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, 2002
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, 2002
----- -----------------
Common Stock, Par Value $.01 902,573
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, 2002 and September 30, 2002 1
Condensed Consolidated Statements of Income
For Three Months Ended December 31, 2002 and 2001 2
Condensed Consolidated Statements of Changes in
Stockholders' Equity For Three Months Ended
December 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows
For Three Months Ended December 31, 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 9-12
Item 3. Controls and Procedures 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
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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, 2002 and September 30, 2002
December 31, September 30,
2002 2002
------------ -------------
(Unaudited)
ASSETS
------
Cash, due from banks and interest bearing deposits $ 3,178,894 $ 2,916,804
Federal funds sold 9,410,490 4,505,780
------------ ------------
Total cash and cash equivalents 12,589,384 7,422,584
Investments in available-for-sale securities (at fair value) 20,866,992 18,712,954
Investments in held-to-maturity securities (fair values of
$29,613,593 as of December 31, 2002 and $28,034,474 as of
September 30, 2002) 29,591,000 28,060,267
Federal Home Loan Bank stock, at cost 878,000 878,000
Loans, net 84,800,328 95,009,955
Premises and equipment 1,766,706 1,792,016
Accrued interest receivable 1,021,578 1,114,924
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 1,297,584 1,134,907
------------ ------------
Total assets $153,206,967 $154,521,002
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 16,575,358 $ 17,552,180
Interest-bearing 113,565,941 114,164,879
------------ ------------
Total deposits 130,141,299 131,717,059
Securities sold under agreements to repurchase 582,461 471,872
Federal Home Loan Bank advances 5,154,775 5,178,175
Other liabilities 408,695 761,663
------------ ------------
Total liabilities 136,287,230 138,128,769
------------ ------------
Minority preferred stockholders' equity in a subsidiary
company of Falmouth Bank 51,500 53,500
------------ ------------
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 14,036,729 13,981,543
Retained earnings 13,993,160 13,735,221
Unallocated Employee Stock Ownership Plan shares (279,252) (301,299)
Treasury stock (552,177 shares as of December 31, 2002;
553,971 shares as of September 30, 2002) (9,776,127) (9,807,890)
Unearned compensation (477,088) (477,088)
Accumulated other comprehensive loss (643,732) (806,301)
------------ ------------
Total stockholders' equity 16,868,237 16,338,733
------------ ------------
Total liabilities and stockholders' equity $153,206,967 $154,521,002
============ ============
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, 2002 and 2001
(Unaudited)
2002 2001
---- ----
Interest and dividend income:
Interest and fees on loans $1,494,869 $2,021,484
Interest and dividends on securities:
Taxable 338,112 190,356
Dividends on marketable equity securities 20,447 24,733
Dividends on Cooperative Bank Investment and Liquidity Funds - 551
Other interest 30,420 40,701
---------- ----------
Total interest and dividend income 1,883,848 2,277,825
---------- ----------
Interest expense:
Interest on deposits 653,351 898,985
Interest on securities sold under agreement to repurchase 1,983 2,114
Interest on Federal Home Loan Bank advances 62,453 84,515
---------- ----------
Total interest expense 717,787 985,614
---------- ----------
Net interest and dividend income 1,166,061 1,292,211
Provision for loan losses - 50,000
---------- ----------
Net interest and dividend income after provision for
loan losses 1,166,061 1,242,211
---------- ----------
Other income:
Service charges on deposit accounts 50,365 48,956
Securities gains (losses), net (76,587) 17,062
Net gains on sales of loans 325,311 186,417
Loan servicing fees 29,192 9,072
Other income 87,800 79,406
---------- ----------
Total other income 416,081 340,913
---------- ----------
Other expense:
Salaries and employee benefits 487,679 430,099
Occupancy expense 40,981 41,540
Equipment expense 44,824 49,040
Data processing expense 88,705 94,764
Directors' fees 18,610 13,000
Legal and professional fees 56,320 47,447
Other expenses 247,055 174,366
---------- ----------
Total other expenses 984,174 850,256
---------- ----------
Income before income taxes 597,968 732,868
Income taxes 222,850 266,200
---------- ----------
Net income $ 375,118 $ 466,668
========== ==========
Comprehensive income $ 537,687 $ 634,284
========== ==========
Earnings per common share $ 0.43 $ 0.52
========== ==========
Earnings per common share, assuming dilution $ 0.41 $ 0.50
========== ==========
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, 2002
(Unaudited)
Unallocated Accumulated
Employee Other
Stock Compre-
Ownership hensive
Common Paid-In Retained Plan Treasury Unearned Income
Stock Capital Earnings Shares Stock Compensation (Loss) Total
------ ------- -------- ----------- -------- ------------ ----------- -----
Balance, September 30, 2002 $14,547 $13,981,543 $13,735,221 $(301,299) $(9,807,890) $(477,088) $(806,301) $16,338,733
Employee Stock Ownership Plan 32,720 32,720
ESOP shares released 22,047 22,047
Recognition and retention plan 26,618 26,618
Exercise of stock options and
related tax benefit (4,152) 31,763 27,611
Dividends declared ($.13 per
share) (117,179) (117,179)
Comprehensive income:
Net income 375,118
Net change in unrealized
holding gain on available-
for-sale securities 162,569
Comprehensive income 537,687
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, December 31, 2002 $14,547 $14,036,729 $13,993,160 $(279,252) $(9,776,127) $(477,088) $(643,732) $16,868,237
======= =========== =========== ========= =========== ========= ========= ===========
Three Months Ended December 31, 2001
(Unaudited)
Unallocated Accumulated
Employee Other
Stock Compre-
Ownership hensive
Common Paid-In Retained Plan Treasury Unearned Income
Stock Capital Earnings Shares Stock Compensation (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
======= =========== =========== ========= =========== ========= ========= ===========
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, 2002 and 2001
2002 2001
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities
Net income $ 375,118 $ 466,668
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized (gains) losses on available-for-sale investment
securities, net 76,587 (17,062)
Amortization of investment securities, net 297,975 107,117
Provision for loan loss - 50,000
Change in deferred loan costs net of origination fees (50,735) (4,652)
Net gains on sales of loans (325,311) (186,417)
Depreciation and amortization 42,641 56,682
Loss on disposal of equipment - 1,071
Decrease in accrued interest receivable 93,346 33,083
Decrease in prepaid expenses 23,072 9,696
Increase in other assets (163,732) (171,567)
Recognition and retention plan (RRP) 26,618 27,060
Increase (decrease) in accrued expenses 7,331 (6,381)
Increase (decrease) in taxes payable (105,765) 255,196
Increase (decrease) in accrued interest payable (28) 390
Decrease in other liabilities (360,271) (90,409)
------------ ------------
Net cash provided by (used in) operating activities (63,154) 530,475
------------ ------------
Cash flows from investing activities
Purchases of available-for-sale securities (6,687,065) (3,086,751)
Proceeds from sales of available-for-sale securities 93,941 60,868
Proceeds from maturities of available-for-sale securities 4,531,090 503,805
Purchases of held-to-maturity securities (11,317,034) (8,101,183)
Proceeds from maturities of held-to-maturity securities 9,566,052 1,506,326
Loan originations and principal collections, net (11,499,798) (6,229,612)
Proceeds from sales of loans 22,085,471 8,392,110
Capital expenditures (17,331) (12,942)
------------ ------------
Net cash provided by (used in) investing activities 6,755,326 (6,967,379)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 627,582 1,775,972
Net decrease in time deposits (2,203,342) (1,897,719)
Net increase (decrease) in securities sold under agreements
to repurchase 110,589 (21,033)
Repayments of Federal Home Loan Bank long-term advances (23,400) (522,064)
Redemption of preferred shares relative to minority interests (2,000) -
Proceeds from exercise of stock options 27,611 54,995
Employee Stock Ownership Plan 32,720 22,546
Unallocated ESOP shares released 22,047 22,046
Dividends paid (117,179) (111,481)
Purchase of treasury stock - (546,760)
------------ ------------
Net cash used in financing activities (1,525,372) (1,223,498)
------------ ------------
Increase (decrease) in cash and cash equivalents 5,166,800 (7,660,402)
The accompanying notes are integral part of these condensed consolidated
financial statements.
4
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended December 31, 2002 and 2001
(continued)
Cash and cash equivalents at beginning of period 7,422,584 10,835,279
------------ ------------
Cash and cash equivalents at end or period $ 12,589,384 $ 3,174,877
============ ============
Supplemental disclosures
Interest paid $ 717,815 $ 985,224
Income taxes paid 328,615 11,004
The accompanying notes are 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, 2002. The
results of operations for the three-month period ended December 31, 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 2002
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
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-interests method is no longer permitted. Statement No. 141
requires that the purchase method be used for business combinations
initiated after June 30, 2001. The adoption of SFAS No. 141 had no
immediate effect on the Company's consolidated financial statements since
it had no pending business combinations as of June 30, 2001
6
or as of the date of the issuance of these consolidated financial
statements. If the Company consummates business combinations in the
future, any such combinations that would have been accounted for by the
pooling-of-interests method under Opinion 16, will be accounted for under
the purchase method and the difference in accounting could have a
substantial impact on the Company's 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. All of the provisions of SFAS No. 142 were effective for the
Company beginning with its fiscal year ending September 30, 2003. The
adoption of SFAS No. 142 did not have an impact on the Company's
consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for
Impairment or Disposal of Long Lived Assets." The provisions of SFAS No.
144 are required to be adopted starting with fiscal years beginning after
December 15, 2001. The adoption of this Statement did not have a material
impact on the Company's consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146 "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized and measured initially at fair value only when the liability is
incurred. SFAS No. 146 is effective for exit or disposal activities that
are initiated after December 31, 2002. Management does not anticipate that
this Statement will have any material impact on the Company's consolidated
financial statements.
In October 2002, the FASB issued SFAS No. 147 "Acquisitions of
Certain Financial Institutions", an Amendment of SFAS Nos. 72 and 144 and
FASB Interpretation No. 9 SFAS No. 72 "Accounting for Certain Acquisitions
of Banking or Thrift Institutions" and FASB interpretation No. 9 "Applying
APB Opinions No. 16 and 17 When a Savings and Loan Association Is Acquired
in a Business Combination Accounted for by the Purchase Method" that
provided interpretive guidance on the application of the purchase method to
acquisitions of financial institutions. SFAS No. 147 was effective October
1, 2002. There was no impact on the Company's consolidated financial
statements on adoption of this Statement.
Note 4 - Earnings per Share
Earnings per share (EPS) for the three months ended December 31, 2002
and 2001 have been calculated according to the guidelines of SFAS Statement
128. ESOP shares are only considered outstanding for EPS calculations when
they are committed to be released.
7
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, 2002
Basic EPS
---------
Net income and income available to
common stockholders $375,118 870,641 $0.43
Effect of dilutive securities options and warrants 47,923
-------- -------
Diluted EPS
-----------
Income available to common stockholders $375,118 918,564 $0.41
======== =======
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
======== =======
Note 5 - Dividends
On November 20, 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 December 18, 2002 to stockholders of record at the close of
business on December 4, 2002.
Note 6 - Recent Developments
During the quarter ended December 31, 2002. the Company released
1,794 shares due to exercised employee stock options. At December 31, 2002,
the Company had 552,177 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 this 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, a
Massachusetts chartered stock co-operative bank, which is doing business as
Falmouth Bank (the "Bank" or "Falmouth"). At December 31, 2002, there were
902,573 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.
Critical Accounting Policies
The Notes to our Audited Consolidated Financial Statements for the
year ended September 30, 2002, included in our Annual Report, contain a
summary of our significant accounting policies. We believe our policies
with respect to the methodology for our determination of the allowance for
loan losses, the valuation of mortgage servicing rights and asset
impairment judgments, and other than temporary declines in the value of our
securities, involve a higher degree of complexity and require management to
make difficult and subjective judgments which often require assumptions or
estimates about highly uncertain matters. Changes in these judgments,
assumptions or estimates could cause reported results to differ materially.
These critical policies and their application are periodically reviewed by
the Audit Committee and our Board of Directors.
Comparison of Financial Condition at December 31, 2002 and September 30,
2002.
Company's total assets decreased by $1.3 million, or 0.8%, from
$154.5 million at September 30, 2002 to $153.2 million at December 31,
2002. Total deposits decreased $1.6 million or 1.2%, from $131.7 million
at September 30, 2002 to $130.1 million at December 31, 2002. This decrease
was due, in part, to withdrawals from demand deposits and certificates of
deposit during the period. Total net loans were $84.8 million or 65.2% of
total deposits at December 31, 2002, as compared to $95.0 million or 72.1%
of total deposits at September 30, 2001, representing a decrease of $10.2
million for the quarter. This decrease was due, in part, to mortgage loans
refinanced at lower rates and sold in the secondary market with the loan
servicing retained. Investment securities were $51.3 million or 33.5% of
total assets at December 31, 2002, as compared to $47.7 million or 30.9% of
total assets at September 30, 2002. Investment securities increased $3.7
million or 7.8%, in part due 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 $5,178,000 at September 30, 2002 to $5,154,000 at December 31, 2002.
The decrease of $24,000 was the result of normal amortization
9
of long term borrowings.
Securities sold under an agreement to repurchase (sweep accounts for
commercial depositors) increased from $472,000 at September 30, 2002 to
$582,000 at December 31, 2002. The increase was attributed to a pricing
adjustment on these relationships as well as the seasonal liquidity
requirements of account holders.
Stockholders' equity was $16.9 million at December 31, 2002, and $16.3
million at September 30, 2002. The change in stockholders' equity was due
to an increase in retained earnings of $258,000, an increase in accumulated
other comprehensive income of $163,000 and the routine effects of stock
based benefit plans of $109,000. The ratio of stockholders' equity to
total assets was 11.0% at December 31, 2002, and the book value per share
of common stock was $18.69, compared to 10.6% and $18.14, respectively, at
September 30, 2002.
The ratio of the allowance for loan losses to total loans was 1.10%
at December 31, 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, during its regular reviews of delinquencies and its loan
portfolio, may provide additional provisions as deemed necessary to
maintain a sufficient allowance for the loan loss to total loan ratio.
Net Income. The Company's net income for the three months ended
December 31, 2002 was $375,000, as compared to $467,000 for the three
months ended December 31, 2001. The decrease in net income of $92,000 was
due, in part, to a decrease in interest and dividend income of $394,000
that was offset, in part, by a decrease in interest expense of $268,000.
Other key factors included an increase in other income of $75,000, a
decrease in the provision for loan losses of $50,000, an increase in other
expenses of $134,000 and a decrease in income taxes of $43,000. The
annualized return on average assets (ROA) for the three months ended
December 31, 2002 was 0.97%, a decrease of 29 basis points, as compared to
1.26% for the same period of the prior 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 and a
slight reduction in total deposits at the same time.
Interest and Dividend Income. Total interest and dividend income for
the three months ended December 31, 2002 was $1.9 million, a decrease of
$394,000, as compared to $2.3 million for the three month period ended
December 31, 2001. The decrease was attributable to a decrease in interest
and fees on loans of $527,000, which was the result of generally lower
interest rates and a decrease in loans held for investment, offset by an
increase in interest on debt securities, dividends on equity securities and
other interest of $133,000.
Interest Expense. Total interest expense for the three months ended
December 31, 2002 was $718,000 as compared to $986,000 for the same period of
the prior year, a decrease of $268,000. The decrease in interest expense is
primarily due to declining short term interest rates, offset by an $6.2
million growth in interest bearing deposits for the twelve months ended
December 31, 2002.
Net Interest and Dividend Income. Net interest and dividend income
was $1.2 million for the three-month period ended December 31, 2002 and
$1.3 million for the three months ended December 31, 2001. The $126,000
decrease was the result of a $394,000 decrease in interest and dividend
income, offset by a $268,000 decrease in interest expense. The net interest
margin for the three months ended December 31, 2002 was 3.20%, a decrease
of 45 basis points, as compared to 3.65% for the three months ended
December 31, 2001. The decrease in net interest margin was primarily the
result of a decrease in the yield on interest earning assets.
10
Provision for Loan Losses. The Bank made no additional provision to
its allowance for loan losses during the quarter ended December 31, 2002, as
compared to a provision of $50,000 for the quarter ended December 31, 2001.
This was the result of management's 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 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 $10.2 million for the three months
ended December 31, 2002, primarily due to 1-4 family loan sales. This
decrease aided in improving the Bank's allowance for loan loss to 1.10% 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, 2002. As of
December 31, 2002, the Bank had one non-performing commercial loan with a
principal balance of $42,000.
Other Income. Other income for the three-month period ended December
31, 2002 was $416,000, as compared to $341,000 for the three months ended
December 31, 2001. The $75,000 increase was primarily the result of an
increase in service charge income of $1,000, an increase in net gains on
mortgages sold of $139,000, and an increase in loan servicing fees and
other income of $29,000. This was offset, in part, by an increase in net
losses realized from the sale of investment securities of $94,000. Gains
on sales of mortgage loans of $325,000 for the three months ended December
31, 2002 was due to the increased sales of mortgage loans in the secondary
market.
Operating Expenses. Operating expenses for the three months ended
December 31, 2002 were $984,000, as compared to $850,000 for the three
months ended December 31, 2001. The $134,000 increase was primarily due to
the combination of an increase in salaries and employee benefits of
$57,000, an increase in Directors' fees of $6,000, an increase in legal and
professional costs of $9,000, and an increase in other expenses of $73,000,
combined with a decrease in data processing expense of $6,000 a decrease in
occupancy expense of $1,000, and a decrease in equipment expense of $4,000.
The annualized ratio of operating expenses to average total assets for the
three months ended December 31, 2002 was 2.54%, as compared to 2.29% for
the three-month period ended December 31, 2001, an increase of 25 basis
points. The increase in other expenses was primarily due to the
amortization of mortgage servicing rights of the large number of re-
financed mortgages sold.
11
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, 2002 was 46.0%.
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, 2002, regulatory liquidity totaled $62.4
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 December 31, 2002, the
Bank had outstanding advances from the FHLB 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.
At December 31, 2002, the Bank had $8.8 million in outstanding
residential and commercial commitments to originate loans, as well as $22.8
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.
Certificates of deposit that are scheduled to mature in one year or less
totaled $42.0 million at December 31, 2002. Based on historical
experience, management believes that a significant portion of such deposits
will remain with the Bank.
At December 31, 2002 the Bank exceeded all of its regulatory capital
requirements.
12
Part 1. Item 3.
Controls and Procedures.
During the 90-day period prior to the filing date of this report,
management, including the Company's President and Chief Executive Officer
and Senior Vice President and Chief Financial Officer, evaluated the
effectiveness of the design and operation of the Company's disclosure
controls and procedures. Based upon and as of the date of that evaluation,
the President and Chief Executive Officer and Senior Vice President and
Chief Financial Officer concluded that the disclosure controls and
procedures were effective, in all material respects, to ensure that
information required to be disclosed in the reports the Company files and
submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
There have been no significant changes in the Company's internal
controls or in other factors which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
There were no significant deficiencies or material weaknesses identified in
the evaluation and therefore, no corrective actions were taken.
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
December 31, 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 Exhibits 99.1 and 99.2.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1, Statement Furnished Pursuant to Section 906 of
the Sarbanes-Oxley Act.
Exhibit 99.2, Statement Furnished Pursuant to Section 906 of
the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
None
14
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: 2/1/03 By: /s/ Santo P. Pasqualucci
-------------------------- ------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: 2/1/03 By: /s/ George E. Young, III
-------------------------- ------------------------------
George E. Young, III
Senior Vice President and Chief
Financial Officer
CERTIFICATIONS
I, Santo P. Pasqualucci, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Falmouth
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 3, 2003 /s/ Santo P. Pasqualucci
-------------------------- ------------------------------------
Santo P. Pasqualucci
President and Chief Executive
Officer
I, George E. Young, III, certify that
1. I have reviewed this quarterly report on Form 10-QSB of Falmouth
Bancorp, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report; and
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and
the audit committee of the registrant's board of directors (or
persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: February 3, 2003 /s/ George E. Young, III
-------------------------- ------------------------------------
George E. Young, III
Senior Vice President and Chief
Financial Officer