.
Distributions. To that the extent that the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to
have been made from the Bank's "base year reserve," i.e., its reserve as of
September 30, 1988, and then from the Bank's supplemental reserve for
losses on loans, to the extent thereof, and an amount based on the amount
distributed (but not in excess of the amount of such reserves) will be
included in the Bank's income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and
profits will not be so included in the Bank's income.
The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes
a non-dividend distribution to the Company, approximately one and one-half
times the amount of such distribution (but not in excess of the amount of
such reserves) would be includible in income, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.
Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of
AMTI can be offset by net operating loss carryovers of which the Bank
currently has none. AMTI is also adjusted by determining the tax treatment
of certain items in a manner that negates the deferral of income resulting
from the regular tax treatment of those items. Thus, the Bank's AMTI is
increased by an amount equal to 75% of the amount by which the Bank's
adjusted current earnings exceeds its AMTI (determined without regard to
this adjustment and prior to reduction for net operating losses). The Bank
does not expect to be subject to the AMT.
Elimination of Dividends; Dividends Received Deduction. The Company
may exclude from its income 100% of dividends received from the Bank as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Company and the Bank
will not file a consolidated tax return, except that if the Company or the
Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.
State Taxation
Massachusetts Taxation. The Bank currently files a separate
Massachusetts excise tax return, based on net income. Under state laws,
Massachusetts-based financial institutions may apportion income earned in
other states. However, the Massachusetts bank excise (income) tax applies
to non-bank entities and out-of-state financial institutions as well as
Massachusetts-based financial institutions. The Massachusetts excise tax
rate for co-operative banks is currently 10.50% of federal taxable income,
adjusted for certain items. Taxable income includes gross income as defined
under the Code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less deductions, but
not the credits, allowable under the provisions of the Code. Carry
forwards and carry backs of net operating losses are not allowed.
The Bank's active subsidiary, Falmouth Securities Corporation, was
established solely for the purpose of acquiring and holding investments
that are permissible for banks to hold under Massachusetts law. Falmouth
Securities Corporation has qualified as a "security corporation" under
Massachusetts's law, qualifying it to take advantage of the 1.32% income
tax rate on gross income applicable to companies that are so classified.
During fiscal 2000, the Bank formed a capital real estate investment trust
subsidiary which is designed to enhance after-tax earnings by reducing
state income tax liabilities.
The Bank and the Company are not permitted to file a combined
Massachusetts excise tax return. The Company will be subject to
Massachusetts corporate excise tax, which is determined by two measures:
(1) the income measure, a tax of 9.5% on net income attributable to
Massachusetts; and (2) the non-income measure, a tax of $2.60 per $1,000
imposed on either (a) tangible property, if the corporation is a tangible
property corporation, or (b) net worth, if the corporation is an intangible
property corporation. Unlike the definition of net income for purposes of
the Bank's taxation, net operating loss carryovers and a 95% dividends
received deduction for intercompany dividends is permissible for
corporations.
For additional information regarding taxation, see Note 9 of the
Notes to Financial Statements.
Delaware Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but
is required to file an annual report with and pay an annual franchise tax
to the State of Delaware.
REGULATION AND SUPERVISION
General
As a co-operative bank chartered by the Commonwealth of
Massachusetts, whose deposits are insured by the Bank Insurance Fund of the
FDIC, the Bank is subject to extensive regulation under state law with
respect to many aspects of its banking activities; this state regulation is
administered by the Division of Banks ("Division"). In addition, the FDIC
levies assessments or deposit insurance premiums on the Bank and is vested
with authority to supervise the Bank and to exercise a broad range of
enforcement powers. Finally, the Bank is required to maintain reserves
against deposits according to a schedule established by the Federal Reserve
System. These laws and regulations have been established primarily for the
protection of depositors and the deposit insurance fund, not the Company's
stockholders.
The Company, as the bank holding company controlling Falmouth
Co-operative Bank, is subject to the Bank Holding Company Act of 1956, as
amended and its rules and regulation promulgated by the Federal Reserve
Board. The Company is also subject to certain Massachusetts banking laws
applicable to bank holding companies.
The following references to the laws and regulations under which the
Company and the Bank are regulated are brief summaries thereof, do not
purport to be complete and are qualified in their entirety by reference to
such laws and regulations.
Financial Services Modernization Legislation
On November 12, 1999, President Clinton signed into law the Gramm-Leach-
Bliley Financial Services Modernization Act of 1999 (GLB Act"). This federal
legislation was intended to modernize the financial services industry by
establishing a comprehensive framework to permit affiliations among commercial
banks, insurance companies, securities firms and other financial service
providers. Generally, the Act:
* repeals the historical restrictions and eliminates many federal and
state law barriers to affiliations among banks, securities firms,
insurance companies and other financial service providers;
* provides a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding
companies;
* broadens the activities that may be conducted by national banks,
banking subsidiaries of bank holding companies and their financial
subsidiaries;
* provides an enhanced framework for protecting the privacy of consumer
information;
* adopts a number of provisions related to the capitalization,
membership, corporate governance and other measures designed to
modernize the Federal Home Loan Bank system;
* modifies the laws governing the implementation of the Community
Reinvestment Act and
* addresses a variety of other legal and regulatory issues affecting
both day-to-day operations and long-term activities of financial
institutions.
Bank holding companies are now permitted to engage in a wider variety
of financial activities than permitted under prior law, particularly with
respect to insurance and securities activities if such companies elected to
be regulated as a financial holding company. In addition, in a change from
prior law, bank holding companies will be in a position to be owned,
controlled or acquired by any company engaged in financially-related
activities.
The Company believes that the Act will not have a material adverse
effect on its operations in the near-term. However, to the extent that it
permits banks, securities firms and insurance companies to affiliate, the
financial services industry may experience further consolidation. This
could result in a growing number of larger financial institutions that
offer a wider variety of financial services than the Bank currently offers
and that can aggressively compete in the markets the Bank currently serves.
Federal Banking Regulations
Capital Requirements. FDIC regulations require BIF-insured banks,
such as the Bank, to maintain minimum levels of capital. The FDIC
regulations define two tiers, or classes, of capital.
Tier 1 Capital or Core Capital is defined in Part 325 and means the
sum of:
* common stockholders' equity (common stock and related surplus,
undivided profits, disclosed capital reserves, foreign currency
translation adjustments, less net unrealized losses on available-for-
sale equity securities with readily determinable fair values);
* noncumulative perpetual preferred stock;
* minority interests in consolidated subsidiaries;
minus
* all intangible assets (other than limited amounts of mortgage
servicing rights and purchased credit card relationships and certain
grandfathered supervisory goodwill;
* identified losses (to the extent that Tier 1 capital would have been
reduced if the appropriate accounting entries to reflect the
identified losses had been recorded on the institution's books);
* investments in certain securities subsidiaries; and
* deferred tax assets in excess of the limit set forth in the
regulations.
Tier 2 Capital consists of:
* allowances for loan and lease losses, up to a maximum of 1.25 percent
of risk-weighted assets;
* cumulative perpetual preferred stock, long-termed preferred stock
(original maturity of at least 20 years) and any related surplus;
* perpetual preferred stock (where the dividend is reset periodically);
* hybrid capital instruments, including mandatory convertible debt; and
* term subordinated debt and intermediate-term preferred stock; and
* up to 45% of the pretax net unrealized holding gains on available for
sale equity securities in Tier 2 capital.
Overall, the amount of Tier 2 capital that may be included in total capital
cannot exceed 100% of Tier 1 capital.
The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a
rating of 1 (the highest examination rating of the FDIC for banks) under
the Uniform Financial Institutions Rating System, of not less than a ratio
of 3.0% of Tier 1 capital to total assets. For all other banks, the
minimum leverage capital requirement is 4.0%, unless a higher leverage
capital ratio is warranted by the particular circumstances or risk profile
of the depository institution.
The FDIC regulations also require that savings banks meet a risk-
based capital standard. The risk-based capital standard requires the
maintenance of a ratio of total capital (which is defined as the sum of
Tier 1 capital and Tier 2 capital) to risk-weighted assets of at least 8%
and a ratio of Tier 1 capital to risk-weighted assets of at least 4%. In
determining the amount of risk-weighted assets, all assets, plus certain
off balance sheet items, are multiplied by a risk-weight of 0% to 100%,
based on the risks the FDIC believes are inherent in the type of asset or
item.
The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to
declines in the economic value of a bank's capital due to changes in
interest rates when assessing the bank's capital adequacy. Under such a
risk assessment, examiners will evaluate a bank's capital for interest rate
risk on a case-by-case basis, with consideration of both quantitative and
qualitative factors. According to the agencies, applicable considerations
include:
* the quality of the bank's interest rate risk management process;
* the overall financial condition of the bank; and
* the level of other risks at the bank for which capital is needed.
Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion
of the critical factors affecting the agencies' evaluation of interest rate
risk in connection with capital adequacy.
The following table shows the Bank's leverage capital ratio, its Tier
1 risk-based capital ratio, and its total risk-based capital ratio, at
September 30, 2000:
<TABLE>
<CAPTION>
At September 30, 2000
------------------------------------------------
Capital Percent of Capital Percent of
Amount Assets(1) Requirement Assets(1)
------- ---------- ----------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tier 1 leverage capital $16,765 12.82% $5,223 4.00%
Tier 1 risk-based capital $16,765 19.46% $3,446 4.00%
Total risk-based capital $17,520 20.33% $6,893 8.00%
___________________
<FN>
<F1> For purposes of calculating the Tier 1 leverage capital ratio, assets
include adjusted total average assets. In calculating Tier 1 risk-
based capital and total risk-based capital ratio, assets include
total risk-weighted assets.
</FN>
</TABLE>
As the table shows, the Bank exceeded the minimum capital adequacy
requirements at September 30, 2000.
Enforcement
The FDIC has extensive enforcement authority over insured co-
operative banks, including the Bank. This enforcement authority includes,
among other things, the ability to assess civil money penalties, to issue
cease and desist orders and to remove directors and officers. In general,
these enforcement actions may be initiated in response to violations of
laws and regulations and to unsafe or unsound practices.
The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is
required, with certain exceptions, to appoint a receiver or conservator for
an insured state bank if that bank is "critically undercapitalized." For
this purpose, "critically undercapitalized" means having a ratio of
tangible capital to total assets of less than 2%. The FDIC may also
appoint a conservator or receiver for a state bank on the basis of the
institution's financial condition or upon the occurrence of certain events,
including:
* insolvency (whereby the assets of the bank are less than its
liabilities to depositors and others);
* substantial dissipation of assets or earnings through violations of
law or unsafe or unsound practices;
* existence of an unsafe or unsound condition to transact business;
* likelihood that the bank will be unable to meet the demands of its
depositors or to pay its obligations in the normal course of
business; and
* insufficient capital, or the incurring or likely incurring of losses
that will deplete substantially all of the institution's capital with
no reasonable prospect of replenishment of capital without federal
assistance.
Deposit Insurance
The FDIC has adopted a risk-based deposit insurance assessment
system. The FDIC assigns an institution to one of three capital categories
based on the institution's financial information, as of the reporting
period ending seven months before the assessment period, consisting of (1)
well capitalized, (2) adequately capitalized or (3) undercapitalized, and
one of three supervisory subcategories within each capital group. The
supervisory subgroup to which an institution is assigned is based on a
supervisory evaluation provided to the FDIC by the institution's primary
federal regulator and information that the FDIC determines to be relevant
to the institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Assessment
rates for BIF deposits currently range from 0 basis points to 27 basis
points. The Bank's assessment rate is currently 0 basis points. The FDIC
is authorized to raise the assessment rates in certain circumstances,
including maintaining or achieving the designated reserve ratio of 1.25%,
which requirement the BIF currently meets. The FDIC has exercised its
authority to raise rates in the past and may raise insurance premiums in
the future. If the FDIC takes such action, it could have an adverse effect
on the earnings of the Bank. In addition, recent legislation requires BIF-
insured institutions like the Bank to assist in the payment of FICO bonds.
Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the FICO bonds was expanded to add,
beginning January 1, 1997, the deposits of BIF-insured institutions, such
as the Bank. Until December 31, 1999, or such earlier date on which the
last savings association ceases to exist, the rate of assessment for BIF-
assessable deposits shall be one-fifth of the rate imposed on SAIF-
assessable deposits. For the fourth quarter 2000, the rates of assessment
for the FICO bonds is 0.0202% for BIF-assessable deposits.
Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the Division.
The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.
Transactions with Affiliates and Insiders
Transactions between state non-member banks and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a bank is any company or entity that controls, is controlled by or is
under common control with the bank. Currently, a subsidiary of a bank that
is not also a depository institution is not treated as an affiliate of the
bank for purposes of Sections 23A and 23B, but the FRB has proposed
treating any subsidiary of a bank that is engaged in activities not
permissible for bank holding companies under the BHCA as an affiliate for
purposes of Sections 23A and 23B. Generally, Section 23A:
* limits the extent to which the bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to
10% of such bank's capital and surplus, and contains an aggregate
limit on all such transactions with all affiliates to an amount equal
to 20% of such capital and surplus; and
* requires that all such transactions be on terms that are consistent
with safe and sound banking practices.
The term "covered transaction" includes the making of loans, purchase
of assets, issuance of guarantees and similar other types of transactions.
In addition, most extensions of credit by a bank to any of its affiliates
must be secured by collateral in amounts ranging from 100% to 130% of the
loan amounts, depending on the type of collateral. Section 23B requires
that any covered transaction, and certain other transactions, including the
bank's sale of assets and purchase of services from an affiliate must be on
terms that are substantially the same, or at least as favorable, to the
institution as those that would prevail in a comparable transaction with a
non-affiliate.
Banks are also subject to the restrictions contained in Section 22(h)
of the Federal Reserve Act and the FRB's Regulation O thereunder on loans
to executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer or a holder of more than
10% of the shares of a bank, as well as certain affiliated interests of
such persons, may not exceed, together with all other outstanding loans to
such person and affiliated interests, the loans-to-one-borrower limit
applicable to national banks (generally 15% of an institution's unimpaired
capital and surplus) and all loans to all such persons in the aggregate may
not exceed an institution's unimpaired capital and unimpaired surplus.
Regulation O also prohibits the making of loans in an amount greater than
the lesser of $25,000 or 5% of capital and surplus but in any event over
$500,000, to a director, executive officer and greater than 10% stockholder
of a bank, and the respective affiliates of such a person, unless such
loans are approved in advance by a majority of the board of directors of
the bank, with any "interested" director not participating in the voting.
Further, the FRB pursuant to Regulation O requires that loans to directors,
executive officers and principal stockholders (a) be made on terms
substantially the same as those that are offered in comparable transactions
to persons not affiliated with the bank and (b) follow credit underwriting
procedures not less stringent than those prevailing for comparable
transactions with persons not affiliated with the bank. Regulation O also
prohibits a depository institution from paying, with certain exceptions, an
overdraft of any of the executive officers or directors of the institution
or any of its affiliates unless the overdraft is paid pursuant to written
pre-authorized extension of interest-bearing extension of credit or
transfer of funds from another account at the bank.
State chartered non-member banks are further subject to the
requirements and restrictions against certain tying arrangements and on
extensions of credit involving correspondent banks. Specifically, a
depository institution is prohibited from extending credit to or offering
any other service, or fixing or varying the consideration for such
extension of credit or service, on the condition that the customer obtain
some additional service from the institution or certain of its affiliates
or not obtain services of a competitor of the institution, subject to
certain exceptions. In addition, a depository institution with a
correspondent banking relationship with another depository institution is
prohibited from extending credit to the executive officers, directors, and
holders of more than 10% of the stock of the other depository institution,
unless such extension of credit is on substantially the same terms as those
prevailing at the time for comparable transactions with other persons and
does not involve more than the normal risk of repayment or present other
unfavorable features.
Real Estate Lending Policies
Under FDIC regulations, state-chartered non-member banks must adopt
and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interest in
real estate or are made for the purpose of financing permanent improvements
to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards, including loan-
to-value limits that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The
real estate lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
that have been adopted by the federal bank regulators.
The Interagency Guidelines, among other things, call upon a
depository institution to establish internal loan-to-value limits for real
estate loans that are not in excess of the following supervisory limits:
* for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral;
* for land development loans (i.e., loans for the purpose of improving
unimproved property prior to the erection of structures), the
supervisory limit is 75%;
* for loans for the construction of commercial, multi-family or other
nonresidential property, the supervisory limit is 80%;
* for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
* for loans secured by other improved property (e.g., farmland,
completed commercial property and other income-producing property
including non-owner-occupied, one- to four-family property), the
limit is 85%.
Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that
equals or exceeds 90% at origination, an institution should require
appropriate credit enhancement in the form of either mortgage insurance or
readily marketable collateral.
Community Reinvestment Act
Under the Community Reinvestment Act, any insured depository
institution, including Falmouth Co-operative Bank, has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor
does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community.
The Community Reinvestment Act requires the FDIC, in connection with its
examination of a bank, to assess the depository institution's record of
meeting the credit needs of its community and to take such record into
account in its evaluation of certain applications by such institution,
including applications for additional branches and acquisitions.
Among other things, the current Community Reinvestment Act
regulations replace the prior process-based assessment factors with a new
evaluation system that rates an institution based on its actual performance
in meeting community needs. In particular, the current evaluation system
focuses on three tests:
* a lending test, to evaluate the institution's record of making loans
in its service areas;
* an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
* a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.
The Community Reinvestment Act requires the FDIC to provide a written
evaluation of an institution's Community Reinvestment Act performance
utilizing a four-tiered descriptive rating system and requires public
disclosure of an institution's Community Reinvestment Act rating. The Bank
received a "satisfactory" rating in its Community Reinvestment Act
examination conducted by the FDIC on January 17, 1999.
Standards for Safety and Soundness
Under federal law, each federal banking agency is required to
prescribe, by regulation, safety and soundness standards for institutions
under its authority. The federal banking agencies, including the FDIC,
have adopted standards covering internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, employee compensation, employee benefits,
fees, asset quality and earnings sufficiency. These standards are in the
form of broad guidelines for performance that generally leave to each
institution the methods for achieving the objectives. The Bank believes it
meets the FDIC's safety and soundness standards.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12
regional Federal Home Loan Banks subject to supervision and regulation by
the Federal Housing Finance Board ("FHFB"). The Federal Home Loan Banks
provide a central credit facility primarily for member institution. As a
member of the FHLB, the Bank is required to acquire and hold shares of
capital stock in the FHLB in an amount at least equal to 1% of the
aggregate unpaid principal of its home mortgage loans, home purchase
contracts, and similar obligations at the beginning of each year, or 1/20
of its advances (borrowings) from the FHLB, whichever is greater. Falmouth
was in compliance with this requirement with an investment in FHLB of
Boston stock at September 30, 2000, of $720,700.
The FHLB of Boston serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It offers policies and procedures established by the FHFB and the
Board of Directors of the FHLB of Boston. Long-term advances may only be
made for the purpose of providing funds for residential housing finance.
Federal Reserve System
Under FRB regulations, the Bank is required to maintain noninterest-
earning reserves against its transaction accounts (primarily NOW and
regular checking accounts). The FRB regulations generally require that
reserves of 3% must be maintained against aggregate transaction accounts of
$42.8 million or less (subject to adjustment by the FRB) and an initial
reserve of $1.4 million plus 10% (subject to adjustment by the FRB between
8% and 14%) against that portion of total transaction accounts in excess of
$46.5 million. The first $5.5 million of otherwise reservable balances
(subject to adjustments by the FRB) are exempted from the reserve
requirements. As of September 30, 2000, the Bank met its reserve
requirements.
Massachusetts Banking Laws and Supervision
Massachusetts's co-operative banks such as the Bank are also
regulated and supervised by the Division of Banks. The Division of Banks
is required to regularly examine each state-chartered bank. The approval
of the Division of Banks is required to establish or close branches, to
merge with another bank, to form a bank holding company, to issue stock or
to undertake many other activities. Any Massachusetts bank that does not
operate in accordance with the regulations, policies and directives of the
Division of Banks is subject to sanctions. The Division of Banks may under
certain circumstances suspend or remove directors or officers of a bank who
have violated the law, conducted a bank's business in a manner which is
unsafe, unsound or contrary to the depositors' interests, or been negligent
in the performance of their duties.
All Massachusetts-chartered co-operative banks are required to be
members of the Co-operative Central Bank and are subject to its
assessments. The Co-operative Central Bank maintains the Share Insurance
Fund, a private deposit insurer, which insures all deposits in member banks
in excess of FDIC deposit insurance limits. In addition, the Co-operative
Central Bank acts as a source of liquidity to its members in supplying them
with low-cost funds, and purchasing certain qualifying obligations from
them.
The powers which Massachusetts-chartered co-operative banks can
exercise are virtually identical to those of state-chartered commercial
banks. These powers are summarized below.
Lending Activities. A wide variety of mortgage loans may be made.
Fixed-rate loans, adjustable-rate loans, variable-rate loans, participation
loans, graduated payment loans, construction loans, condominium and co-
operative loans, second mortgage loans and other types of loans may be made
in accordance with applicable regulations. Mortgage loans may be made on
real estate in Massachusetts or in another New England state if the bank
making the loan has an office there or under certain other circumstances.
In addition, certain mortgage loans may be made on improved real estate
located anywhere in the United States. Commercial loans may be made to
corporations and other commercial enterprises with or without security.
With certain exceptions, such loans may be made without geographic
limitations. Consumer and personal loans may be made with or without
security and without geographic limitations. Loans to individual borrowers
generally will be limited to 20% of the total of the Bank's capital
accounts and stockholders' equity.
Investments Authorized. Massachusetts-chartered co-operative banks
have broad investment powers under Massachusetts law, including so-called
"leeway" authority for investments that are not otherwise specifically
authorized. The investment powers authorized under Massachusetts law are
restricted by federal law to permit only investments of the kinds that
would be permitted for national banks. The Bank has authority to invest in
all of the classes of loans and investments that are permitted by its
existing loan and investment policies.
Payment of Dividends. A co-operative bank only may pay dividends on
its capital stock from net profits and no dividends may be declared,
credited or paid so long as there is any impairment of the capital stock.
No dividends may be declared on the Bank's common stock so long as there is
any period other than for which dividends are declared upon preferred
stock, except as authorized by the Commissioner. The approval of the
Commissioner is also required for a co-operative bank to declare a dividend
if the total of all dividends declared by the Bank in any calendar year
exceed the total of its net profits for that year combined with its
retained net profits of the preceding two years, less any required transfer
to surplus or a fund for the retirement of any preferred stock.
Branches. With the approval of the Division of Banks, bank branches
may be established in any city or town in Massachusetts. In addition, co-
operative banks may operate automated teller machines at any of their
offices or, with the approval of the Division of Banks, anywhere in
Massachusetts. Sharing of ATMs or "networking" is also permitted with the
approval of the Division of Banks. Massachusetts-chartered co-operative
banks may also operate ATMs outside of Massachusetts if permitted to do so
by the law of the jurisdiction in which the ATM is located.
Interstate Banking. An out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by:
* merging with a Massachusetts bank that has been in existence for at
least three years;
* acquiring a branch or branches of a Massachusetts bank without
acquiring the entire bank; or
* opening such branches de novo.
Massachusetts banks' ability to exercise similar interstate banking powers
in other states depends upon the laws of the other states. For example,
according to the law of the bordering state of New Hampshire, out-of-state
banks may acquire New Hampshire banks by merger, but may not establish de
novo branches in New Hampshire.
Community Reinvestment Act. The Bank is also subject to provisions
of the Massachusetts banking laws that, like the provisions of the federal
Community Reinvestment Act, impose continuing and affirmative obligations
upon a banking institution organized in Massachusetts to serve the credit
needs of its local communities. The obligations of the Massachusetts
Community Reinvestment Act are similar to those imposed by the federal
Community Reinvestment Act with the exception of the assigned exam ratings.
Massachusetts banking law provides for an additional exam rating of "high
satisfactory" in addition to the federal Community Reinvestment Act ratings
of "outstanding," "satisfactory," "needs to improve" and "substantial
noncompliance." The Division has adopted regulations to implement the
Massachusetts Community Reinvestment Act that are based on the federal
Community Reinvestment Act. The Division is required to consider a bank's
Massachusetts Community Reinvestment Act rating when reviewing the bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller
machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Massachusetts Community Reinvestment
Act requires the Division to assess a bank's compliance with the
Massachusetts Community Reinvestment Act and to make such assessment
available to the public.
Other Powers. Massachusetts-chartered co-operative banks may also
lease machinery and equipment, act as trustee or custodian for tax
qualified retirement plans, establish trust departments and act as
professional trustee or fiduciary, provide payroll services for their
customers, issue or participate with others in the issuance of mortgage-
backed securities and establish mortgage banking companies and discount
securities brokerage operations. Some of these activities require the
prior approval of the Division of Banks.
Loans to Bank's Insiders. The Massachusetts banking laws prohibit
any officer, director or trustee from borrowing, otherwise becoming
indebted, or becoming liable for a loan or other extension of credit by
such bank to any other person, except for any of the following loans or
extensions of credit:
* loan or extension of credit, secured or unsecured, to an officer of
the bank in an amount not exceeding $20,000;
* loan or extension of credit intended or secured for educational
purposes to an officer of the bank in an amount not exceeding
$75,000;
* loan or extension of credit secured by a mortgage on residential real
estate to be occupied in whole or in part by the officer to whom the
loan or extension of credit is made, in an amount not exceeding
$275,000;
* loan or extension of credit to a director or trustee of the bank who
is not also an officer of the bank in an amount permissible under the
bank's loan-to-one borrower limit.
The loans listed above require approval of the majority of the members of
the bank's executive committee, excluding any member involved in the loan
or extension of credit. No such loan or extension of credit may be granted
with an interest rate or other terms that are preferential in comparison to
loans granted to persons not affiliated with the Bank.
Regulation of Holding Company
Federal Regulation. The Company is subject to examination,
regulation and periodic reporting under the BHCA, as administered by the
FRB. The FRB has adopted capital adequacy guidelines for bank holding
companies on a consolidated basis substantially similar to those of the
FDIC for the Bank.
The Company is required to obtain the prior approval of the FRB and
the Massachusetts Board of Bank Incorporation ("BBI") to acquire all, or
substantially all, of the assets or any bank of bank holding company.
Prior FRB and BBI approval would be required for the Company to acquire
direct or indirect ownership or control of any voting securities of any
bank or bank holding company if, after giving effect to such acquisition,
it would, directly or indirectly, own or control more than 5% of any class
of voting shares of such bank or bank holding company.
The Company will be required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the
net consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the Company's consolidated
net worth. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound
practice, or would violate any law, regulation, FRB order or directive, or
any condition imposed by, or written agreement with, the FRB. Such notice
and approval is not required for a bank holding company that would be
treated as "well capitalized" under applicable regulations of the FRB, that
has received a composite "1" or "2" rating at its most recent bank holding
company inspection by the FRB, and that is not the subject of any
unresolved supervisory issues.
The status of the Company as a registered bank holding company under
the BHCA will not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.
1. In addition, a bank holding company which does not qualify as a
financial holding company under the Gramm-Leach-Bliley Act, is
generally prohibited from engaging in, or acquiring 5% or more of any
class of voting securities of any company engaged in, non-banking
activities. One of the principal exceptions to this prohibition is
for activities found by the FRB to be so closely related to banking
or managing or controlling banks as to be a proper incident thereto.
Some of the principal activities that the FRB has determined by
regulation to be so closely related to banking as to be a proper
incident thereto are:
* making or servicing loans;
* performing certain data processing services;
* providing discount brokerage services;
* acting as fiduciary, investment or financial advisor;
* leasing personal or real property;
* making investments in corporations or projects designed primarily to
promote community welfare; and
* acquiring a savings and loan association.
Bank holding companies that qualify as a financial holding company
may engage in activities that are financial in nature or incident to
activities which are financial in nature. Bank holding companies may
qualify to become a financial holding company if:
* each of its depository institution subsidiaries is "well
capitalized";
* each of its depository institutions is "well managed";
* each of its depository institution subsidiaries has at least a
"satisfactory" CRA rating at its most recent examination; and
* the bank holding company has filed a certification with the Federal
Reserve Board that it elects to become a financial holding company.
To date, the Company has not elected to become regulated as a financial
holding company.
Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in
connection with the default of a commonly controlled depository institution
or any assistance provided by the FDIC to such an institution in danger of
default. This law would have potential applicability if the Company ever
acquired as a separate subsidiary a depository institution in addition to
the Bank.
Federal Securities Laws
The Company's common stock is registered with the SEC under Section
12(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
2000 regarding Falmouth's office facilities, and certain other information
relating to the properties at that date.
<TABLE>
<CAPTION>
Year Completed Square Net Book Value
or Acquired Footage at September 30, 2000
-------------- ------- ---------------------
<S> <C> <C> <C>
Main Office:
20 Davis Straits
Falmouth, MA 02540 1978 10,696 $299,160
Branch Offices:
North Falmouth, MA
78 County Rd.
N. Falmouth, MA 02556 1998 1,706 $569,749
East Falmouth, MA
397 E. Falmouth Hwy
E. Falmouth, MA 02536 1998 2,380 $794,254
</TABLE>
At September 30, 2000, the net book value of Falmouth's computer
equipment and other furniture, fixtures and equipment at its offices
totaled $327,914. For more information, see Note 5 of Notes to Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors
or its officers is a party or to which any of its property is subject as of
the date of this Form 10-KSB.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The following information included in the Falmouth Bancorp, Inc. 2000
Annual Report to Stockholders (the "Annual Report") is incorporated herein
by reference: "Market for the Company's Common Stock" on page 16 of the
Annual Report.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information included in the Falmouth Bancorp, Inc. 2000
Annual Report to Stockholders (the "Annual Report") is incorporated herein
by reference: "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Financial Highlights" on pages 3 through 15
of the Annual Report.
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS
The following information included in the Annual Report is
incorporated herein by reference: "Consolidated Financial Statements and
Notes to Consolidated Financial Statements" on pages 17 through 42 of the
Annual Report.
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY
The following information included in the Company's 2000 Proxy
Statement for the 2001 Annual Meeting of Stockholders ("Proxy Statement")
is incorporated herein by reference: "Election of Directors," "Nominees
and Continuing Directors," "Executive Officers," and "Section 16(a)
Beneficial Ownership Reporting Compliance."
ITEM 10. EXECUTIVE COMPENSATION
The following information included in the Proxy Statement is
incorporated herein by reference: "Proposal 1 - Election of Directors -
Directors' Compensation," "- Compensation Table," "- Certain Employee
Benefit Plans and Employment Agreements" and "- Transactions with Certain
Related Persons."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information included in the Proxy Statement is
incorporated herein by reference:
"Stock Ownership of Management" and "Security Ownership of Certain
Beneficial Owners."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following information included in the Proxy Statement is
incorporated herein by reference:
"Transactions with Certain Related Persons."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following financial statements included in the 2000 Annual
Report are incorporated herein by reference:
Balance Sheets - At September 30, 2000 and 1999;
Statements of Income - Years Ended September 30, 2000, 1999 and
1998;
Statements of Changes in Stockholders' Equity - Years Ended
September 30, 2000, 1999 and 1998;
Statements of Cash Flows - Years Ended September 30, 2000, 1999
and 1998; and
Notes to Financial Statements - Years Ended September 30, 2000,
1999 and 1998
(b) Exhibits. The following exhibits are either filed as part of
this report or are incorporated herein by reference:
3.1 Certificate of Incorporation of Falmouth Bancorp, Inc.(1)
3.2 By-laws of Falmouth Bancorp, Inc.(1)
4.3 Specimen Stock Certificate of Falmouth Bancorp, Inc.(1).
10.1 1997 Stock Option Plan for Outside Directors, Officers
and Employees of Falmouth Bancorp, Inc.(1)
10.2 Amendments to 1997 Stock Option Plan for Outside
Directors, Officers and Employees of Falmouth Bancorp,
Inc.
10.3 1997 Recognition and Retention Plan for Outside
Directors, Officers and Employees of Falmouth Bancorp,
Inc.(1)
10.4 Agreement and Plan of Reorganization by and among
Falmouth Co-operative Bank and Falmouth Bancorp, Inc.,
dated November 25, 1997 (1)
10.5 Employment Agreement by and between Falmouth Co-operative
Bank and Santo P. Pasqualucci.
10.6 Employment Agreement by and between Falmouth Co-operative
Bank and George E. Young III.
10.7 Falmouth Co-operative Bank Employee Stock Ownership
Plan.(1)
10.8 Falmouth Bancorp, Inc. Employee Stock Ownership Trust.(1)
13 Annual Report to Stockholders for the Year Ended
September 30, 2000.
21 Subsidiaries of the Registrant.
23 Consent of Shatswell, MacLeod & Company, P.C.
27 Financial Data Schedule.*
___________________
(1) Incorporated herein by reference Registration Statement on Form S-4
(Registration No. 333-16931), as filed with the Securities and
Exchange Commission on November 27, 1996.
(2) Incorporated herein by reference Registration Statement on Form
10-KSB for the year ended September 30, 1997, as filed with the
Securities and Exchange Commission on December 29, 1997.
*Filed in electronic format only.
(c) Reports on Form 8-K.
None.
This Form 10-KSB 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, but are not limited to: general
and local economic conditions; changes in interest rates, deposit flows,
demand for mortgages and other loans, real estate values, and competition;
changes in accounting principles, policies, or guidelines; changes in
legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing,
products and services.
Any or all of our forward-looking statements in this Form 10-KSB and
in any other public statements we make may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
FALMOUTH BANCORP, INC.
By: /s/ Santo P. Pasqualucci
Santo P. Pasqualucci
President and Chief Executive
Officer
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ Santo P. Pasqualucci Director, President and Chief December 19, 2000
------------------------------ Executive Officer
Santo P. Pasqualucci (Principal executive officer)
/s/ George E. Young, III Vice President and Chief December 19, 2000
------------------------------ Financial Officer
George E. Young, III (Principal financial officer)
/s/ John W. Holland, Jr. Director December 19, 2000
------------------------------
John W. Holland, Jr.
/s/ James A. Keefe Director December 19, 2000
------------------------------
James A. Keefe
/s/ Wayne C. Lamson Director December 19, 2000
------------------------------
Wayne C. Lamson
/s/ Gardner L. Lewis Director December 19, 2000
------------------------------
Gardner L. Lewis
/s/ John J. Lynch, Jr. Director December 19, 2000
------------------------------
John J. Lynch, Jr.
/s/ Eileen C. Miskell Director December 19, 2000
------------------------------
Eileen C. Miskell
/s/ Robert H. Moore Director December 19, 2000
------------------------------
Robert H. Moore
/s/ Walter A. Murphy Chairman of the Board December 19, 2000
------------------------------
Walter A. Murphy
/s/ William E. Newton Director December 19, 2000
------------------------------
William E. Newton
</TABLE>
