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 March 31, 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 March 31, 2002
----- --------------
Common Stock, Par Value $.01 914,747
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
March 31, 2002 and September 30, 2001 1
Condensed Consolidated Statements of Income
For Three and Six Months Ended March 31, 2002 and 2001 2
Condensed Consolidated Statements of Changes in Stockholders' Equity
For Six Months Ended March 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows
For Six Months Ended March 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 9-13
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
-------------------------------------
March 31, 2002 and September 30, 2001
-------------------------------------
March 31, September 30,
2002 2001
--------- -------------
(unaudited)
ASSETS
------
Cash, due from banks, and interest bearing deposits $ 2,476,042 $ 3,521,609
Federal funds sold 5,062,890 7,313,670
------------ ------------
Total cash and cash equivalents 7,538,932 10,835,279
Investments in available-for-sale securities
(at fair value) 12,809,542 9,381,853
Investments in held-to-maturity securities
(fair values of $14,965,135 as of March 31,
2002 and $10,036,408 as of September 30, 2001) 14,968,723 9,948,877
Federal Home Loan Bank stock, at cost 878,000 878,000
Loans, net 107,485,301 112,554,093
Premises and equipment 1,864,628 1,897,697
Accrued interest receivable 873,754 830,421
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 824,633 717,147
------------ ------------
Total Assets $147,638,908 $147,438,762
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 14,471,669 $ 16,147,253
Interest-bearing 110,117,173 106,028,583
------------ ------------
Total deposits 124,588,842 122,175,836
Securities sold under agreements to repurchase 333,009 675,756
Advances from Federal Home Loan Bank of Boston 5,224,638 7,267,948
Other liabilities 241,464 354,534
------------ ------------
Total Liabilities 130,387,953 130,474,074
------------ ------------
Minority preferred stockholders' equity in a
subsidiary company of Falmouth Co-operative 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 13,838,247 13,901,279
Retained earnings 13,313,803 12,676,198
Unallocated Employee Stock Ownership Plan shares (345,391) (389,483)
Treasury stock (540,003 shares as of March 31,
2002; 516,743 shares as of September 30, 2001) (9,256,066) (8,749,737)
Unearned compensation - (137,429)
Accumulated other comprehensive loss (368,185) (404,687)
------------ ------------
Total stockholders' equity 17,196,955 16,910,688
------------ ------------
Total liabilities and stockholders' equity $147,638,908 $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
-------------------------------------------
(unaudited)
Three Months Ended Six Months Ended
------------------------ -----------------------
March 31, March 31, March 31, March 31,
2002 2001 2002 2001
--------- --------- --------- ---------
Interest and dividend income:
Interest and fees on loans $1,897,389 $2,089,807 $3,918,873 $4,149,246
Interest and dividends on securities:
Taxable 215,134 218,700 405,490 464,374
Dividends on marketable equity securities 17,989 26,418 42,722 57,163
Dividends on Cooperative Bank Investment
and Liquidity Funds - 7,672 551 15,417
Other interest 20,538 42,491 61,239 95,049
---------- ---------- ---------- ----------
Total interest and dividend income 2,151,050 2,385,088 4,428,875 4,781,249
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 764,953 1,050,147 1,663,938 2,111,729
Interest on securities sold under agreement
to repurchase 1,285 11,003 3,399 24,175
Interest on Federal Home Loan Bank advances 80,023 91,541 164,538 142,925
---------- ---------- ---------- ----------
Total interest expense 846,261 1,152,691 1,831,875 2,278,829
---------- ---------- ---------- ----------
Net interest and dividend income 1,304,789 1,232,397 2,597,000 2,502,420
Provision for loan losses 30,000 30,000 80,000 115,000
---------- ---------- ---------- ----------
Net interest income after provision
for loan losses 1,274,789 1,202,397 2,517,000 2,387,420
---------- ---------- ---------- ----------
Other income:
Service charges on deposit accounts 43,815 34,964 92,771 72,859
Securities gains, net - 77,953 17,062 153,677
Gains (losses) on mortgages sold, net 73,109 (1,532) 259,526 16,330
Other income 67,660 59,854 156,138 135,897
---------- ---------- ---------- ----------
Total other income 184,584 171,239 525,497 378,763
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits 421,653 464,938 851,752 902,200
Occupancy expense 40,641 50,349 82,181 97,391
Equipment expense 50,548 42,568 99,588 86,700
Data processing expense 92,949 76,676 187,713 148,181
Directors' fees 22,050 13,650 35,050 28,550
Legal and professional fees 47,271 64,704 94,718 135,306
Other expenses 165,589 164,602 339,955 339,958
---------- ---------- ---------- ----------
Total other expenses 840,701 877,487 1,690,957 1,738,286
---------- ---------- ---------- ----------
Income before income taxes 618,672 496,149 1,351,540 1,027,897
Income taxes 226,425 178,475 492,625 367,038
---------- ---------- ---------- ----------
Net income $ 392,247 $ 317,674 $ 858,915 $ 660,859
========== ========== ========== ==========
Comprehensive income $ 261,133 $ 208,996 $ 895,417 $ 418,731
========== ========== ========== ==========
Earnings per common share $ 0.45 $ 0.33 $ 0.97 $ 0.67
========== ========== ========== ==========
Earnings per common share, assuming dilution $ 0.43 $ 0.32 $ 0.93 $ 0.67
========== ========== ========== ==========
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
--------------------------------------------------------------------
Six Months ended March 31, 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 46,499 46,499
ESOP shares released 44,092 44,092
Recognition and retention plan 36,080 36,080
Distribution of RRP shares (137,429) 137,429 -
Purchase of treasury stock (576,195) (576,195)
Exercise of stock options and
related tax benefit (8,182) 69,866 61,684
Dividends declared (221,310) (221,310)
Comprehensive income:
Net income 858,915
Net change in unrealized
holding gain on available-
for-sale securities 36,502
Comprehensive Income 895,417
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, March 31, 2002 $14,547 $13,838,247 $13,313,803 $(345,391) $(9,256,066) - $(368,185) $17,196,955
======= =========== =========== ========= =========== ========= ========= ===========
Six Months ended March 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, 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 20,449 20,449
ESOP shares released 44,092 44,092
Recognition and retention plan 57,457 57,457
Distribution of RRP shares (150,556) 150,556
Purchase of treasury stock (180,532) (180,532)
Exercise of stock options and
related tax benefit (3,513) 9,781 6,268
Dividends declared (194,754) (194,754)
Comprehensive income:
Net income 660,859
Net change in unrealized
holding gain on available-
for-sale securities (242,128)
Comprehensive Income 418,731
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, March 31, 2001 $14,547 $13,825,289 $12,135,982 $(433,576) $(7,021,473) $(140,541) $(216,454) $18,163,774
======= =========== =========== ========= =========== ========= ========= ===========
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 Six Months Ended March 31, 2002 and 2001
------------------------------------------------
2002 2001
---- ----
(unaudited) (unaudited)
Cash flows from operating activities
Net income $ 858,915 $ 660,859
Adjustments to reconcile net income to net cash
provided by operating activities:
Gains on sales of investment securities, net (17,062) (153,677)
(Amortization) accretion of investment securities, net 217,777 (1,582)
Provision for loan loss 80,000 115,000
Change in unearned income (678) 8,652
Net gains on sales of loans (259,526) (16,330)
Depreciation and amortization 101,984 89,432
Loss on disposal of equipment 1,071 -
Amortization of mortgage servicing rights 12,706 -
Increase in mortgage servicing rights (245,565) -
Increase in accrued interest receivable (43,333) (70,920)
Increase in prepaid expenses (17,339) (12,147)
Decrease in other assets 36 6,605
Recognition and retention plan (RRP) 36,080 57,457
Decrease in accrued expenses (36,599) (111,942)
Increase (decrease) in taxes payable 77,238 (17,726)
Decrease in accrued interest payable (172) (70)
Decrease in other liabilities (90,980) (13,496)
------------ -----------
Net cash provided by operating activities 674,553 540,115
------------ -----------
Cash flows from investing activities
Purchases of available-for-sale securities (4,112,161) (2,789,641)
Proceeds from sales of available-for-sale securities 60,868 517,651
Proceeds from maturities of available-for-sale securities 629,203 550,717
Purchases of held-to-maturity securities (12,132,422) (4,636,256)
Proceeds from maturities of held-to-maturity securities 7,022,884 7,033,475
Purchase of Federal Home Loan Bank Stock - (157,300)
Loan originations and principal collections, net (11,805,518) (8,387,853)
Proceeds from sales of loans 17,054,513 2,650,396
Capital expenditures (69,986) (37,290)
------------ -----------
Net cash used in by investing activities (3,352,619) (5,256,101)
------------ -----------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, NOW and
savings accounts 4,941,686 (4,569,271)
Net increase (decrease) in time deposits (2,528,680) 3,458,426
Net decrease in securities sold under agreements
to repurchase (342,747) (102,667)
Proceeds from Federal Home Loan Bank long-term advances - 4,500,000
Repayments of Federal Home Loan Bank long-term advances (2,043,310) (2,041,760)
Net change in Federal Home Loan Bank short-term advances - 2,000,000
Proceeds from exercise of stock options 61,684 6,268
Dividends paid (221,310) (194,754)
Employee Stock Ownership Plan 46,499 20,449
Unallocated ESOP shares released 44,092 44,092
Purchase of treasury stock (576,195) (180,532)
------------ -----------
Net cash (used in) provided by financing activities (618,281) 2,940,251
------------ -----------
Decrease in cash and cash equivalents (3,296,347) (1,775,735)
Cash and cash equivalents at beginning of period 10,835,279 6,830,473
------------ -----------
Cash and cash equivalents at end or period $ 7,538,932 $ 5,054,738
============ ===========
Supplemental disclosures
Interest paid $ 1,832,047 $ 2,278,829
Income taxes paid 415,387 434,470
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 six-month period ended March 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 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
5
accounted for under a single method - the purchase method. Use of the
pooling-of-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. 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
Earnings per share (EPS) for the three months and six months ended
March 31, 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 March 31, 2002
Basic EPS
---------
Net income and income available to
common stockholders $392,247 875,806 $0.45
Effect of dilutive securities options and warrants 42,748
-------- -------
Diluted EPS
-----------
Income available to common stockholders $392,247 918,554 $0.43
======== =======
Three Months Ended March 31, 2001
Basic EPS
---------
Net income and income available to
common stockholders $317,674 975,829 $0.33
Effect of dilutive securities options and warrants 22,532
-------- -------
Diluted EPS
-----------
Income available to common stockholders $317,674 998,361 $0.32
======== =======
Six Months ended March 31, 2002
Basic EPS
---------
Net income and income available to
common stockholders $858,915 883,990 $0.97
Effect of dilutive securities options and warrants 37,188
-------- -------
Diluted EPS
-----------
Income available to common stockholders $858,915 921,178 $0.93
======== =======
6
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Six Months Ended March 31, 2001
Basic EPS
---------
Net income and income available to
common stockholders $660,859 979,304 $0.67
Effect of dilutive securities options and warrants 14,081
-------- -------
Diluted EPS
-----------
Income available to common stockholders $660,859 993,385 $0.67
======== =======
Note 5 - Dividends
On February 19, 2002, the Board of Directors of the Company declared a
quarterly cash dividend of $0.12 per share of common stock, which was paid
on March 20, 2002 to stockholders of record on March 6, 2002.
Note 6 - Recent Developments
During the quarter ended March 31, 2002 the Company repurchased 1,360
shares of its common stock. The Company issued 500 treasury shares due to
exercised employee stock options. At March 31, 2002, the Company had 540,003
treasury shares.
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 (the
"Bank" or "Falmouth"), a Massachusetts chartered stock co-operative bank. At
March 31, 2002, there were 914,747 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 915,087 at March 31,
2002, as compared to 975,829 average shares outstanding at March 31, 2001.
The Company has continued with its stock buy-back programs. At March 31,
2002, the Company had repurchased a total of 540,003 shares, or 37.12% of
its common stock, leaving 914,747 shares issued and outstanding.
Comparison of Financial Condition at March 31, 2002 and September 30, 2001.
The Company's total assets increased by $200,000 or 0.1% for the six
months ended March 31, 2002, from $147.4 million at September 30, 2001 to
$147.6 million at March 31, 2002. Total deposits increased $2.4 million or
2.0%, from $122.2 million at September 30, 2001 to $124.6 million at March
31, 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 $107.5 million or 86.3% of total deposits
at March 31, 2002, as compared to $112.6 million or 92.1% of total deposits
at September 30, 2001, representing a decrease of $5.1 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 $28.7 million
or 19.4% of total assets at March 31, 2002, as compared to $20.2 million or
13.7% of total assets at September 30, 2001. Investment securities increased
$8.5 million or 43.7% 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 March 31, 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 $675,000 at September 30, 2001 to
$333,000 at March 31, 2002. The decrease was attributed to the
8
increased seasonal needs of our commercial demand deposit customers.
Stockholders' equity was $17.2 million at March 31, 2002, as compared
to $16.9 million at September 30, 2001, an increase of $286,000. This change
was primarily the result of net income, net of dividends paid to
stockholders, added to retained earnings of $638,000, an increase in
accumulated other comprehensive income of $37,000, and the scheduled
discharge of liabilities on stock based employee benefit plans of $187,000
(ESOP, RRP, and stock options), off-set in part by the purchase of treasury
shares under the Company's stock repurchase programs at a cost of $576,000.
The ratio of stockholders' equity to total assets was 11.65% at March 31,
2002, and the book value per share of common stock was $18.80, compared to
11.48% and $18.01, respectively, at September 30, 2001.
The ratio of the allowance for loan losses to total loans was .94% at
March 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 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 March 31, 2002 and 2001
Net Income. The Company's net income for the three months ended March
31, 2002 was $392,000, as compared to $317,000 for the three months ended
March 31, 2001. The increase in net income of $75,000 was due, in part, to a
decrease in interest and dividend income of $234,000 that was more than
offset by a decrease in interest expense of $306,000. Other key factors
included an increase in other income of $14,000, a decrease in other
expenses of $37,000 and an increase in income taxes of $48,000. The
annualized return on average assets (ROA) for the three months ended March
31, 2002 was 1.07%, an increase of 13 basis points, as compared to 0.94% for
the same period of the prior year. The annualized return on average equity
(ROE) for the three months ended March 31, 2002 was 9.15%, an increase of
216 basis points, as compared to 6.99% 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
$1.3 million for the three-month period ended March 31, 2002 as compared to
$1.2 million for the three months ended March 31, 2001. The $72,000 increase
was the result of a $234,000 decrease in interest and dividend income,
offset by a $306,000 decrease in interest expense. The net interest margin
for the three months ended March 31, 2002 was 3.70%, a decrease of 14 basis
points, as compared to 3.84% for the three months ended March 31, 2001. The
decrease in net interest margin was primarily the result of a decrease in
the yield on earning assets.
Interest Expense. Total interest expense for the three months ended
March 31, 2002 was $846,000, as compared to $1.15 million for the same
period of the prior year, a decrease of $304,000. 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 March 31, 2002, as compared to $30,000
for the quarter ended March 31, 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
9
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 $3.0 million for the three months
ended March 31, 2002, primarily due to 1-4 family loan sales. This decrease
aided in improving the Bank's allowance for loan loss to .94 % of total loans
at March 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 March 31, 2002. As of March 31, 2002, the Bank had no
non-performing loans.
Other Income. Total other income for the three-month period ended
March 31, 2002 was $185,000, as compared to $171,000 for the three months
ended March 31, 2001. The $14,000 increase was primarily the result of an
increase in service charge income of $9,000, an increase in net gains on
mortgages sold of $75,000, and an increase in other income of $8,000. This
was offset, in part, by a decrease in net gains realized from the sale of
investment securities of $78,000 as no securities were sold during the
period.
Operating Expenses. Operating expenses for the three months ended
March 31, 2002 were $841,000, as compared to $878,000 for the three months
ended March 31, 2001. The $37,000 decrease was primarily due to the
combination of a decrease in salaries and employee benefits of $43,000, a
decrease in occupancy expense of $10,000, and a decrease in legal and
professional costs of $17,000, combined with an increase in data processing
expense of $16,000, an increase in equipment expense of $8,000, an increase
in Directors' fees of $8,000 and an increase in other expenses of $1,000.
The annualized ratio of operating expenses to average total assets for the
three months ended March 31, 2002 was 2.30%, as compared to 2.58% for the
three-month period ended March 31, 2001, a decrease of 28 basis points. 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.
Six months Ended March 31, 2002 and 2001
Net Income. The Company's net income for the six months ended March
31, 2002 was $859,000 as compared to $661,000 at March 31, 2001, and
increase of $198,000, or 30.0%. This was primarily due to a decrease in
interest and dividend income of $352,000, offset by a decrease in interest
expense of $447,000, and a decrease in the provision for loan losses of
$35,000, an increase in other income of $147,000, a decrease on other
expenses of $47,000 and an increase in taxes of $126,000. The annualized
return on average equity (ROE) for the six months ended March 31, 2002 was
10.04%, an increase of 274 basis points, as compared to 7.30% for the six
months ended March 31, 2001.
Interest and Dividend Income. Total interest and dividend income for
the six months ended March 31, 2002 was $4.4 million, a decrease of $352,000
as compared to $4.7 million for the six-month period ended March 31, 2001.
The decrease in interest and dividend income is attributable to lower
interest rates on loans and other investments as well as a reduction of loans
held for investment from 100.0% of total deposits at March 31, 2001 to 86.3%
at March 31, 2002. Although the investment portfolio grew $10.2 million from
$18.5 million at March 31, 2001 to $28.7 million at March 31, 2002,
investment and other interest income decreased $122,000 due to the decrease
in interest rates generally and the Bank's strategy of investing in short
term, lower yielding
10
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 costing term deposits and borrowings being replaced with
lower costing term deposits and borrowings.
Interest Expense. Interest expense for the six months ended March 31,
2002 was $1.8 million, including $165,000 in interest on FHLB advances, which
is a decrease of $447,000 from $2.2 million for the six months ended March
31, 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
$448,000 decrease in interest on deposits and a $21,000 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 six-month period ended March 31, 2002 was $2.5 million as compared to
$2.4 million for the six months ended March 31, 2001. The net interest margin
for the six months ended March 31, 2002 was 3.70%, a decrease of 14 basis
points as compared to 3.84% for the six months ended March 31, 2001. The
annualized return on average assets (ROA) for the six-month period ended
March 31, 2002 was 1.17%, an increase of 19 basis points, as compared to
0.98% for the same period of the prior year. The reason for the increase in
the ROA was primarily due to the increase in gains on sales of current
production loans, and decreases in the amount provided for loan loss and
other expenses.
Provision for Loan Losses. The Bank added $80,000 to its allowance for
loan loss account for the six months ended March 31, 2002 which is $35,000
less than the $115,000 added for six months period ended March 31, 2001. 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 and risk associated with the
portfolio at that time. At March 31, 2002, the Bank had no loans 30 days or
more delinquent. The Bank's allowance for loan losses was 0.94% of total
loans at March 31, 2002. Management believes the provision to be adequate and
commensurate with the level of credit risk.
Other Income. Total other income for the six-month period ended March
31, 2002 was $525,000 as compared to $379,000 for the six months ended March
31, 2001. The $146,000 increase is primarily the result of an increase of
$243,000 in gains on loans sold offset, in part by a decrease of $137,000 in
securities gains net, on the sale of investment securities taken during the
six months ended March 31, 2002. Other income increased $20,000 during the
same six-month comparative. The $20,000 increase consisted of increases in
check fees of $2,000, increases in ATM fees collected of $13,000, increases
in loan servicing fee income of $15,000 and increases in loan processing
fees, wire transfer fees, and prepayment penalty fees of $15,000. These were
offset by a decrease in rental income of $18,000 and a decrease in tellers
over of $7,000.
Operating Expenses. Operating expenses for the six months ended March
31, 2002 were $1.69 million as compared to $1.74 million for the six months
ended March 31, 2001. The $47,000 decrease was primarily due to a decrease in
salaries and employee benefits expense of $50,000, a decrease in occupancy
expense of $15,000, and a decrease in legal and professional fees of $41,000
partially offset by an increase in equipment expense of $13,000, an increase
in data processing expense of $40,000, and an increase in directors fees of
$6,000. The ratio of annualized operating expenses to average total assets
for the six months ended March 31, 2002 was 2.30% as compared to 2.58% for
the six-month period ended March 31, 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.
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 March 31,
2002 was 27.82%.
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 March 31, 2002, regulatory liquidity totaled $35.5 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 March 31, 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 March 31, 2002, the Bank had $10.2 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 March 31, 2002,
certificates of deposit that are scheduled to mature in one year or less
totaled $43.8 million. Based on historical experience, management believes
that a significant portion of such deposits will remain with the Bank.
At March 31, 2002 the Bank exceeded all of its regulatory capital
requirements.
12
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
The Company held its Annual Meeting of Stockholders ("Meeting")
on January 15, 2002. All of the proposals submitted to stockholders and the
tabulation of votes for each proposal is as follows:
1. Election of three candidates to the Board of Directors to
serve for a three-year term.
The number of votes cast with respect to this matter were as
follows:
-------------------------------------------------------
Nominee For % Withhold %
-------------------------------------------------------
Wayne C. Lamson 833,141 99.6 3,395 0.4
-------------------------------------------------------
Gardener L. Lewis 832,765 99.5 3,771 0.5
-------------------------------------------------------
Eileen C. Miskell 833,166 99.6 3,370 0.4
-------------------------------------------------------
2. Ratification of the appointment of Shatswell, MacLeod &
Company, P.C. as independent public accountants for the fiscal year ending
September 30, 2002.
---------------------------------------------------
For % Against % Abstain %
---------------------------------------------------
832,594 99.6 1,082 0.1 2,860 0.3
---------------------------------------------------
There were no broker non-votes with respect to the above
proposals.
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
None
13
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: May 3, 2002 By: /s/ Santo P. Pasqualucci
--------------- ------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: May 3, 2002 By: /s/ George E. Young, III
--------------- ------------------------
George E. Young, III
Senior Vice President and
Chief Financial Officer
14