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 ACTS OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACTS 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)
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 June 30, 2003
----- -------------
Common Stock, Par Value $.01 905,642
Transitional small business disclosure format:
Yes [ ] No [X]
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
INDEX TO FORM 10-QSB
PART I. FINANCIAL INFORMATION Page
Item 1 Financial Statements
Condensed Consolidated Balance Sheets
June 30, 2003 and September 30, 2002 1
Condensed Consolidated Statements of Income
For Three and Nine Months Ended June 30, 2003 and 2002 2-3
Condensed Consolidated Statements of Changes
in Stockholders' Equity For Nine Months Ended
June 30, 2003 and 2002 4
Condensed Consolidated Statements of Cash Flows
For Nine Months Ended June 30, 2003 and 2002 5-6
Notes to Unaudited Condensed Consolidated
Financial Statements 7-9
Item 2 Management's Discussion and Analysis of
Financial Condition and Operating Results 10-15
Item 3 Controls and Procedures 16
PART II OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements consisting of
estimates with respect to the financial condition, results of operations and
business of the Company and the Bank that are subject to various factors
which could cause actual results to differ materially from these estimates.
These factors include, but are not limited to: general and local economic
conditions; changes in interest rates, deposit flows, demand for mortgages
and other loans, real estate values, and competition; changes in accounting
principles, policies, or guidelines; changes in legislation or regulation;
and other economic, competitive, governmental, regulatory, and technological
factors affecting our operations, pricing, products and services.
Any or all of our forward-looking statements in the report and in any
other public statements we make may turn out to be wrong. They can be
affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed.
We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise.
Part I. Item I. FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
June 30, 2003 and September 30, 2002
------------------------------------
June 30, September 30,
2003 2002
---- ----
(unaudited)
<s> <c> <c>
ASSETS
Cash, due from banks, and interest bearing deposits $ 6,128,166 $ 2,916,804
Federal funds sold 3,931,558 4,505,780
------------ ------------
Total cash and cash equivalents 10,059,724 7,422,584
Investments in available-for-sale securities (at fair value) 34,052,054 18,712,954
Investments in held-to-maturity securities (fair values of $30,397,848
as of June 30, 2003 and $28,034,474 as of September 30, 2002) 30,375,569 28,060,267
Federal Home Loan Bank stock, at cost 878,000 878,000
Loans, net 83,832,032 95,009,955
Premises and equipment 1,784,722 1,792,016
Accrued interest receivable 1,340,733 1,114,924
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 1,237,521 1,134,907
------------ ------------
Total Assets $163,955,750 $154,521,002
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Non-Interest-bearing $ 19,403,451 $ 17,552,180
Interest-bearing 121,996,357 114,164,879
------------ ------------
Total deposits 141,399,808 131,717,059
Securities sold under agreements to repurchase 1,246,812 471,872
Federal Home Loan Bank advances 3,607,146 5,178,175
Other liabilities 272,689 761,663
------------ ------------
Total Liabilities 146,526,455 138,128,769
------------ ------------
Minority preferred stockholders' equity in a
subsidiary company of Falmouth Bank 50,500 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 14,030,959 13,981,543
Retained earnings 13,755,005 13,735,221
Unallocated Employee Stock Ownership Plan shares (235,160) (301,299)
Treasury stock (549,108 shares as of June 30, 2003;
553,971 shares as of September 30, 2002) (9,721,792) (9,807,890)
Unearned compensation (340,994) (477,088)
Accumulated other comprehensive loss (123,770) (806,301)
------------ ------------
Total stockholders' equity 17,378,795 16,338,733
------------ ------------
Total liabilities and stockholders' equity $163,955,750 $154,521,002
============ ============
The accompanying notes are an integral part of
these condensed consolidated financial statements.
1
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Interest and dividend income:
Interest and fees on loans $1,269,363 $1,860,975 $4,086,068 $5,779,848
Interest and dividends on securities:
Taxable 300,894 318,263 950,528 723,753
Dividends on marketable equity securities 16,819 19,209 58,109 61,931
Dividends on Cooperative Bank Investment
and Liquidity Funds - - - 551
Other interest 37,531 29,302 101,452 90,541
---------- ---------- ---------- ----------
Total interest and dividend income 1,624,607 2,227,749 5,196,157 6,656,624
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits 500,461 714,616 1,714,925 2,378,554
Interest on securities sold under agreement
to repurchase 4,125 857 9,334 4,256
Interest on Federal Home Loan Bank advances 53,819 62,799 177,916 227,337
---------- ---------- ---------- ----------
Total interest expense 558,405 778,272 1,902,175 2,610,147
---------- ---------- ---------- ----------
Net interest and dividend income 1,066,202 1,449,477 3,293,982 4,046,477
Provision for loan losses - 30,000 - 110,000
---------- ---------- ---------- ----------
Net interest income after provision for
loan losses 1,066,202 1,419,477 3,293,982 3,936,477
---------- ---------- ---------- ----------
Other income:
Service charges on deposit accounts 53,664 43,450 147,308 136,221
Security losses, net (1,211) (70,020) (456,703) (52,958)
Net gains on sales of loans 243,531 78,560 855,304 338,086
Loan servicing fees 40,969 18,320 105,141 42,248
Other income 75,102 64,526 222,547 196,736
---------- ---------- ---------- ----------
Total other income 412,055 134,836 873,597 660,333
---------- ---------- ---------- ----------
Other expense:
Salaries and employee benefits 453,147 434,746 1,447,633 1,286,498
Occupancy expense 42,033 38,182 127,447 120,363
Equipment expense 48,844 44,706 138,537 144,294
Data processing expense 111,270 103,849 309,028 291,562
Directors' fees 24,815 17,900 62,100 52,950
Legal and professional fees 34,835 55,559 125,748 150,277
Other expenses 384,889 178,147 887,552 518,102
---------- ---------- ---------- ----------
Total other expenses 1,099,833 873,089 3,098,045 2,564,046
---------- ---------- ---------- ----------
Income before income taxes 378,424 681,224 1,069,534 2,032,764
Income taxes 105,295 253,667 420,465 746,292
---------- ---------- ---------- ----------
Net income before extraordinary item 273,129 427,557 649,069 1,286,472
Extraordinary item (net of tax expense of $146,221
for the 3 month period ended June 30, 2003 and
net of tax benefit of $153,799 for the 9 month
period ended June 30, 2003) 295,389 - (276,959) -
---------- ---------- ---------- ----------
Net income after extraordinary item $ 568,518 $ 427,557 $ 372,110 $1,286,472
========== ========== ========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
2
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
-------------------------------------------
(Continued)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
June 30, June 30, June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Comprehensive income $ 691,448 $ 218,728 $1,054,641 $1,114,146
========== ========== ========== ==========
Earnings per common share before
extraordinary item $ 0.31 $ 0.49 $ 0.74 $ 1.46
Earnings(loss) per common share on
extraordinary item .34 - (.31) -
---------- ---------- ---------- ----------
Earnings per common share after
extraordinary item $ 0.65 $ 0.49 $ 0.43 $ 1.46
========== ========== ========== ==========
Earnings per common share before
extraordinary item, assuming dilution $ 0.30 $ 0.46 $ 0.70 $ 1.39
Earnings (loss) per common share on
extraordinary item, assuming dilution .32 - (.30) -
---------- ---------- ---------- ----------
Earnings per common share after
extraordinary item, assuming dilution $ 0.62 $ 0.46 $ 0.40 $ 1.39
========== ========== ========== ==========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------------------------------------------------------------------
Nine Months ended June 30, 2003
-------------------------------
(unaudited)
Unallocated
Employee Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income (Loss) Total
------ ------- -------- -------------- -------- ------------ ------------- -----
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, September 30, 2002 $14,547 $13,981,543 $13,735,221 $(301,299) $(9,807,890) $(477,088) $(806,301) $16,338,733
Employee Stock Ownership
Plan 99,011 99,011
ESOP shares released 66,139 66,139
Recognition and retention
plan 93,396 93,396
Distribution of RRP shares (136,094) 136,094 -
Purchase of treasury stock
Exercise of stock options
and related tax benefit (6,897) 86,098 79,201
Dividends declared
($.39 per share) (352,326) (352,326)
Comprehensive income:
Net Income 372,110
Net change in unrealized
holding gain on
available-for-sale
securities 682,531
Comprehensive Income 1,054,641
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, June 30, 2003 $14,547 $14,030,959 $13,755,005 $(235,160) $(9,721,792) $(340,994) $(123,770) $17,378,795
======= =========== =========== ========= =========== ========= ========= ===========
Nine Months ended June 30, 2002
-------------------------------
(unaudited)
Unallocated
Employee Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income (Loss) Total
------ ------- -------- -------------- -------- ------------ ------------- -----
<s> <c> <c> <c> <c> <c> <c> <c> <c>
Balance, September 30, 2001 $14,547 $13,901,279 $12,676,198 $(389,483) $(8,749,737) $(137,429) $(404,687) $16,910,688
Employee Stock Ownership
Plan 77,746 77,746
ESOP shares released 66,138 66,138
Recognition and retention
plan 53,825 (477,088) (423,263)
Distribution of RRP shares (137,429) 137,429 -
Purchase of treasury stock (1,328,901) (1,328,901)
Exercise of stock options
and related tax benefit 105 233,641 233,746
Dividends declared
($.37 per share) (340,062) (340,062)
Comprehensive income:
Net income 1,286,472
Net change in unrealized
holding gain on
available-for-sale
securities (172,326)
Comprehensive Income 1,114,146
------- ----------- ----------- --------- ----------- --------- --------- -----------
Balance, June 30, 2002 $14,547 $13,895,526 $13,622,608 $(323,345) $(9,844,997) $(477,088) $(577,013) $16,310,238
======= =========== =========== ========= =========== ========= ========= ===========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Nine Months Ended June 30, 2003 and 2002
------------------------------------------------
2003 2002
---- ----
(Unaudited) (Unaudited)
<s> <c> <c>
Cash flows from operating activities
Net income $ 372,110 $ 1,286,472
Adjustments to reconcile net income to net cash
provided by operating activities:
Realized losses on available for sale investment securities, net 456,703 52,958
Amortization of investment securities, net 1,049,456 313,254
Provision for loan loss - 110,000
Change in deferred loan costs net of origination fees (36,049) (2,242)
Net gains on sales of loans (855,304) (338,086)
Depreciation and amortization 124,838 145,375
Loss on disposal of equipment - 1,071
Increase in accrued interest receivable (225,809) (87,046)
(Increase) decrease in prepaid expenses 7,726 (6,311)
Increase in other assets (124,726) (288,797)
Recognition and retention plan (RRP) 93,396 53,825
(Increase) decrease accrued expenses (31,315) 1,663
Decrease (increase) in taxes payable 36,840 (114,191)
Increase in accrued interest payable 319 5
Decrease in other liabilities (457,978) (41,487)
------------ ------------
Net cash provided by operating activities 410,207 1,086,463
------------ ------------
Cash flows from investing activities
Purchases of available-for-sale securities (40,299,762) (9,875,415)
Proceeds from sales of available-for-sale securities 664,940 60,881
Proceeds from maturities of available-for-sale securities 24,185,809 1,350,285
Purchases of held-to-maturity securities (32,666,947) (19,471,386)
Proceeds from maturities of held-to-maturity securities 29,615,476 12,278,909
Loan originations and principal collections, net (41,873,128) (17,036,358)
Proceeds from sales of loans 53,942,404 23,470,564
Capital expenditures (117,544) (72,287)
------------ ------------
Net cash used in investing activities (6,548,752) (9,294,807)
------------ ------------
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts 12,808,372 11,857,728
Net decrease in time deposits (3,125,623) (937,903)
Net increase (decrease) in securities sold under agreements to repurchase 774,940 (278,811)
Repayments of Federal Home Loan Bank long-term advances (1,571,029) (2,066,940)
Redemption of preferred shares relative to minority interests (3,000) (500)
Proceeds from exercise of stock options 79,201 233,746
Dividends paid (352,326) (340,062)
Employee Stock Ownership Plan 99,011 77,746
Unallocated ESOP shares released 66,139 66,138
Purchase of company shares for RRP Trust - (477,088)
Purchase of treasury stock - (1,328,901)
------------ ------------
Net cash provided by financing activities 8,775,685 6,805,153
------------ ------------
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
For the Nine Months Ended June 30, 2003 and 2002
------------------------------------------------
(continued)
2003 2002
---- ----
(Unaudited) (Unaudited)
<s> <c> <c>
Increase (decrease) in cash and cash equivalents 2,637,140 (1,403,191)
Cash and cash equivalents at beginning of period 7,422,584 10,835,279
------------ ------------
Cash and cash equivalents at end of period $ 10,059,724 $ 9,432,088
============ ============
Supplemental disclosures
Interest paid $ 1,901,856 $ 2,610,142
Income taxes paid (229,826) 860,483
The accompanying notes are an integral part of
these condensed consolidated financial statements.
6
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 nine-month period ended June 30, 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 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
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 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.
SFAS 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, 2002. 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
7
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. This Statement did not have a
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 No. 72 and SFAS No. 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 - 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 Nine months ended
June 30, June 30,
2003 2002 2003 2002
---- ---- ---- ----
<s> <c> <c> <c> <c>
Net income (loss) as reported, after extraordinary item $568,518 $427,557 $372,110 $1,286,472
Stock based compensation expense
determined under fair value method, net of tax benefit (4,746) (4,780) (14,187) (27,403)
-------- -------- -------- ----------
Pro forma net income (loss) $563,772 $422,777 $357,923 $1,259,069
======== ======== ======== ==========
Earnings (loss) per share:
Basic as reported $ 0.65 $ 0.49 $ 0.43 $ 1.46
======== ======== ======== ==========
Basic - pro forma $ 0.65 $ 0.48 $ 0.41 $ 1.43
======== ======== ======== ==========
Diluted as reported $ 0.62 $ 0.46 $ 0.40 $ 1.39
======== ======== ======== ==========
Diluted - pro forma $ 0.61 $ 0.46 $ 0.39 $ 1.36
======== ======== ======== ==========
8
Note 5 - Dividends
On May 20, 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 June 24, 2003 to stockholders of record at the close of business on June
10, 2003.
Note 6 - Recent Developments
During the quarter ended June 30, 2003 the Company issued 2,469
treasury shares due to exercised employee stock options. At June 30, 2003,
the Company had 549,108 treasury shares.
Note 7 - Contingency and Extraordinary Item
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 previously 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 its intentions were to vigorously appeal
this Notice. The Company did not record a loss provision in regard to this
matter.
On March 5, 2003, the Commonwealth of Massachusetts enacted tax
legislation that imposed taxes on the Bank for the above described dividends
paid by the Bank's REIT to the Bank. The new tax, including interest, for
the Bank was $572,348 covering the years ending 1999, 2000, 2001, 2002, and
the five months ended February 28, 2003. The Company expensed this amount
in its financial statements for the quarter ended March 31, 2003, net of the
tax benefit of approximately $300,020 and classified it as an extraordinary
item on the statements of income for the three months ended March 31, 2003
and the six months ended March 31, 2003.
On June 20, 2003, the Bank and its subsidiary real estate investment
trust entered into an agreement with the DOR settling the dispute concerning
the dividends received deduction claimed by the Bank. Under the agreement,
the Bank paid $250,970 to the DOR, which will abate the balance of
assessments and all tax and interest otherwise remaining due under the
assessments. The Bank recorded a credit to extraordinary expense of
$295,389. Net of tax effects, the item of extraordinary expense was reduced
from $572,348 as reported for the three month and six month periods ended
March 31, 2003 to $276,959 on the statements of income for the nine month
period ended June 30, 2003.
Because of the inability to deduct dividends received from the Bank's
REIT, it is expected that net income during the remainder of 2003 will be
reduced by approximately $40,000 per quarter.
9
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 Bank (the "Bank" or
"Falmouth"), a Massachusetts chartered stock co-operative bank. At June 30,
2003, there were 905,642 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 investments trust.
The Company had average shares outstanding of 904,524 at June 30,
2003, as compared to 873,431 average shares outstanding at June 30, 2002.
At June 30, 2003, the Company had repurchased a total of 549,108 shares, or
37.74% of its common stock, leaving 905,642 shares issued and outstanding.
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.
The Audit Committee and our Board of Directors periodically review these
critical policies and their application.
Comparison of Financial Condition at June 30, 2003 and September 30, 2002.
The Company's total assets increased by $9.4 million or 6.11% for the
nine months ended June 30, 2003, from $154.5 million at September 30, 2002
to $163.9 million at June 30, 2003. Total deposits increased $9.7 million
or 7.35%, from $131.7 million at September 30, 2002 to $141.4 million at
June 30, 2003. This increase was due, in part, to seasonal deposits in NOW
accounts and regular savings accounts during the period. Total net loans
were $83.8 million or 59.3% of total deposits at June 30, 2003, as compared
to $95.0 million or 72.1% of total deposits at September 30, 2002,
representing a decrease of
10
$11.2 million for the period. This decrease was due, in part, to the large
number of 1-4 family mortgages that were re-written, due to lower market
rates, and then sold by the Bank on the secondary market with the loan
servicing retained. Investment securities were $65.3 million or 39.8% of
total assets at June 30, 2003, as compared to $47.7 million or 30.8% of
total assets at September 30, 2002. Investment securities increased $17.6
million or 37.0% 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 $5.2 million at September 30, 2002 to $3.6 million at June 30, 2003.
The decrease of $1.6 million was due to routine amortization and maturity of
advances during the period.
Securities sold under agreements to repurchase (sweep accounts for
commercial depositors) increased from $472,000 at September 30, 2002 to $1.3
at June 30, 2003. The increase was attributed to the increased seasonal
deposits of our commercial demand deposit customers.
Stockholders' equity was $17.38 million at June 30, 2003, as compared
to $16.34 million at September 30, 2002, an increase of $1.04 million. This
change was primarily due to an increase of $20,000 in retained earnings, a
decrease in other comprehensive loss of $683,000 due to realized gains on
available for sale investments and the increased value of available for sale
investments, the scheduled discharge of liabilities on stock-based employee
benefit plans of $258,000 (ESOP and RRP), and the exercise of stock options,
net of tax benefits, of $79,000. The ratio of stockholders' equity to total
assets was 10.60% at June 30, 2003, and the book value per share of common
stock was $19.19, compared to 10.57% and $18.15, respectively, at September
30, 2002.
The ratio of the allowance for loan losses to total loans was 1.11% at
June 30, 2003. 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.
Three Months Ended June 30, 2003 and 2002
Net Income. The Company's net gain, after an extraordinary item, for
the three months ended June 30, 2003 was $569,000, as compared to net income
of $428,000 for the three months ended June 30, 2002. The increase in net
income of $141,000 was due, in part, to a decrease in interest and dividend
income of $603,000 that was offset, in part, by a decrease in interest
expense of $220,000. Other key factors include a reduction of $295,000 of a
one-time charge to earnings of $572,000 (classified as an extraordinary item
on the March 31, 2003 consolidated statements of income) that is related to
a dispute and subsequent settlement between the Bank and the Commonwealth of
Massachusetts concerning the tax treatment of dividends received of the
Bank's real estate investment trust subsidiary; an increase in total other
expenses of $227,000 and a decrease in income taxes of $148,000. The
annualized return on average assets (ROA) for the three months ended June
30, 2003 was 1.43%, an increase of 253 basis points, as compared to 1.13%
for the same period in the prior year. The annualized return on average
equity (ROE) for the three months ended June 30, 2003 was 13.27%, as
compared to 10.20% 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 slightly.
Interest and Dividend Income. Total interest and dividend income for
the three months ended June
11
30, 2003 was $1.6 million, a decrease of $603,000, as compared to $2.2
million for the three-month period ended June 30, 2002. The decrease was
attributed to a decrease in interest and fees on loans of $592,000, which
was the result of generally lower interest rates on loans held for
investment, offset by a decrease in interest and dividends on debt
securities of $17,000, dividends on equities securities of 2,000, and an
increase in other interest of $8,000.
Interest Expense. Total interest expense for the three months ended
June 30, 2003 was $558,000, as compared to $778,000 for the same period of
the prior year, a decrease of $220,000. This was the result of decreased
FHLB borrowings as well as a reduction in interest rates paid on deposits
during the period.
Net Interest and Dividend Income. Net interest and dividend income
was $1.07 million for the three-month period ended June 30, 2003 as compared
to $1.45 million for the three months ended June 30, 2002. The $383,000
decrease was the result of a $603,000 decrease in interest and dividend
income, offset in part by a $220,000 decrease in interest expense. The net
interest margin for the three months ended June 30, 2003 was 2.82%, a
decrease of 121 basis points, as compared to 4.03% for the three months
ended June 30, 2002. The decrease in net interest margin was primarily the
result of a decrease in the yield on earning assets.
Provision for Loan Losses. The Bank made no additional provision to its
allowance for loan losses during the quarter ended June 30, 2003, as compared
to a provision of $30,000 for the quarter ended June 30, 2002. This was the
result of management's decision 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 have declined since September 30, 2002. The
Bank's allowance for loan loss was 1.11% of total loans at June 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 June
30, 2003. As of June 30, 2003, the Bank had no non-performing loans.
Other Income. Total other income for the three-month period ended
June 30, 2003 was $412,000, as compared to $135,000 for the three months
ended June 30, 2002. The $277,000 increase was primarily the result of an
increase in net gains on mortgages sold of $165,000, an increase in services
charges on deposit accounts of $10,000, an increase in loan servicing fee
income of $23,000 an increase in other income of $10,000, and a reduction in
realized losses on investments securities of $69,000.
Other Expenses. Total other expenses for the three months ended June
30, 2003 were $1.1 million, as compared to $873,000 for the three months
ended June 30, 2002. The $227,000 increase was primarily due to the
combination of an increase in salaries and employee benefits of $18,000, an
increase in occupancy expense of $4,000, an increase in data processing
expense of $7,000, and an increase in other expenses of $207,000, combined
with an increase in equipment expense of $4,000, an increase in Directors'
fees of $7,000, and a decrease in legal and professional costs of $20,000.
The increase in other
12
expenses was primarily the result of the amortization and impairment of
mortgage-servicing rights due to the large number of loans serviced for
others that have been re-financed and the general market for mortgage
servicing rights. The annualized ratio of operating expenses to average
total assets for the three months ended June 30, 2003 was 2.75%, as compared
to 2.31% for the three-month period ended June 30, 2002, an increase of 44
basis points.
Extraordinary Item. The extraordinary item expense was the result of
the recent Massachusetts tax legislation effecting the 95% tax dividend
exclusion of dividends received by the Bank from its real estate investment
trust subsidiary. The new tax legislation expressly disallows the deduction
for dividends received from a real estate investment trust subsidiary. As a
result of the enactment of the legislation, the Company ceased recording the
tax benefits associated with the dividend-received deduction and an
extraordinary item of $572,000 (net of income tax benefits of $300,000) was
recorded in March 2003.
On June 20, 2003, the Bank and its subsidiary real estate investment
trust entered into an agreement with Massachusetts concerning the dividends
received deduction claimed by the Bank. Under the agreement, the Bank paid
$250,970 to the DOR, which will abate the balance of assessments and all tax
and interest otherwise remaining due under the assessments. During the
three months period ended June 30, 2003, the Bank recorded a credit to
extraordinary expense of $295,000, net of tax effects.
Nine months Ended June 30, 2003 and 2002
Net Income. The Company's net gain, after an extraordinary item, for
the nine months ended June 30, 2003 was $372,000 as compared to net income
of $1,286,000 at June 30, 2002. The decrease in net income of $914,000 was
due, in part, to a decrease in interest and dividend income of $1,460,000
that was offset, in part, by a decrease in interest expense of $708,000.
Other key factors included a one-time charge to earnings of $277,000,
classified as an extraordinary item on the consolidated statements of
income, that is the result of tax legislation recently enacted by the
Commonwealth of Massachusetts related to the Company's real estate
investment trust subsidiary; an increase in total other income of $213,000,
an increase in total other expenses of $534,000 and a decrease in income
taxes of $326,000. The annualized return on average assets (ROA) for the
nine months ended June 30, 2003 was 0.31%, as compared to 1.15% for the same
period in the prior year. The annualized return on average equity (ROE) for
the nine months ended June 30, 2003 was 2.90%, as compared to 10.09% for the
nine months ended June 30, 2002.
Interest and Dividend Income. Total interest and dividend income for
the nine months ended June 30, 2003 was $5.2 million, a decrease of $1.5
million as compared to $6.7 million for the nine-month period ended June 30,
2002. 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 79.9% of total deposits at June 30, 2002 to 59.3% at
June 30, 2003. Although the investment portfolio grew $30.0 million from
$35.3 million at June 30, 2002 to $65.3 million at June 30, 2003, interest and
dividends on securities increased $223,000 due to the decrease in interest
rates generally and the Bank's strategy of investing in short term, lower
yielding securities in anticipation of rising interest rates. Management
believes it is well positioned for a rising rate scenario. In the short term,
profitability will remain relatively unchanged as the effects of higher
earning assets being replaced with lower earning assets are offset by the
effects of higher costing term deposits and borrowings being replaced with
lower costing term deposits and borrowings.
Interest Expense. Interest expense for the nine months ended June 30,
2003 was $1.9 million, including $178,000 in interest on FHLB advances, which
is a decrease of $708,000 from $2.6 million for the nine months ended June 30,
2002. 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
$664,000 decrease in interest on
13
deposits and a $44,000 decrease in interest on borrowed funds and securities
sold under agreement to repurchase.
Net Interest and Dividend Income. Net interest and dividend income for
the nine-month period ended June 30, 2003 was $3.3 million as compared to $4.0
million for the nine months ended June 30, 2002. The net interest margin
(NIM) for the nine months ended June 30, 2003 was 2.82%, a decrease of 121
basis points as compared to 4.03% for the nine months ended June 30, 2002. The
reason for the decrease in the NIM was primarily due to the decrease in
interest and fees on loans and the low interest rate environment.
Provision for Loan Losses. The Bank made no allocation to its allowance
for loan loss account for the nine months ended June 30, 2003 compared to
$110,000 for nine months period ended June 30, 2002. 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 June 30, 2003, the Bank had no loans 90 days or more delinquent.
The Bank's allowance for loan losses was 1.11% of total loans at June 30,
2003. Management believes the provision to be adequate and commensurate with
the level of credit risk.
Other Income. Total other income for the nine-month period ended June
30, 2003 was $873,000 as compared to $660,000 for the nine months ended June
30, 2002. The $213,000 increase is primarily the result of an increase of
$517,000 in gains on sales of loans, an increase of $11,000 in service charges
on deposit accounts, and increase in loan servicing fee income of $63,000, an
increase of $26,000 in other income, and an increase of $404,000 on realized
losses on the sale of investment securities taken during the nine months ended
June 30, 2003.
Other Expenses. Total other expenses for the nine months ended June 30,
2003 were $3.1 million as compared to $2.6 million for the nine months ended
June 30, 2002. The $534,000 increase was primarily due to an increase in
salaries and employee benefits expense of $161,000, an increase in occupancy
expense of $7,000, an increase in data processing expense of $17,000, an
increase in directors fees of $9,000 and an increase in other expense of
$369,000, offset in part by a decrease in legal and professional fees of
$24,000 and a decrease in equipment expense of $5,000. The ratio of
annualized operating expenses to average total assets for the nine months
ended June 30, 2003 was 2.63% as compared to 2.30% for the nine-month period
ended June 30, 2003. The increase in salary and employee benefits was due,
substantially, to the annual increase in employee compensation. The increase
in other expense was primarily the result of the amortization and impairment
of mortgage servicing rights.
Extraordinary Item. The extraordinary item expense was the result of
the recent Massachusetts tax legislation effecting the 95% tax dividend
exclusion of dividends received by the Bank from its real estate investment
trust subsidiary. The new tax legislation expressly disallows the deduction
for dividends received from a real estate investment trust subsidiary. As a
result of the enactment of the legislation, the Company ceased recording the
tax benefits associated with the dividend-received deduction and an
extraordinary item of $572,000 (net of income tax benefits of $300,000) was
recorded in March 2003.
On June 20, 2003, the Bank and its subsidiary real estate investment
trust entered into an agreement with Massachusetts concerning the dividends
received deduction claimed by the Bank. Under the agreement, the Bank paid
$250,970 to the DOR, which will abate the balance of assessments and all tax
and interest otherwise remaining due under the assessments. The Bank
recorded a credit to extraordinary expense of $295,000. Net of tax effects,
the item of extraordinary expense was reduced from $572,000 as reported for
the three month and six month periods ended March 31, 2003 to $277,000 on
the statements of income for the nine month period ended June 30, 2003.
14
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment and
prepayment of loans and mortgage-backed securities, maturities of
investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable sources
of funds, deposit flows and loan prepayments are greatly influenced by the
general level of interest rates, economic conditions and competition. The
Bank uses its liquidity resources principally to fund existing and future
loan commitments, to fund net deposit outflows, to invest in other interest-
earning assets, to maintain liquidity, and to meet operating expenses.
The Bank is required to maintain adequate levels of liquid assets.
This guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Bank has historically maintained a level of liquid assets
in excess of regulatory requirements. The Bank's liquidity ratio at June
30, 2003 was 51.13%.
A major portion of the Bank's liquidity consists of short-term
securities obligations. The level of these assets is dependent on the
Bank's operating, investing, lending and financing activities during any
given period. At June 30, 2003, regulatory liquidity totaled $111.5
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 June 30, 2003, the Bank had
outstanding advances from the FHLB of Boston in the amount of $3.6 million
in short and long-term borrowings. As these advances mature, they will be
repaid or re-written as longer term matched borrowings, which will assist
the match of rate sensitive assets to rate sensitive liabilities as well as
reduce interest expense.
At June 30, 2003, the Bank had $10.3 million in outstanding
residential and commercial commitments to originate loans, as well as $23.9
million in unadvanced loan commitments. If the Bank anticipates that it may
not have sufficient funds available to meet its current loan commitments it
may commence further matched borrowing from the FHLB. At June 30, 2003,
certificates of deposit that are scheduled to mature in one year or less
totaled $40.2 million. Based on historical experience, management believes
that a significant portion of such deposits will remain with the Bank.
At June 30, 2003 the Bank exceeded all of its regulatory capital
requirements.
15
Part 1. 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(f) 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 has materially
affected, or that is reasonably likely to materially affect, the Company's
internal control over financial reporting.
16
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
17
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11, Computation of Earnings (Losses) per Share.
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
1. The Company filed a Form 8-K with the Securities and
Exchange Commission on June 23, 2003 reporting in Item 5 a reduction of a
previously reported one-time charge to earnings. The recovery is the result
of a settlement between a number of Massachusetts's banks and the
Massachusetts Department of Revenue, related to the banks' real estate
investment trust subsidiaries.
18
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: August 8, 2003 By: /s/ Santo P. Pasqualucci
--------------- -------------------------
Santo P. Pasqualucci
President and
Chief Executive Officer
Date: August 11, 2003 By: /s/ George E. Young, III
---------------- -------------------------
George E. Young, III
Senior Vice President and
Chief Financial Officer
19