SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 01-13465
Falmouth Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Davis Straits, Falmouth, MA 02540
(Address of principal executive offices) (Zip Code)
(508) 548-3500
(Registrant's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding twelve months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject
to such filing requirement for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date
Outstanding at
Class June 30, 2002
----- --------------
Common Stock, Par Value $.01 898,679
Transitional small business disclosure format:
Yes [ ] No [X]
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2002 and September 30, 2001 1
Condensed Consolidated Statements of Income
For Three and Nine months Ended June 30, 2002 and 2001 2
Condensed Consolidated Statements of Changes in
Stockholders' Equity For Nine months Ended June 30, 2002
and 2001 3
Condensed Consolidated Statements of Cash Flows
For Nine months Ended June 30, 2002 and 2001 4-5
Notes to Unaudited Condensed Consolidated Financial
Statements 6-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Operating Results 9-13
PART II OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
============================================================================
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
-------------------------------------
June 30, 2002 and September 30, 2001
------------------------------------
June 30, September 30,
2002 2001
-------- ------------
(unaudited)
ASSETS
Cash, due from banks, and interest bearing deposits $ 2,528,914 $ 3,521,609
Federal funds sold 6,903,174 7,313,670
------------ ------------
Total cash and cash equivalents 9,432,088 10,835,279
Investments in available-for-sale securities (at fair value) 17,430,588 9,381,853
Investments in held-to-maturity securities (fair values of $16,994,755 as of
June 30, 2002 and $10,036,408 as of September 30, 2001) 16,990,872 9,948,877
Federal Home Loan Bank stock, at cost 878,000 878,000
Loans, net 106,350,214 112,554,093
Premises and equipment 1,823,538 1,897,697
Accrued interest receivable 917,467 830,421
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 1,153,904 717,147
------------ ------------
Total Assets $155,372,066 $147,438,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 18,274,219 $ 16,147,253
Interest-bearing 114,821,441 106,028,583
------------ ------------
Total deposits 133,095,660 122,175,836
Securities sold under agreements to repurchase 396,945 675,756
Advances from Federal Home Loan Bank of Boston 5,201,008 7,267,948
Other liabilities 314,715 354,534
------------ ------------
Total Liabilities 139,008,328 130,474,074
------------ ------------
Minority preferred stockholders' equity in a subsidiary company of
Falmouth Co-operative Bank 53,500 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 13,895,526 13,901,279
Retained earnings 13,622,608 12,676,198
Unallocated Employee Stock Ownership Plan shares (323,345) (389,483)
Treasury stock (556,071 shares as of June 30, 2002;
516,743 shares as of September 30, 2001) (9,844,997) (8,749,737)
Unearned compensation (477,088) (137,429)
Accumulated other comprehensive loss (577,013) (404,687)
------------ ------------
Total stockholders' equity 16,310,238 16,910,688
------------ ------------
Total liabilities and stockholders' equity $155,372,066 $147,438,762
============ ============
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(unaudited)
Three Months Ended Nine months Ended
-------------------------- --------------------------
June 30, June 30, June 30, June 30,
2002 2001 2002 2001
-------- -------- -------- --------
Interest and dividend income:
Interest and fees on loans $1,860,975 $2,147,048 $5,779,848 $6,296,294
Interest and dividends on securities:
Taxable 318,263 210,129 723,753 674,503
Dividends on marketable equity securities 19,209 24,200 61,931 81,363
Dividends on Cooperative Bank Investment
and Liquidity Funds - 7,378 551 22,795
Other interest 29,302 51,228 90,541 146,277
---------- ---------- ---------- ----------
Total interest and dividend income 2,227,749 2,439,983 6,656,624 7,221,232
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 714,616 1,019,785 2,378,554 3,131,514
Interest on securities sold under agreement
to repurchase 857 7,193 4,256 31,368
Interest on Federal Home Loan Bank
advances 62,799 116,095 227,337 259,020
---------- ---------- ---------- ----------
Total interest expense 778,272 1,143,073 2,610,147 3,421,902
---------- ---------- ---------- ----------
Net interest and dividend income 1,449,477 1,296,910 4,046,477 3,799,330
Provision for loan losses 30,000 30,000 110,000 145,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,419,477 1,266,910 3,936,477 3,654,330
---------- ---------- ---------- ----------
Other income:
Service charges on deposit accounts 43,450 39,084 136,221 111,943
Securities gains (losses), net (70,020) 39,340 (52,958) 193,017
Gains (losses) on mortgages sold, net 78,560 1,116 338,086 17,446
Other income 82,846 75,205 238,984 211,102
---------- ---------- ---------- ----------
Total other income 134,836 154,745 660,333 533,508
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits 434,746 423,892 1,286,498 1,326,092
Occupancy expense 38,182 51,124 120,363 148,515
Equipment expense 44,706 47,305 144,294 134,005
Data processing expense 103,849 87,832 291,562 236,013
Directors' fees 17,900 12,900 52,950 41,450
Legal and professional fees 55,559 49,849 150,277 185,155
Other expenses 178,147 171,445 518,102 511,403
---------- ---------- ---------- ----------
Total other expenses 873,089 844,347 2,564,046 2,582,633
---------- ---------- ---------- ----------
Income before income taxes 681,224 577,308 2,032,764 1,605,205
Income taxes 253,667 202,645 746,292 569,683
---------- ---------- ---------- ----------
Net income $ 427,557 $ 374,663 $1,286,472 $1,035,522
========== ========== ========== ==========
Comprehensive income $ 218,728 $ 352,035 $1,114,146 $ 770,766
========== ========== ========== ==========
Earnings per common share $0.49 $0.39 $1.46 $1.06
===== ===== ===== =====
Earnings per common share, assuming dilution $0.46 $0.38 $1.39 $1.05
===== ===== ===== =====
The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
Nine months ended June 30, 2002
-------------------------------
(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 77,746 77,746
ESOP shares released 66,138 66,138
Recognition and retention plan 53,825 (477,088) (423,263)
Distribution of RRP shares (137,429) 137,429 -
Purchase of treasury stock (1,328,901) (1,328,901)
Exercise of stock options and
related tax benefit 105 233,641 233,746
Dividends declared (340,062) (340,062)
Comprehensive income:
Net income 1,286,472
Net change in unrealized
holding gain on available-
for-sale securities (172,326)
Comprehensive Income 1,114,146
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, June 30, 2002 $14,547 $13,895,526 $13,622,608 $(323,345) $(9,844,997) $(477,088) $(577,013) $16,310,238
======= =========== =========== ========= =========== ========= ========= ===========
Nine months ended June 30, 2001
-------------------------------
(unaudited)
Unallocated
Employee Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income 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 34,300 34,300
ESOP shares released 66,138 66,138
Recognition and retention plan 82,759 82,759
Distribution of RRP shares (153,668) 153,668 -
Purchase of treasury stock (427,432) (427,432)
Exercise of stock options and
related tax benefit (8,521) 74,453 65,932
Dividends declared (306,163) (306,163)
Comprehensive income:
Net income 1,035,522
Net change in unrealized
holding gain on available-
for-sale securities (264,756)
Comprehensive Income 770,766
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, June 30, 2001 $14,547 $13,856,322 $12,399,236 $(411,530) $(7,203,701) $(137,429) $(239,082) $18,278,363
======= =========== =========== ========= =========== ========= ========= ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Nine months Ended June 30, 2002 and 2001
------------------------------------------------
2002 2001
---- ----
(unaudited) (unaudited)
Cash flows from operating activities
Net income $ 1,286,472 $ 1,035,522
Adjustments to reconcile net income to net cash
provided by operating activities:
(Gains) losses on sales of investment securities, net 52,958 (193,017)
Amortization of investment securities, net 313,254 8,527
Provision for loan loss 110,000 145,000
Change in unearned income (2,242) 80,206
Net gains on sales of loans (338,086) (17,446)
Depreciation and amortization 145,375 139,253
Loss on disposal of equipment 1,071 -
Amortization of mortgage servicing rights 20,547 -
Increase in mortgage servicing rights (308,934) -
Increase in accrued interest receivable (87,046) (23,366)
(Increase) decrease in prepaid expenses (6,311) 3,442
Increase in other assets (410) (1,124)
Recognition and retention plan (RRP) 53,825 82,759
Decrease in minority interests in a consolidated
subsidiary of Falmouth Co-operative Bank (500) -
Increase (decrease) in accrued expenses 1,663 (77,075)
Increase (decrease) in taxes payable (114,191) 121,313
Increase in accrued interest payable 5 79
Decrease in other liabilities (41,487) (43,256)
------------ ------------
Net cash provided by operating activities 1,085,963 1,260,817
------------ ------------
Cash flows from investing activities
Purchases of available-for-sale securities (9,875,415) (4,165,129)
Proceeds from sales of available-for-sale securities 60,881 841,009
Proceeds from maturities of available-for-sale securities 1,350,285 2,200,569
Purchases of held-to-maturity securities (19,471,386) (9,160,046)
Proceeds from maturities of held-to-maturity securities 12,278,909 11,547,756
Purchase of Federal Home Loan Bank Stock - (157,300)
Loan originations and principal collections, net (17,036,358) (13,159,446)
Proceeds from sales of loans 23,470,564 2,733,511
Capital expenditures (72,287) (91,661)
------------ ------------
Net cash used in by investing activities (9,294,807) (9,410,737)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 11,857,728 1,719,498
Net increase (decrease) in time deposits (937,903) 5,897,052
Net decrease in securities sold under agreements to repurchase (278,811) (178,132)
Proceeds from Federal Home Loan Bank long-term advances - 6,500,000
Repayments of Federal Home Loan Bank long-term advances (2,066,940) (4,562,916)
Net change in Federal Home Loan Bank short-term advances - 2,000,000
Proceeds from exercise of stock options 233,746 65,932
Dividends paid (340,062) (306,163)
Employee Stock Ownership Plan 77,746 34,300
Unallocated ESOP shares released 66,138 66,138
Purchase of company shares for RRP Trust (477,088) -
Purchase of treasury stock (1,328,901) (427,432)
------------ ------------
Net cash provided by financing activities 6,805,653 10,808,277
------------ ------------
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Nine months Ended June 30, 2002 and 2001
------------------------------------------------
(continued)
2002 2001
---- ----
(unaudited) (unaudited)
Increase (decrease) in cash and cash equivalents (1,403,191) 2,658,357
Cash and cash equivalents at beginning of period 10,835,279 6,830,473
------------ ------------
Cash and cash equivalents at end of period $ 9,432,088 $ 9,488,830
============ ============
Supplemental disclosures
Interest paid $ 2,610,142 $ 3,421,902
Income taxes paid 860,483 628,220
The accompanying notes are an integral part of these condensed
consolidated financial statements.
5
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 nine-month period ended June 30, 2002 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 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, Business
Combinations, 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-
6
interests method is no longer permitted. Statement No. 141, Goodwill and
Other Intangible Assets, requires that the purchase method be used for
business combinations initiated after June 30, 2001. Adoption of this
Statement had no impact on the consolidated financial statements.
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. Adoption of
this Statement had no impact on the consolidated financial statements.
Note 4 - Earnings per Share
Earnings per share (EPS) for the three months and nine months ended
June 30, 2002 and 2001 have been calculated according to the guidelines of
FASB 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 earnings per share are as follows:
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Three Months Ended June 30, 2002
Basic EPS
---------
Net income and income available to
common stockholders $ 427,557 873,431 $0.49
Effect of dilutive securities options and warrants 53,659
---------- -------
Diluted EPS
-----------
Income available to common stockholders $ 427,557 927,090 $0.46
========== =======
Three Months Ended June 30, 2001
Basic EPS
---------
Net income and income available to
common stockholders $ 374,663 964,798 $0.39
Effect of dilutive securities options and warrants 21,633
---------- -------
Diluted EPS
-----------
Income available to common stockholders $ 374,663 986,431 $0.38
========== =======
Nine months ended June 30, 2002
Basic EPS
---------
Net income and income available to
common stockholders $1,286,472 880,471 $1.46
Effect of dilutive securities options and warrants 45,678
---------- -------
Diluted EPS
-----------
Income available to common stockholders $1,286,472 926,149 $1.39
========== =======
7
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Nine months Ended June 30, 2001
Basic EPS
---------
Net income and income available to
common stockholders $1,035,522 974,468 $1.06
Effect of dilutive securities options and warrants 15,547
---------- -------
Diluted EPS
-----------
Income available to common stockholders 1,035,522 990,015 $1.05
========== =======
Note 5 - Dividends
On May 21, 2002, the Board of Directors of the Company declared a
quarterly cash dividend of $0.13 per share of common stock, which was paid
on June 20, 2002 to stockholders of record on June 6, 2002.
Note 6 - Recent Developments
During the quarter ended June 30, 2002 the Company repurchased 25,600
shares of its common stock. The Company issued 9,532 treasury shares due to
exercised employee stock options. At June 30, 2002, the Company had 556,071
treasury shares.
Note 7 - Contingency
Falmouth Capital Corporation ("FCC"), a subsidiary of the Bank, was
established in December 1999 as a Massachusetts-chartered real estate
investment trust (the "REIT"). The Bank received dividends from FCC.
The Bank, and several other financial institutions operating in the
Commonwealth of Massachusetts with similar real estate investment trust
subsidiaries, have recently received Notices of Intent to Assess additional
state excise taxes from the Massachusetts Department of Revenue (the "DOR"),
challenging the dividends received deduction claimed by the Bank and other
institutions. The Bank received a Notice of Intent to assess a tax in the
amount of $470,972 and intends to vigorously appeal this Notice. The Company
has not recorded a loss provision in regard to the matter.
8
Part I. Item 2. Management's Discussion and
Analysis of Financial Condition and Operating Results
General
Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank (the
"Bank" or "Falmouth"), a Massachusetts chartered stock co-operative bank. At
June 30, 2002, there were 898,679 shares of the common stock of the company
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.
The Company had average shares outstanding of 873,431 in the three
months ended June 30, 2002, as compared to 964,798 average shares
outstanding in the three months ended June 30, 2001. The Company has
continued with its stock buy-back programs. At June 30, 2002, the Company
had a total of 556,071 shares of treasury stock, or 38.23% of its common
stock, leaving 898,679 shares issued and outstanding.
Comparison of Financial Condition at June 30, 2002 and September 30, 2001.
The Company's total assets increased by $7.9 million or 5.4% from
$147.4 million at September 30, 2001, to $155.4 million at June 30, 2002.
Total deposits increased $10.9 million or 8.9%, from $122.2 million at
September 30, 2001 to $133.1 million at June 30, 2002. This increase was
due, in part to seasonal deposits in NOW accounts, regular savings accounts
and Money Market Deposit accounts during the period. Total net loans were
$106.4 million or 80.0% of total deposits at June 30, 2002, as compared to
$112.6 million or 92.1% of total deposits at September 30, 2001,
representing a decrease of $6.2 million for the period. This decrease was
due, in part, to the large number of 1-4 family mortgages that were re-
written, due to lower market rates, and then sold by the Bank on the
secondary market. Investment securities were $35.3 million or 22.7% of
total assets at June 30, 2002, as compared to $20.2 million or 13.7% of
total assets at September 30, 2001. Investment securities increased $15.1
million or 74.7% due, in part, to the reinvestment of cash flows generated
from loan payoffs and sold loans into short-term securities.
Borrowed funds from the Federal Home Loan Bank of Boston decreased
from $7.3 million at September 30, 2001 to $5.2 million at June 30, 2002.
The decrease of $2.1 million was the result of the repayment of maturing
debt along with normal amortization of long term borrowings.
Securities sold under agreements to repurchase (sweep accounts for
commercial depositors) decreased from $676,000 at September 30, 2001 to
$397,000 at June 30, 2002. The decrease was attributed to the increased
seasonal needs of our commercial demand deposit customers.
9
Stockholders' equity was $16.3 million at June 30, 2002, as compared
to $16.9 million at September 30, 2001, a decrease of $600,000. This change
was primarily the result of net income, net of dividends paid to
stockholders, added to retained earnings of $946,000 and the scheduled
discharge of liabilities on stock based employee benefit plans of $431,000
(ESOP, RRP, and stock options), off-set in part by a decrease in accumulated
other comprehensive income of $172,000, the purchase of treasury shares
under the Company's stock repurchase programs at a cost of $1,328,000, and
the purchase of company stock for the RRP Trust at a cost of $477,000. The
ratio of stockholders' equity to total assets was 10.50% at June 30, 2002,
and the book value per share of common stock was $18.15, compared to 11.47%
and $18.01, respectively, at September 30, 2001.
The ratio of the allowance for loan losses to total loans was .98% at
June 30, 2002. 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.
Three Months Ended June 30, 2002 and 2001
Net Income. The Company's net income for the three months ended June
30, 2002 was $428,000, as compared to $375,000 for the three months ended
June 30, 2001. The increase in net income of $53,000 was due, in part, to a
decrease in interest and dividend income of $212,000 that was more than
offset by a decrease in interest expense of $365,000. Other key factors
included a decrease in other income of $20,000, an increase in other
expenses of $29,000 and an increase in income taxes of $51,000. The
annualized return on average assets (ROA) for the three months ended June
30, 2002 was 1.13%, an increase of 8 basis points, as compared to 1.05% for
the same period of the prior year. The annualized return on average equity
(ROE) for the three months ended June 30, 2002 was 10.20%, an increase of
203 basis points, as compared to 8.17% for the same period of the previous
year. Interest and dividend income decreased, primarily as the result of low
interest rates, loan payoffs, and loan sales during the period. The decrease
in interest expense was primarily due to a reduction in the general level of
interest rates while total deposits rose only slightly.
Net Interest and Dividend Income. Net interest and dividend income
was $1.5 million for the three-month period ended June 30, 2002 as compared
to $1.3 million for the three months ended June 30, 2001. The $153,000
increase was the result of a $212,000 decrease in interest and dividend
income, offset by a $365,000 decrease in interest expense. The net interest
margin for the three months ended June 30, 2002 was 4.08%, an increase of 21
basis points, as compared to 3.87% for the three months ended June 30, 2001.
The increase in net interest margin was primarily the result of a decrease
in interest expense.
Interest Expense. Total interest expense for the three months ended
June 30, 2002 was $778,000, as compared to $1.14 million for the same period
of the prior year, a decrease of $365,000. This was the result of decreased
FHLB borrowings as well as a reduction in interest rates paid on deposits
during the period.
Provision for Loan Losses. The Bank added $30,000 to its allowance for
loan losses during the quarter ended June 30, 2002, as compared to $30,000
for the quarter ended June 30, 2001. 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
10
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 imminent 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 $6.2 million for the three months ended June 30, 2002, primarily
due to 1-4 family loan sales. This decrease aided in improving the Bank's
allowance for loan loss to .98 % of total loans at June 30, 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 June
30, 2002. As of June 30, 2002, the Bank had no non-performing loans.
Other Income. Other income for the three-month period ended June 30,
2002 was $135,000, as compared to $155,000 for the three months ended June
30, 2001. The $20,000 decrease was primarily the result of a decrease in
net gains realized from the sale of investment securities of $109,000, an
increase in service charge income of $4,000, an increase in net gains on
mortgages sold of $77,000, and an increase in other income of $8,000.
Operating Expenses. Operating expenses for the three months ended
June 30, 2002 were $873,000, as compared to $844,000 for the three months
ended June 30, 2001. The $29,000 increase was primarily due to increase in
salaries and employee benefits of $11,000, an increase in legal and
professional costs of $6,000, combined with an increase in data processing
expense of $16,000, an increase in directors' fees of $5,000 and an increase
in other expenses of $7,000, offset, in part, by the combination of a
decrease in occupancy expense of $13,000, and decrease in equipment expense
of $3,000. The annualized ratio of operating expenses to average total
assets for the three months ended June 30, 2002 was 2.31%, as compared to
2.36% for the three-month period ended June 30, 2001, a decrease of 5 basis
points. The increase in salaries and employee benefits was due,
substantially, to increased employees' medical insurance premiums and in the
cost of the employees stock ownership plan, whose cost fluctuates with the
current market price of Falmouth Bancorp, Inc. common stock. The decrease in
occupancy expense was due, primarily to the decrease in equipment
depreciation expense. Data processing expense increased, in part, due to the
increased operating costs of Internet Banking and bill paying as well as
Internet Cash Management and bill paying for our business customers.
Nine months Ended June 30, 2002 and 2001
Net Income. The Company's net income for the nine months ended June
30, 2002 was $1.3 million as compared to $1.0 million at June 30, 2001, an
increase of $251,000, or 24.2%. This was primarily due to a decrease in
interest and dividend income of $565,000, offset by a decrease in interest
expense of $812,000, a decrease in the provision for loan losses of $35,000,
an increase in other income of $127,000, a decrease on other expenses of
$19,000 and an increase in taxes of $177,000. The loan loss provision was
decreased due to the reduction in the Bank's loan portfolio due to the sale
of loans. It had been increased in the previous year to better align the
reserve with the size of the portfolio at that time. At June 30, 2002, the
Bank had three loans, with a combined balance of $87,000, which are 30 days
or more delinquent. The Bank's allowance for loan losses was 0.98% of total
loans at June 30, 2002. The annualized return on average equity (ROE) for
the nine months ended June 30, 2002 was 9.06%, an increase of 182 basis
points, as compared to 7.24% for the nine months ended June 30, 2001.
Interest and Dividend Income. Total interest and dividend income for
the nine months ended June 30, 2002 was $6.7 million, a decrease of $565,000
as compared to $7.2 million for the nine-month period ended June 30, 2001.
The decrease in interest and dividend income is attributable to lower
interest rates on loans
11
and other investments as well as a reduction of loans held for investment
from 92.1% of total deposits at June 30, 2001 to 79.9% at June 30, 2002.
Although the investment portfolio grew $15.1 million from $20.2 million at
June 30, 2001 to $35.3 million at June 30, 2002, investment and other
interest income decreased $48,000 due to the decrease in interest rates
generally and the Bank's strategy of investing in short term, lower yielding
securities in anticipation of rising interest rates. Management believes it
is well positioned for a rising rate scenario. In the short term,
profitability will remain relatively unchanged as the effects of higher
earning assets being replaced with lower earning assets are offset by the
effects of higher cost term deposits and borrowings being replaced with lower
cost term deposits and borrowings.
Interest Expense. Interest expense for the nine months ended June 30,
2002 was $2.6 million, including $227,000 in interest on FHLB advances, which
is a decrease of $812,000 from $3.4 million for the nine months ended June
30, 2001. This was the result of decreased FHLB borrowings as well as a
reduction in interest rates paid on deposits during the period. There was a
$753,000 decrease in interest on deposits and a $59,000 decrease in interest
on borrowed funds and securities sold under agreement to repurchase.
Net Interest and Dividend Income. Net interest and dividend income for
the nine-month period ended June 30, 2002 was $4.1 million as compared to
$3.8 million for the nine months ended June 30, 2001. The net interest
margin for the nine months ended June 30, 2002 was 3.83%, a decrease of 7
basis points as compared to 3.90% for the nine months ended June 30, 2001.
The annualized return on average assets (ROA) for the nine-month period ended
June 30, 2002 was 1.15%, an increase of 15 basis points, as compared to 1.00%
for the same period of the prior year. The reason for the increase in the
ROA was primarily due to the increase in net interest income after the
provision for loan loss, the gain on sales of current production loans, and
decreases in other expenses, offset somewhat by the net losses on sales of
investment securities.
Provision for Loan Losses. The Bank added $110,000 to its allowance
for loan loss account for the nine months ended June 30, 2002 which is
$35,000 less than the $145,000 added for the nine month period ended June 30,
2001. The loan loss provision was decreased because of the reduction in the
Bank's loan portfolio due to the sale of loans. It had been increased in
the previous year to better align the reserve with the size and risk
associated with the portfolio at that time. At June 30, 2002, the Bank had
three loans, with a combined balance of $87,000, which are 30 days or more
delinquent. The Bank's allowance for loan losses was 0.98% of total loans
at June 30, 2002. Management believes the provision to be adequate and
commensurate with the level of credit risk.
Other Income. Total other income for the nine-month period ended June
30, 2002 was $660,000 as compared to $534,000 for the nine months ended June
30, 2001. The $126,000 increase is primarily the result of an increase of
$320,000 in gains on loans sold offset, in part by a decrease of $246,000 in
securities gains net, on the sale of investment securities taken during the
nine months ended June 30, 2002. Other income increased $28,000 and services
charges on deposit accounts increased $24,000 during the same nine-month
period. The $28,000 increase in other income consisted of increases in ATM
fees collected of $21,000, increases in loan servicing fee income of $28,000
and increases in loan processing fees, wire transfer fees, and prepayment
penalty fees of $14,000. These were offset by a decrease in rental income of
$26,000 and a decrease in miscellaneous income of $9,000.
Operating Expenses. Operating expenses for the nine months ended June
30, 2002 and 2001 were $2.6 million. A $19,000 decrease was primarily due to
a decrease in salaries and employee benefits expense of $40,000, a decrease
in occupancy expense of $28,000, and a decrease in legal and professional
fees of $35,000 partially offset by an increase in equipment expense of
$10,000, an increase in data processing
12
expense of $55,000, an increase in directors fees of $12,000, and an increase
of other expense of $7,000. The ratio of annualized operating expenses to
average total assets for the nine months ended June 30, 2002 was 2.31% as
compared to 2.42% for the nine-month period ended June 30, 2001. The
decrease in salary and employee benefits was due, substantially, to the
recent elimination of the Bank's defined benefit retirement plan. 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 operating
costs of Internet Banking and bill paying as well as Internet Cash
Management and bill paying for our business customers.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment and
prepayment of loans and mortgage-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 June
30, 2002 was 31.96%.
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 June 30, 2002, regulatory liquidity totaled $44.2 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
Federal Home Loan Bank of Boston (FHLB). At June 30, 2002, the Bank had
outstanding advances from the FHLB of Boston in the amount of $5.2 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 as well as
reduce interest expense.
At June 30, 2002, the Bank had $5.2 million in outstanding residential
and commercial commitments to originate loans, as well as $21.0 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 FHLB. At June 30, 2002,
certificates of deposit that are scheduled to mature in one year or less
totaled $47.4 million. Based on historical experience, management believes
that a significant portion of such deposits will remain with the Bank.
At June 30, 2002 the Bank exceeded all of its regulatory capital
requirements.
13
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
The Company's Chief Executive Officer and Chief Financial
Officer have furnished statements relating to its Form 10-Q
for the quarter ended June 30, 2002 pursuant to 18 U.S.C.
section 1350, as adopted pursuant to section 906 of the
Sarbanes-Oxley Act of 2002. The statements are attached
hereto as Exhibit 99.1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certification of Chief Executive Officer and
Treasurer.
(b) Reports on Form 8-K.
None
14
Falmouth Bancorp, Inc. is a publicly owned bank holding company and
the parent corporation of Falmouth Co-operative Bank, a Massachusetts
chartered stock co-operative bank offering traditional products and
services. The Bank conducts business through its main office located at 20
Davis Straits, Falmouth, Massachusetts 02540, and its two branch locations
in North and East Falmouth. The telephone number is (508) 548-3500.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has
duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
FALMOUTH BANCORP, INC.
(Registrant)
Date: August 12, 2002 By: /s/ Santo P. Pasqualucci
________________________________
Santo P. Pasqualucci
President and Chief Executive
Officer
Date: August 12, 2002 By: /s/ George E. Young, III
________________________________
George E. Young, III
Senior Vice President and Chief
Financial Officer
15