SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2001
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 01-13465
Falmouth Bancorp, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Davis Straits, Falmouth, MA 02540
(Address of principal executive offices)
(508) 548-3500
(Issuer's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed since last Report)
Check whether issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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 requirement for
the past 90 days.
Yes X No
----- -----
State the number of shares outstanding of each of the issuer's classes
of common equity as of the latest practicable date.
Outstanding at
Class December 31, 2001
----- -----------------
Common Stock, Par Value $.01 915,607
Transitional small business disclosure format (check one):
Yes No X
----- -----
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
December 31, 2001 and September 30, 2001 1
Condensed Consolidated Statements of Income
For Three Months Ended December 31, 2001 and 2000 2
Condensed Consolidated Statements of Changes in Stockholders' Equity
For Three Months Ended December 31, 2001 and 2000 3
Condensed Consolidated Statements of Cash Flows
For Three Months Ended December 31, 2001 and 2000 4-5
Notes to Unaudited Condensed Consolidated Financial Statements 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Operating Results 9-12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 13
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8 - K 13
============================================================================
FORWARD LOOKING STATEMENTS
This report contains certain forward looking statements consisting of
estimates with respect to the financial condition, results of operations and
business of the Company and the Bank that are subject to various factors
which could cause actual results to differ materially from these estimates.
These factors include, 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 the report 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.
============================================================================
Part I. Item I. FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
December 31, 2001 and September 30, 2001
----------------------------------------
December 31, September 30,
2001 2001
------------ -------------
(Unaudited)
ASSETS
------
Cash, due from banks and interest bearing deposits $ 1,879,971 $ 3,521,609
Federal funds sold 1,294,906 7,313,670
------------ ------------
Total cash and cash equivalents 3,174,877 10,835,279
Investments in available-for-sale securities
(at fair value) 12,103,749 9,381,853
Investments in held-to-maturity securities
(fair values of $16,565,725 as of December
31, 2001 and $10,036,408 as of September 30,
2001) 16,507,733 9,948,877
Federal Home Loan Bank stock, at cost 878,000 878,000
Loans, net 110,532,664 112,554,093
Premises and equipment 1,852,886 1,897,697
Accrued interest receivable 797,338 830,421
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 730,114 717,147
------------ ------------
Total assets $146,972,756 $147,438,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 14,640,076 $ 16,147,253
Interest-bearing 107,414,013 106,028,583
------------ ------------
Total deposits 122,054,089 122,175,836
Securities sold under agreements to repurchase 654,723 675,756
Federal Home Loan Bank advances 6,745,884 7,267,948
Other liabilities 450,682 354,534
------------ ------------
Total liabilities 129,905,378 130,474,074
------------ ------------
Minority preferred stockholders' equity in a
subsidiary company of Falmouth Bank 54,000 54,000
------------ ------------
Stockholders' equity:
Preferred stock, par value $.01 per share,
authorized 500,000 shares; none issued
Common stock, par value $.01 per share, authorized
2,500,000 shares; issued 1,454,750 shares 14,547 14,547
Paid-in capital 13,944,608 13,901,279
Retained earnings 13,031,385 12,676,198
Unallocated Employee Stock Ownership Plan shares (367,437) (389,483)
Treasury stock (539,143 shares as of December 31,
2001; 516,743 shares as of September 30, 2001) (9,235,225) (8,749,737)
Unearned compensation (137,429) (137,429)
Accumulated other comprehensive loss (237,071) (404,687)
------------ ------------
Total stockholders' equity 17,013,378 16,910,688
------------ ------------
Total liabilities and stockholders' equity $146,972,756 $147,438,762
============ ============
The accompanying notes are integral part of these
condensed consolidated financial statements.
1
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
Three Months Ended December 31, 2001 and 2000
---------------------------------------------
(Unaudited)
2001 2000
---- ----
Interest and dividend income:
Interest and fees on loans $2,021,484 $2,059,439
Interest and dividends on securities:
Taxable 190,356 245,674
Dividends on marketable equity securities 24,733 30,745
Dividends on Cooperative Bank Investment
and Liquidity Funds 551 7,745
Other interest 40,701 52,558
---------- ----------
Total interest and dividend income 2,277,825 2,396,161
---------- ----------
Interest expense:
Interest on deposits 898,985 1,061,582
Interest on securities sold under agreement
to repurchase 2,114 13,172
Interest on Federal Home Loan Bank advances 84,515 51,384
---------- ----------
Total interest expense 985,614 1,126,138
---------- ----------
Net interest and dividend income 1,292,211 1,270,023
Provision for loan losses 50,000 85,000
---------- ----------
Net interest and dividend income after
provision for loan losses 1,242,211 1,185,023
---------- ----------
Other income:
Service charges on deposit accounts 48,956 37,895
Securities gains, net 17,062 75,724
Gains on mortgages sold, net 186,417 17,862
Other income 88,478 76,043
---------- ----------
Total other income 340,913 207,524
---------- ----------
Other expense:
Salaries and employee benefits 430,099 437,262
Occupancy expense 41,540 47,042
Equipment expense 49,040 44,132
Data processing expense 94,764 71,505
Directors' fees 13,000 14,900
Legal and professional fees 47,447 70,602
Other expenses 174,366 175,356
---------- ----------
Total other expenses 850,256 860,799
---------- ----------
Income before income taxes 732,868 531,748
Income taxes 266,200 188,563
---------- ----------
Net income $ 466,668 $ 343,185
========== ==========
Comprehensive income $ 167,616 $ 209,735
========== ==========
Earnings per common share $ 0.52 $ 0.35
========== ==========
Earnings per common share, assuming dilution $ 0.50 $ 0.35
========== ==========
The accompanying notes are integral part of these
condensed consolidated financial statements.
2
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
Three Months Ended December 31, 2001
------------------------------------
(Unaudited)
Unallocated
Employee Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income(Loss) Total
------ ------- -------- -------------- -------- ------------ ------------- -----
Balance, September 30, 2001 $14,547 $13,901,279 $12,676,198 $(389,483) $(8,749,737) $(137,429) $(404,687) $16,910,688
Employee Stock Ownership Plan 22,546 22,546
ESOP shares released 22,046 22,046
Recognition and retention plan 27,060 27,060
Purchase of treasury stock (546,760) (546,760)
Exercise of stock options and
related tax benefit (6,277) 61,272 54,995
Dividends declared ($.12
per share) (111,481) (111,481)
Comprehensive income:
Net income 466,668
Net change in unrealized
holding gain on available-
for-sale securities 167,616
Comprehensive income 634,284
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, December 31, 2001 $14,547 $13,944,608 $13,031,385 $(367,437) $(9,235,225) $(137,429) $(237,071) $17,013,378
======= =========== =========== ========= =========== ========= ========= ===========
Three Months Ended December 31, 2000
------------------------------------
(Unaudited)
Unallocated
Employee Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income(Loss) Total
------ ------- -------- -------------- -------- ------------ ------------- -----
Balance, September 30, 2000 $14,547 $13,901,452 $11,669,877 $(477,668) $(6,850,722) $(291,097) $ 25,674 $17,992,063
Employee Stock Ownership Plan 8,236 8,236
ESOP shares released 22,046 22,046
Recognition and retention plan 27,357 27,357
Purchase of treasury stock (180,532) (180,532)
Exercise of stock options and
related tax benefit (1,756) 9,781 8,025
Dividends declared ($.09
per share) (92,424) (92,424)
Comprehensive income:
Net income 343,185
Net change in unrealized
holding gain on available-
for-sale securities (133,450)
Comprehensive income 209,735
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, December 31, 2000 $14,547 $13,935,289 $11,920,638 $(455,622) $(7,021,473) $(291,097) $(107,776) $17,994,506
======= =========== =========== ========= =========== ========= ========= ===========
The accompanying notes are integral part of these
condensed consolidated financial statements.
3
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Three Months Ended December 31, 2001 and 2000
-----------------------------------------------------
2001 2000
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 466,668 $ 343,185
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on sales of investment securities, net (17,062) (75,724)
(Amortization) accretion of investment securities, net 107,117 (4,861)
Provision for loan loss 50,000 85,000
Change in unearned income (4,652) (10,496)
Net gains on sales of loans (186,417) (17,862)
Depreciation and amortization 56,682 43,984
Loss on disposal of equipment 1,071 -
Amortization of mortgage servicing rights 3,890 -
Increase in mortgage servicing rights (174,493) -
(Increase) decrease in accrued interest receivable 33,083 (1,669)
(Increase) decrease in prepaid expenses 9,696 (16,269)
(Increase) decrease in other assets (964) 1,364
Recognition and retention plan (RRP) 27,060 27,357
Decrease in accrued expenses (6,381) (91,508)
Increase in taxes payable 255,196 129,643
Increase in accrued interest payable 390 -
Decrease in other liabilities (90,409) (16,884)
----------- -----------
Net cash provided by operating activities 530,475 395,260
----------- -----------
Cash flows from investing activities
Purchases of available-for-sale securities (3,086,751) (1,106,107)
Proceeds from sales of available-for-sale securities 60,868 155,623
Proceeds from maturities of available-for-sale securities 503,805 525,597
Purchases of held-to-maturity securities (8,101,183) (983,176)
Proceeds from maturities of held-to-maturity securities 1,506,326 3,400,247
Net increase in loans (6,229,612) (3,942,300)
Proceeds from sales of loans 8,392,110 2,445,422
Capital expenditures (12,942) (27,451)
----------- -----------
Net cash (used in) provided by investing activities (6,967,379) 467,855
----------- -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 1,775,972 (4,514,089)
Net increase (decrease) in time deposits (1,897,719) 1,621,157
Net decrease in securities sold under agreements
to repurchase (21,033) (332,669)
Proceeds from Federal Home Loan Bank long-term advances - 2,000,000
Repayments of Federal Home Loan Bank long-term advances (522,064) (20,659)
Net change in Federal Home Loan Bank short-term advances - 943,000
Proceeds from exercise of stock options 54,995 8,025
Dividends paid (111,481) (92,424)
Employee Stock Ownership Plan 22,546 8,236
Unallocated ESOP shares released 22,046 22,046
Purchase of treasury stock (546,760) (180,532)
----------- -----------
Net cash used in financing activities (1,223,498) (537,909)
----------- -----------
Increase (decrease) in cash and cash equivalents (7,660,402) 325,206
Cash and cash equivalents at beginning of period 10,835,279 6,830,473
----------- -----------
Cash and cash equivalents at end or period $ 3,174,877 $ 7,155,679
=========== ===========
Supplemental disclosures
Interest paid $ 985,614 $ 1,126,138
Income taxes paid 4,508 57,920
The accompanying notes are integral part of these
condensed consolidated financial statements.
4
FALMOUTH BANCORP, INC.
----------------------
AND SUBSIDIARIES
----------------
Notes to Unaudited Condensed Consolidated Financial Statements
Note 1 - Basis of Presentation
The condensed consolidated financial statements of Falmouth Bancorp,
Inc. (the "Company") and its subsidiaries presented herein are unaudited and
should be read in conjunction with the consolidated financial statements of
the Company for the year ended September 30, 2001. The results of operations
for the three-month period ended December 31, 2001 are not necessarily
indicative of the results to be expected for the full year. All material
intercompany balances and transactions have been eliminated in
consolidation. In the opinion of management, the condensed consolidated
financial statements reflect all adjustments (consisting solely of normal
recurring adjustments) necessary for a fair presentation of results for the
interim periods. The year-end condensed balance sheet was derived from
audited financial statements, but does not include all disclosures required
by accounting principles generally accepted in the USA (GAAP).
Note 2 - Accounting Policies
The accounting and reporting policies of the Company conform to GAAP
and prevailing practices within the banking industry. The interim financial
information should be read in conjunction with the Company's 2001 Annual
Report contained on Form 10-KSB.
Management is required to make estimates and assumptions that affect
amounts reported in the consolidated financial statements. Actual results
could differ significantly from those estimates.
Note 3 - Impact of New Accounting Standards
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities". Statement No. 133, as amended by SFAS
No. 138, establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities. The Statement is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The adoption
of SFAS No. 133, did not have a material effect on the Company's
consolidated financial statements.
FASB has issued SFAS No. 140, Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. This replaces SFAS
No, 125, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and rescinds SFAS Statement No. 127,
"Deferral of the Effective Date of Certain Provisions of FASB Statement No.
125." SFAS No. 140 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishments of liabilities. This
statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are secured borrowings.
This statement is effective for transfers and servicing of
5
financial assets and extinguishments of liabilities occurring after March
31, 2001; however, the disclosure provisions are effective for fiscal years
ending after December 15, 2000. The effect of this statement did not have a
material impact on the Company's financial position or result of operations.
Statement of Financial Accounting Standards No. 141 improves the
consistency of the accounting and reporting for business combinations by
requiring that all business combinations be accounted for under a single
method - the purchase method. Use of the pooling-of-interests method is no
longer permitted. Statement No. 141 requires that the purchase method be
used for business combinations initiated after June 30, 2001. Management
does not anticipate any impact on the consolidated financial statements upon
adoption of this statement.
Statement of Financial Accounting Standards No. 142 requires that
goodwill no longer be amortized to earnings, but instead be reviewed for
impairment. The amortization of goodwill ceases upon adoption of the
Statement, which for most companies, will be January 1, 2002. Management
does not anticipate any impact on the consolidated financial statements upon
adoption of this statement.
Note 4 - Earnings per Share
EPS for the three months ended December 31, 2001 and 2000 have been
calculated according to the guidelines of Statement 128. ESOP shares are
only considered outstanding for earnings per share calculations when they
are committed to be released.
Reconciliation of the numerators and the denominators in the
calculation of basic and diluted per share comparisons for net income are as
follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Three Months Ended December 31, 2001
Basic EPS
---------
Net income and income available to
common stockholders $466,668 892,175 $0.52
Effect of dilutive securities options and warrants 40,628
-------- -------
Diluted EPS
-----------
Income available to common stockholders $466,668 932,803 $0.50
======== =======
Three Months Ended December 31, 2000
Basic EPS
---------
Net income and income available to
common stockholders $343,185 982,778 $0.35
Effect of dilutive securities options and warrants 5,630
-------- -------
Diluted EPS
-----------
Income available to common stockholders $343,185 988,408 $0.35
======== =======
6
Note 5 - Dividends
On November 21, 2001, the Board of Directors of the Company declared a
quarterly cash dividend of $0.12 per share of common stock, which was paid
to stockholders of record on December 17, 2001.
Note 6 - Recent Developments
During the quarter ended December 31, 2001 the Company repurchased
26,000 shares of its common stock. The Company released 3,600 shares due to
exercised employee stock options. At December 31, 2001, the Company had
539,143 treasury shares.
Effective September 28, 2001, Falmouth Bank dissolved a subsidiary,
The Falmouth Securities Corporation, a Massachusetts securities corporation.
7
Part I. Item 2. Management's Discussion and
Analysis of Financial Condition and Operating Results
General
Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank, a
Massachusetts chartered stock co-operative bank, which is doing business as
Falmouth Bank (the "Bank" or "Falmouth"). At December 31, 2001, there were
915,607 shares outstanding. The Company's stock trades on the American Stock
Exchange under the symbol "FCB."
The Company's sole business activity is ownership of the Bank. The
Company also makes investments in long and short-term marketable securities
and other liquid investments. The business of the Bank consists of
attracting deposits from the general public and local businesses and using
these funds to originate primarily residential and commercial real estate
loans located in Falmouth, Massachusetts and surrounding areas and to invest
in United States Government and Agency securities. To a lesser extent, the
Bank engages in various forms of consumer and home equity lending. The
Bank's business strategy is to operate as a profitable community bank
dedicated to financing home ownership, small business, and consumer needs in
its market area and to provide personal, high quality service to its
customers. The Bank has one subsidiary, Falmouth Capital Corporation, a real
estate investment trust.
Comparison of Financial Condition at December 31, 2001 and September 30, 2001.
The Company's total assets decreased by $466,000 or 0.3% for the three
months ended December 31, 2001, from $147.4 million at September 30, 2001 to
$147.0 million at December 31, 2001. Total deposits decreased $122,000 or
0.1%, from $122.2 million at September 30, 2001 to $122.1 million at December
31, 2001. This decrease was due, in part to withdrawals from retail checking,
commercial checking, and certificate of deposit accounts during the period.
Total net loans were $110.5 million or 90.5% of total deposits at December
31, 2001, as compared to $112.6 million or 92.1% of total deposits at
September 30, 2001, representing a decrease of $2.0 million for the quarter.
This decrease is due, in part, to the Bank's decision to sell $7.3 million of
1-4 family loans on the secondary market coupled with an increase in loan
principal repayments due to refinancing activity caused by a decline in
interest rates during the period. Investment securities were $29.5 million or
20.1% of total assets at December 31, 2001, as compared to $20.2 million or
13.7% of total assets at September 30, 2001. Investment securities increased
$9.3 million or 46.0% due, in part, to cash flow provided by the Bank's
decision to sell a significant portion of its current loan production.
Borrowed funds from the Federal Home Loan Bank of Boston decreased
from $7.3 million at September 30, 2001 to $6.8 million at December 31,
2001. The decrease of $522,000 was the result of the repayment of maturing
debt along with normal amortization of long term borrowings.
Securities sold under an agreement to repurchase (sweep accounts for
commercial depositors) decreased from $676,000 at September 30, 2001 to
$655,000 at December 31, 2001. The decrease was attributed to the increased
seasonal liquidity needs of selected commercial deposit accounts at December
31, 2001.
8
Stockholders' equity was $17.0 million at December 31, 2001, and $16.9
million at September 30, 2001. The components of stockholders' equity
changed as a result of an increase in retained earnings of $355,000 and a
decrease in the unrealized accumulated comprehensive loss in securities of
$168,000, which was offset, in part, by an increase in treasury shares
purchased of $485,000 under the Company's stock repurchase programs. The
ratio of stockholders' equity to total assets was 11.6% at December 31,
2001, and the book value per share of common stock was $18.58, compared to
11.5% and $18.01, respectively, at September 30, 2001.
The ratio of the allowance for loan losses to total loans was .89% at
December 31, 2001. Management believes the allowance will be adequate based
upon, among other things, past loss experience, prevailing economic
conditions, and the level of credit risk in the loan portfolio. However, the
Bank may periodically provide additional provisions as deemed necessary to
maintain a sufficient allowance for the loan loss to total loan ratio. The
Bank plans to continue to set aside additional general reserves as well as
specific reserves for commercial loans and large residential mortgages.
Net Income. The Company's net income for the three months ended
December 31, 2001 was $467,000 as compared to $343,000 on December 31, 2000.
The increase in net income of $123,000 was primarily due to an increase in
other income of $133,000, an increase of $57,000 in net interest and dividend
after provision for loan losses, a decrease in other expenses of $11,000
offset by an increase in income taxes of $78,000. The annualized return on
average assets (ROA) for the three months ended December 31, 2001 was 1.26%,
an increase of 22 basis points, as compared to 1.04% for the same period of
the prior year. The increase of $123,000 included $116,000 in after tax
income from the adoption of SFAS No. 122 and SFAS No. 125 "Mortgage Servicing
Assets and Mortgage Servicing Rights."
Interest and Dividend Income. Total interest and dividend income for
the three months ended December 31, 2001 was $2.3 million, a decrease of
$118,000, as compared to $2.4 million for the three month period ended
December 31, 2000. The decrease was attributable to a decrease in interest
and fees on loans of $38,000, and a decrease in dividends on securities and
other interest of $80,000.
Interest Expense. Total interest expense for the three months ended
December 31, 2001 was $986,000 as compared to $1.1 million for the same
period of the prior year, a decrease of $141,000. The decrease in interest
expense is primarily due to declining short term interest rates offset by an
$11.3 million growth in interest bearing deposits for the twelve months ended
December 31, 2001.
Net Interest and Dividend Income. Net interest and dividend income for
the three-month period ended December 31, 2001 was $1.292 million as compared
to $1.270 million for the three months ended December 31, 2000. During the
most recent period, there was a $22,000 increase resulting from a $118,000
decrease in interest and dividend income, offset by a $140,000 decrease in
interest expense. The net interest margin for the three months ended December
31, 2001 was 3.70%, a decrease of 31 basis points, as compared to 4.01% for
the three months ended December 31, 2000. The decrease in net interest margin
was primarily the result of a decrease in interest income.
9
Provision for Loan Losses. The Bank added $50,000 to its allowance for
loan losses during the quarter ended December 31, 2001, as compared to
$85,000 for the quarter ended December 31, 2000. This decrease was the result
of managements desire to sell a substantial amount of its newly originated
loans on the secondary market, thus reducing the amount of growth in loans as
compared to the same period of the previous year. Management believes that,
although the provision is deemed adequate based on its delinquency and loan
loss record, additional provisions may be added from time to time as the loan
portfolio expands by loan type and volume, including expansion in the
commercial loan portfolio. The Bank reviews the general and specific reserves
allocated to each loan type, both on and off the balance sheet. This review
procedure allows management to look at the growth and risk of each loan type.
If necessary, additional reserves can be allocated where loss exposure
appears to have risen. Where commercial loans traditionally have a greater
degree of loss exposure, the amount of the allowance may be greater than that
of traditional 1-4 family mortgage loan of the same amount. If losses appear
eminent within a loan type or in general, allowances could be increased.
General allowances are generally increased as the total loan portfolio
increases. Net loans decreased $2.0 million for the three months ended
December 31, 2001, primarily due to 1-4 family loan sales. This decrease
aided in improving the Bank's allowance for loan loss to .89 % of total loans
at December 31, 2002. The Bank's Asset/Liability Committee routinely reviews
the risk weighting applied to each type of loan. There have been no changes
during the period ended December 31, 2001. As of December 31, 2001, the Bank
had three non-performing installment loans with combined principal balances
of $5,000.
Other Income. Other income for the three months ended December 31, 2001
was $341,000, as compared to $208,000 for the three months ended December 31,
2000. The $133,000 increase was primarily the result of an increase in
service charge income of $11,000, an increase in net gains on the sale of
mortgages of $169,000 and an increase in other income of $12,000. This was
offset, in part, by a decrease in net gains realized from the sale of
investment securities of $59,000. Gains on mortgages sold of $186,000 for the
three months ended December 31, 2001 was primarily due to the adoption of
SFAS No. 122 and SFAS No. 125 "Mortgage Servicing Assets and Mortgage
Servicing Rights." Mortgage servicing assets are to be amortized over the
expected life of the asset. The expense is not expected to have a significant
impact on net income. To the extent that loans serviced for others increase
or decrease, the valuation of the mortgage servicing asset will be adjusted
accordingly. Large changes over short periods of time in the valuation of the
asset could have a significant impact on net earnings. Management does not
anticipate large short term changes in the valuation, but expects decreases
due to loan pay-offs to be offset by increases in sales of newly originated
loans. Management believes that changes in the valuation of the mortgage
servicing asset will be gradual and impact on net income will not be
significant.
Operating Expenses. Operating expenses for the three months ended
December 31, 2001 were $850,000 compared to $861,000 for the three months
ended December 31, 2000. The $11,000 decrease was primarily due to the
combination of a decrease in salaries and employee benefits of $7,000, a
decrease in occupancy expense of $6,000, a decrease in directors' fees of
$2,000, a decrease in legal and professional costs of $23,000 and a decrease
in other expenses of $1,000, combined with an increase in data processing
expense of $23,000 and an increase in equipment expense of $5,000. The
annualized ratio of operating expenses to average total assets for the three
months ended December 31, 2001 was 2.29%, as compared to 2.57% for the three
month period ended December 31, 2000, a decrease of 28 basis points. The
operating efficiency ratio improved from 67.48% for the three months period
ended December 31, 2000 to 55.69% for the three months period ended December
31, 2001. The decrease in legal and professional cost was due to the absence
of third party consultants utilized during the same period of the previous
year. Data processing expense increased, in part, due to the increased annual
operating costs of Internet Banking and bill paying which were introduced in
August 2001.
10
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment and
prepayment of loans and mortgaged-backed securities, maturities of
investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable sources
of funds, deposit flows and loan prepayments are greatly influenced by the
general level of interest rates, economic conditions and competition. The
Bank uses its liquidity resources principally to fund existing and future
loan commitments, to fund net deposit outflows, to invest in other interest-
earning assets, to maintain liquidity, and to meet operating expenses.
The Bank is required to maintain adequate levels of liquid assets.
This guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Bank has historically maintained a level of liquid assets in
excess of regulatory requirements. The Bank's liquidity ratio at December
31, 2001 was 25.0%.
A major portion of the Bank's liquidity consists of short-term
securities obligations. The level of these assets is dependent on the Bank's
operating, investing, lending and financing activities during any given
period. At December 31, 2001, regulatory liquidity totaled $31.8 million.
The primary investing activities of the Bank include origination of loans
and the purchase of investment securities.
Liquidity management is both a daily and long-term function of
management. If the Bank requires funds beyond its ability to generate them
internally, the Bank believes that it could borrow additional funds from the
FHLB of Boston. At December 31, 2001, the Bank had outstanding advances from
the FHLB of Boston in the amount of $6.8 million in short and long-term
borrowings. As these advances mature, they will be repaid or re-written as
longer term matched borrowings which will assist the match of rate sensitive
assets to rate sensitive liabilities.
At December 31, 2001, the Bank had $5.1 million in outstanding
residential and commercial commitments to originate loans, as well as $19.9
million in unadvanced loan commitments. If the Bank anticipates that it may
not have sufficient funds available to meet its current loan commitments it
may commence further matched borrowing from the Federal Home Loan Bank of
Boston. Certificates of deposit that are scheduled to mature in one year or
less totaled $43.6 million at December 31, 2001. Based on historical
experience, management believes that a significant portion of such deposits
will remain with the Bank.
At December 31, 2001 the Bank exceeded all of its regulatory capital
requirements.
11
OTHER INFORMATION
Part II.
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
12
Falmouth Bancorp, Inc. is a publicly owned bank holding company and
the parent corporation of Falmouth Bank, a Massachusetts chartered stock co-
operative bank offering traditional products and services. The Bank conducts
business through its main office located at 20 Davis Straits, Falmouth,
Massachusetts 02540, and its two branch locations in North and East
Falmouth. The telephone number is (508) 548-3500.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALMOUTH BANCORP, INC.
(Registrant)
Date: February 13, 2002 By: /s/ Santo P. Pasqualucci
---------------------- ------------------------
Santo P. Pasqualucci
President and Chief Executive
Officer
Date: February 13, 2002 By: /s/ George E. Young, III
---------------------- ------------------------
George E. Young, III
Senior Vice President and
Chief Financial Officer
13