UNITED STATES
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, 2003
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)
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 February 1, 2004
----- ----------------
Common Stock, Par Value $.01 916,727
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, 2003 and September 30, 2003 1
Condensed Consolidated Statements of Income
For Three Months Ended December 31, 2003 and 2002 2
Condensed Consolidated Statements of Changes in
Stockholders' Equity For Three Months Ended
December 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows
For Three Months Ended December 31, 2003 and 2002 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
Item 3. Controls and Procedures 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8 - K 15
============================================================================
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 Falmouth Bancorp, Inc. and Falmouth Co-operative 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 1. FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
December 31, 2003 and September 30, 2003
----------------------------------------
December 31, September 30,
2003 2003
------------ -------------
(Unaudited) (Audited)
ASSETS
------
Cash, due from banks and interest bearing deposits $ 1,527,997 $ 3,335,059
Federal funds sold 2,146,192 4,037,306
------------ ------------
Total cash and cash equivalents 3,674,189 7,372,365
Investments in available-for-sale securities (at fair value) 36,344,767 37,179,799
Investments in held-to-maturity securities (fair values of
$24,709,897 as of December 31, 2003 and $32,556,554 as of
September 30, 2003) 24,709,980 32,549,241
Federal Home Loan Bank stock, at cost 878,000 878,000
Loans, net 87,665,181 83,319,478
Premises and equipment 1,992,932 1,911,894
Accrued interest receivable 1,395,336 1,333,910
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 1,053,453 1,178,108
------------ ------------
Total assets $158,109,233 $166,118,190
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Deposits:
Noninterest-bearing $ 20,579,585 $ 20,425,557
Interest-bearing 116,999,733 125,109,413
------------ ------------
Total deposits 137,579,318 145,534,970
Securities sold under agreements to repurchase - -
Federal Home Loan Bank advances 2,562,070 2,582,885
Other liabilities 112,228 256,956
------------ ------------
Total liabilities 140,253,616 148,374,811
------------ ------------
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 14,147,775 14,093,713
Retained earnings 13,740,559 13,858,343
Unallocated Employee Stock Ownership Plan shares (191,068) (213,114)
Treasury stock (538,023 shares as of December 31, 2003;
541,023 shares as of September 30, 2003) (9,525,535) (9,578,649)
Unearned compensation (340,994) (340,994)
Accumulated other comprehensive loss 10,333 (90,467)
------------ ------------
Total stockholders' equity 17,855,617 17,743,379
------------ ------------
Total liabilities and stockholders' equity $158,109,233 $166,118,190
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
Three Months Ended December 31, 2003 and 2002
---------------------------------------------
(Unaudited)
December 31, December 31,
2003 2002
------------ ------------
Interest and dividend income:
Interest and fees on loans $1,252,631 $1,494,869
Interest and dividends on securities:
Taxable 285,210 338,112
Dividends on marketable equity securities 18,908 20,447
Other interest 11,525 30,420
---------- ----------
Total interest and dividend income 1,568,274 1,883,848
---------- ----------
Interest expense:
Interest on deposits 429,570 653,351
Interest on securities sold under agreement to repurchase - 1,983
Interest on Federal Home Loan Bank advances 32,848 62,453
---------- ----------
Total interest expense 462,418 717,787
---------- ----------
Net interest and dividend income 1,105,856 1,166,061
Provision for loan losses - -
---------- ----------
Net interest and dividend income after provision for
loan losses 1,105,856 1,166,061
---------- ----------
Other income:
Service charges on deposit accounts 60,745 50,365
Securities gains (losses), net 16,802 (76,587)
Net gains on sales of loans 40,432 325,311
Loan servicing fees 15,112 6,600
Other income 60,524 87,800
---------- ----------
Total other income 193,615 393,489
---------- ----------
Other expense:
Salaries and employee benefits 565,334 487,679
Occupancy expense 59,139 40,981
Equipment expense 52,213 44,824
Data processing expense 129,605 88,705
Directors' fees 19,365 18,610
Legal and professional fees 132,619 56,320
Writedowns of mortgage servicing rights 16,061 53,855
Other expenses 227,550 170,608
---------- ----------
Total other expenses 1,201,886 961,582
---------- ----------
Income before income taxes 97,585 597,968
Income taxes 96,441 222,850
---------- ----------
Net income $ 1,144 $ 375,118
========== ==========
Comprehensive income $ 101,944 $ 537,687
========== ==========
Earnings per common share $ 0.00 $ 0.43
========== ==========
Earnings per common share, assuming dilution $ 0.00 $ 0.41
========== ==========
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
--------------------------------------------------------------------
Three Months Ended December 31, 2003
------------------------------------
(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, 2003 $14,547 $14,093,713 $13,858,343 $(213,114) $(9,578,649) $(340,994) $ (90,467) $17,743,379
Employee Stock Ownership Plan 41,664 41,664
ESOP shares released 22,046 22,046
Recognition and retention plan 25,387 25,387
Exercise of stock options and
related tax benefit (12,989) 53,114 40,125
Dividends declared ($.13
per share) (118,928) (118,928)
Comprehensive income:
Net income 1,144
Net change in unrealized
holding gain on available-
for-sale securities 100,800
Comprehensive income 101,944
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, December 31, 2003 $14,547 $14,147,775 $13,740,559 $(191,068) $(9,525,535) $(340,994) $ 10,333 $17,855,617
======= =========== =========== ========= =========== ========= ========= ===========
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
======= =========== =========== ========= =========== ========= ========= ===========
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 Three Months Ended December 31, 2003 and 2002
-----------------------------------------------------
(Unaudited)
December 31, December 31,
2003 2002
------------ ------------
Cash flows from operating activities
Net income $ 1,144 $ 375,118
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized (gains) losses on available-for-sale investment
securities, net (16,802) 76,587
Amortization of investment securities, net 741,049 297,975
Provision for loan loss - -
Change in deferred loan costs net of origination fees (1,992) (50,735)
Net gains on sales of loans (40,432) (325,311)
Depreciation and amortization 45,106 42,641
(Increase) decrease in accrued interest receivable (61,426) 93,346
(Increase) decrease in prepaid expenses (72,438) 23,072
Decrease (increase) in other assets 23,211 (163,732)
Recognition and retention plan (RRP) 25,387 26,618
(Decrease) increase in accrued expenses (81,507) 7,331
Increase (decrease) in taxes payable 183,553 (105,765)
Increase (decrease) in accrued interest payable 4 (28)
Decrease in other liabilities (63,225) (360,271)
----------- ------------
Net cash provided by (used in) operating activities 681,632 (63,154)
----------- ------------
Cash flows from investing activities
Purchases of available-for-sale securities (1,988,046) (6,687,065)
Proceeds from sales of available-for-sale securities 7,625 93,941
Proceeds from maturities of available-for-sale securities 2,570,084 4,531,090
Purchases of held-to-maturity securities (2,025,540) (11,317,034)
Proceeds from maturities of held-to-maturity securities 9,477,052 9,566,052
Loan originations and principal collections, net (6,191,588) (11,499,798)
Proceeds from sales of loans 1,888,109 22,085,471
Recoveries of previously charged off loans 200 -
Capital expenditures (126,144) (17,331)
----------- ------------
Net cash provided by investing activities 3,611,752 6,755,326
----------- ------------
Cash flows from financing activities:
Net (decrease) increase in demand deposits, NOW and savings accounts (4,835,357) 627,582
Net decrease in time deposits (3,120,295) (2,203,342)
Net increase in securities sold under agreements to repurchase - 110,589
Repayments of Federal Home Loan Bank long-term advances (24,815) (23,400)
Net change in Federal Home Loan Bank short-term advances 4,000 -
Redemption of preferred shares relative to minority interests - (2,000)
Proceeds from exercise of stock options 40,125 27,611
Employee Stock Ownership Plan 41,664 32,720
Unallocated ESOP shares released 22,046 22,047
Dividends paid (118,928) (117,179)
----------- ------------
Net cash used in financing activities (7,991,560) (1,525,372)
----------- ------------
(Decrease) increase in cash and cash equivalents (3,698,176) 5,166,800
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 Three Months Ended December 31, 2003 and 2002
-----------------------------------------------------
(continued)
Cash and cash equivalents at beginning of period 7,372,365 7,422,584
----------- ------------
Cash and cash equivalents at end or period $ 3,674,189 $ 12,589,384
=========== ============
Supplemental disclosures
Interest paid $ 462,414 $ 717,815
Income taxes paid 87,112 328,615
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
FALMOUTH BANCORP, INC.
----------------------
AND SUBSIDIARIES
----------------
Notes to Unaudited 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, 2003. The results of operations
for the three-month period ended December 31, 2003 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 2003 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
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 2003, 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. This statement did not have a material
impact on the Company's consolidated financial statements.
6
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, 2003. There was no impact on the Company's consolidated financial
statements on adoption of this Statement.
On May 15, 2003, FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
SFAS No. 150 requires that certain financial instruments classified as
equity must be classified as a liability. Most of the guidance in SFAS No.
150 is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. This statement did not have
any material effect on the Company's consolidated financial statements.
Note 4 - Accounting for Stock-Based Compensation.
Statement of Financial Accounting Standards No. 148 "Accounting for
Stock-Based Compensation - Transition and Disclosure, an amendment to FASB
Statement No. 123 (SFAS No. 148)" was issued by FASB in December 2002. This
new Statement requires, in interim financial statements, certain new
disclosures about stock-based compensation. Management measures stock-based
compensation in accordance with APB Opinion No. 25. The following table
illustrates the effect on net income and earnings per share if the Company
had applied the fair value recognition provision of SFAS No. 123 "Accounting
for Stock-Based Compensation" to stock-based compensation.
Three months ended
December 31,
2003 2002
---- ----
Net income $ 1,144 $375,118
Stock based compensation expense determined
under fair value method, net of tax benefit (4,799) (4,799)
------- --------
Pro forma net income (loss) $(3,655) $370,319
======= ========
Earnings (loss) per share:
Basic as reported $ 0.00 $ 0.43
======= ========
Basic - pro forma $ 0.00 $ 0.43
======= ========
Diluted as reported $ 0.00 $ 0.41
======= ========
Diluted - pro forma $ 0.00 $ 0.40
======= ========
7
Note 5 - Dividends
On November 18, 2003, 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 23, 2003 to stockholders of record at the close of business on
December 9, 2003.
Note 6 - Recent Developments
During the quarter ended December 31, 2003, the Company released 3,000
shares due to exercised employee stock options. At December 31, 2003, the
Company had 538,023 treasury shares.
Note 7 - Contingency
On January 8, 2004, Independent Bank Corp. ("Independent"), INDB Sub,
Inc. ("INDB") and the Company entered into an Agreement and Plan of Merger
(the "Agreement") between Independent, INDB, an interim de novo wholly-owned
subsidiary of Independent, and the Company. Under the terms of the
Agreement, Independent will acquire the Company in a part cash, part stock
transaction. The acquisition is subject to customary conditions, including
shareholder and regulatory approval, and is expected to be completed mid-
year 2004.
8
Item 2. Management's Discussion and Analysis or Plan of Operation
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, 2003, there were
916,727 shares outstanding. The Company's stock trades on the American Stock
Exchange under the symbol "FCB."
On January 8, 2004, the Board of Directors of the Company approved,
and the Company entered into, an Agreement and Plan of Merger, dated as of
January 8, 2004, between Independent Bank Corp., INDB Sub, Inc. and the
Company whereby Independent will acquire the Company in a part cash, part
stock transaction valued at approximately $36.9 million, including
approximately $2.5 million in cash that will be paid to Company option
holders in exchange for the cancellation of those options. The $36.9 million
transaction value is derived by using Independent's closing price per share
on January 8, 2004 of $29.00 for the stock component of the transaction. The
terms of the Agreement call for half of the outstanding shares of the
Company to be converted into the right to receive 1.28 shares of Independent
common stock per share of Company common stock and for the other half of the
outstanding shares of the Company to be purchased for $38.00 cash per share
of Company common stock.
The transaction is subject to the approval of the Company's
shareholders and various regulatory authorities. If approved, it is
anticipated the transaction will be finalized mid-year 2004.
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.
Critical Accounting Policies
The Notes to our Audited Consolidated Financial Statements for the
year ended September 30, 2003, included in our Annual Report which was filed
with the Securities and Exchange Commission on December 29, 2003 as Exhibit
13.1 to the Company's report on Form 10-KSB, 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
9
differ materially. These critical policies and their application are
periodically reviewed by the Audit Committee and the Company's Board of
Directors.
Comparison of Financial Condition at December 31, 2003 and September 30, 2003.
The Company's total assets decreased by $8.0 million, or 4.8%, from
$166.1 million at September 30, 2003 to $158.1 million at December 31, 2003.
Total deposits decreased $8.0 million or 5.5%, from $145.5 million at
September 30, 2003 to $137.6 million at December 31, 2003. This decrease was
due, in part, to seasonal withdrawals from demand deposits accounts, money
market accounts and certificates of deposit; and, in part, to a recent
upward trend in the equities market during the period. Total net loans were
$87.7 million or 63.7% of total deposits at December 31, 2003, as compared
to $83.3 million or 57.2% of total deposits at September 30, 2002,
representing an increase of $4.4 million for the quarter. This increase was
due, in part, to the Bank's decision to selectively retain some of its
current higher yielding loan production for portfolio rather than selling it
on the secondary market. Investment securities were $61.9 million or 39.2%
of total assets at December 31, 2003, as compared to $70.6 million or 42.5%
of total assets at September 30, 2003. Investment securities decreased $8.7
million or 12.32%, in part, due to maturing and called investment
securities. The proceeds were used to fund loans held for investment and
deposit outflows.
Borrowed funds from the Federal Home Loan Bank of Boston decreased
$21,000 from $2.6 million at September 30, 2003 to $2.6 at December 31,
2003. The decrease was the result of normal amortization of long term
borrowings combined with a short-term advance of $4,000 that was the result
of normal cash management operations with FHLB.
Stockholders' equity was $17.9 million at December 31, 2003, and $17.7
million at September 30, 2003. The change in stockholders' equity was due to
an increase in accumulated other comprehensive income of $101,000, changes
in capital due to annual entries effecting the Bank's Employee Stock
Ownership Plan, Employee Stock Option Plan and the Employee Recognition and
Retention Plan of $129,000, offset, in part, by and the payment of a cash
dividend of $119,000. The ratio of stockholders' equity to total assets was
11.3% at December 31, 2003, and the book value per share of common stock was
$19.48 at December 31, 2003, compared to 10.7% and $19.43, respectively, at
September 30, 2003.
The ratio of the allowance for loan losses to total loans was 0.86% at
December 31, 2003. Management believes the allowance is 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, 2003 was $1,000, as compared to $375,000 for the three months
ended December 31, 2002. The decrease in net income of $374,000 was due, in
part, to a decrease in interest and dividend income of $316,000 that was
offset, in part, by a decrease in interest expense of $255,000. Other key
factors included a decrease in other income of $200,000, an increase in
other expenses of $240,000 and a decrease in income taxes of $126,000. The
increase in other expenses was related, in part, to costs associated with
potential merger activities, which totaled $91,000 in
10
added legal and professional fees for the three-month period ended December
31, 2003. The additional costs associated with the proposed plan of merger
are expected to continue to rise sharply in the next two quarters. The
annualized return on average assets (ROA) for the three months ended
December 31, 2003 was 0.00%, a decrease of 96 basis points, as compared to
0.96% for the same period of the prior year.
Interest and Dividend Income. Total interest and dividend income for the
three months ended December 31, 2003 was $1.6 million, a decrease of $316,000,
as compared to $1.9 million for the three month period ended December 31,
2002. The decrease was attributable to a decrease in interest and fees on
loans of $242,000, which was the result of continuing historically low
interest rates and a decrease in loans held for investment, and a decrease in
interest on debt securities, dividends on equity securities and other interest
of $74,000.
Interest Expense. Total interest expense for the three months ended
December 31, 2003 was $462,000 as compared to $718,000 for the same period of
the prior year, a decrease of $256,000. The decrease in interest expense was
primarily due to declining short term interest rates, partially offset by a
$3.4 million growth in interest bearing deposits for the twelve months ended
December 31, 2003.
Net Interest and Dividend Income. Net interest and dividend income was
$1.1 million for the three-month period ended December 31, 2003 and $1.2
million for the three months ended December 31, 2002. The $60,000 decrease
was the result of a $316,000 decrease in interest and dividend income,
offset by a $255,000 decrease in interest expense. The net interest margin
for the three months ended December 31, 2003 was 2.86%, a decrease of 28
basis points, as compared to 3.14% for the three months ended December 31,
2002. The decrease in net interest margin was primarily the result of a
decrease in the yield on interest earning assets.
Provision for Loan Losses. The Bank made no additional provision to its
allowance for loan losses during the quarter ended December 31, 2003.
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. Generally, allowances are usually increased as the total loan
portfolio increases. Net loans increased $4.3 million for the three months
ended December 31, 2003, primarily in 1-4 family residential loans. The Bank's
allowance for loan loss was 0.86% of total loans at December 31, 2003 as
compared to 0.91% at September 30, 2003. 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, 2003. The Bank had no
non-performing loans as of December 31, 2003.
11
Other Income. Other income for the three-month period ended December
31, 2003 was $194,000, as compared to $393,000 for the three months ended
December 31, 2002. The $199,000 decrease was primarily the result of an
increase in service charge income of $10,000, an increase in net gains on
sales of investment securities of $93,000, and an increase in loan servicing
fee income of $9,000. This was offset, in part, by an decrease in gains on
sales of mortgage loans of $285,000 and a decrease in other income of
$27,000.
Operating Expenses. Operating expenses for the three months ended
December 31, 2003 were $1,202,000, as compared to $962,000 for the three
months ended December 31, 2002. The $240,000 increase was primarily due to
the combination of an increase in salaries and employee benefits of $78,000,
an increase in occupancy expense of $18,000, an increase in equipment
expense of $7,000, and an increase in data processing expense of $41,000, an
increase in legal and professional costs of $76,000, and an increase in
other expenses of $57,000, combined with a decrease in the write downs of
mortgage servicing assets of $38,000. The increase in legal and professional
costs was primarily due to the one time additional costs associated with the
proposed merger agreement of $91,000. The increase in other operating
expenses can be primarily attributed to the costs associated with the Bank's
newest branch, opened in Bourne, Massachusetts, in November 2003. The
annualized ratio of operating expenses to average total assets for the three
months ended December 31, 2003 was 3.04%, as compared to 2.53% for the
three-month period ended December 31, 2002, an increase of 51 basis points.
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, 2003 was 47.5%.
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, 2003, regulatory liquidity totaled $65.9 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, 2003, the Bank
had outstanding advances from the FHLB in the amount of $2.6 million in
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short and long-term borrowings. As these advances mature, they will be
repaid or re-written as long-term matched borrowings which will assist the
match of rate sensitive assets to rate sensitive liabilities.
At December 31, 2003, the Bank had $5.4 million in outstanding
residential and commercial commitments to originate loans, as well as $24.7
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 $36.8
million at December 31, 2003. Based on historical experience, management
believes that a significant portion of such deposits will remain with the
Bank.
At December 31, 2003 the Bank exceeded all of its regulatory capital
requirements.
Off Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on the Company's
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
13
Item 3. Controls and Procedures.
Management, including the Company's President and Chief Executive
Officer and Senior Vice President and Chief Financial Officer, has evaluated
the effectiveness of the Company's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report. Based upon 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 changes in the Company's internal control over
financial reporting identified in connection with the evaluation that
occurred during the Company's last fiscal quarter that have materially
affected, or that are reasonably likely to materially affect, the Company's
internal control over financial reporting.
14
OTHER INFORMATION
Part II.
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits 3.2, Amended and Restated Bylaws of Falmouth Bancorp, Inc.
Exhibit 31.1, Certifications Furnished Pursuant to Section 302
of the Sarbanes-Oxley Act.
Exhibit 32.1, Statement Furnished Pursuant to Section 906 of the
Sarbanes-Oxley Act.
Exhibit 32.2, Statement Furnished Pursuant to Section 906 of the
Sarbanes-Oxley Act.
(b) Reports on Form 8-K
The Company furnished a Form 8-K with the Securities and
Exchange Commission, dated November 7, 2003, reporting under
Item 12 a press release dated November 7, 2003 describing fourth
quarter earnings.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FALMOUTH BANCORP, INC.
(Registrant)
Date: February 12, 2004 By: /s/ Santo P. Pasqualucci
----------------- -------------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: February 12, 2004 By: /s/ George E. Young, III
----------------- -------------------------------------
George E. Young, III
Senior Vice President and Chief
Financial Officer
16