SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 01-13465
Falmouth Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Davis Straits, Falmouth, MA 02540
(Address of principal executive offices)
(Zip Code)
(508) 548-3500
(Registrant's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirement for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of the latest practicable date.
Outstanding at
Class June 30, 1998
--------------------------- --------------
Common Stock, Par Value $.01 1,454,750
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
Consolidated Statements of Financial Condition June 30, 1998 and
September 30, 1997 1
Consolidated Statements of Income For Three Months Ended June 30,
1998 and 1997 For Nine Months Ended June 30, 1998 and 1997 2
Consolidated Statements of Changes in Stockholders' Equity For
Nine Months Ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows For Nine Months Ended
June 30, 1998 and 1997 4
Notes To Consolidated Financial Statements 5-6
Item 2 Management's Discussion and Analysis of Financial Condition 7-11
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 12
Item 3. Defaults Upon Senior Debt 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on 8-K
None
*Submitted only with filing in electronic format
Part I. Item I.
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, September 30,
1998 1997
------------ -------------
(unaudited)
Assets
Cash and due from banks $ 2,193,772 $ 2,563,517
Federal funds sold 2,304,685 1,352,403
----------------------------
Total cash and cash equivalents 4,498,457 3,915,920
----------------------------
Investment securities 23,018,646 35,996,739
Federal Home Loan Bank stock, at cost 562,800 405,200
Loans, net 78,806,387 53,881,171
Premises and equipment 2,429,964 999,707
Accrued interest receivable 598,047 614,289
Cooperative Central Bank Reserve Fund Deposit 395,395 285,680
Other assets 213,611 292,478
----------------------------
Total assets $110,523,307 $ 96,391,184
============================
Liabilities and Stockholders' Equity:
Liabilities:
Demand deposits $ 5,133,964 $ 3,136,116
Savings and NOW deposits 34,705,153 31,922,355
Time deposits 39,801,278 37,132,618
----------------------------
Total deposits 79,640,395 72,191,089
----------------------------
Repurchase agreements 469,149 --
Short term advances from FHLB 3,155,000 --
Long term borrowing from FHLB 3,000,000 --
Employee Stock Ownership Plan loan -- 741,923
Other liabilities 627,899 652,656
----------------------------
Total liabilities 86,892,443 73,585,668
----------------------------
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 and outstanding 1,454,750
shares 14,547 14,547
Common stock purchased under RRP (293,142) --
Paid-in capital 13,987,973 13,782,498
Retained earnings 9,982,095 9,334,011
Employee Stock Ownership Plan loan (676,084) (741,923)
Net unrealized gain on available-for-sale securities 615,475 416,383
----------------------------
Total stockholders' equity 23,630,864 22,805,516
----------------------------
Total liabilities and stockholders' equity $110,523,307 $ 96,391,184
============================
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(unaudited) (unaudited)
Three Months Ended Nine Months Ended
June 30, June 30,
------------------------ ------------------------
1998 1997 1998 1997
----------------------------------------------------
Interest and dividend income:
Interest and fees on loans $1,442,919 $ 965,031 $3,815,237 $2,728,258
Interest and dividends on investment securities 370,295 509,222 1,367,061 1,752,089
Interest on short-term investments 28,051 47,858 136,209 98,392
----------------------------------------------------
Total interest and dividend income 1,841,265 1,522,111 5,318,507 4,578,739
----------------------------------------------------
Interest expense:
Interest expense on deposits 743,056 682,414 2,175,966 2,042,703
Interest expense on borrowings 64,091 -- 117,376 --
----------------------------------------------------
Total interest expense 807,147 682,414 2,293,342 2,042,703
----------------------------------------------------
Net interest and dividend income 1,034,118 839,697 3,025,165 2,536,036
Provision for loan losses 6,000 -- 16,000 --
----------------------------------------------------
Net interest and dividend income after provision
for possible loan losses 1,028,118 839,697 3,009,165 2,536,036
----------------------------------------------------
Other income
Service charges 17,559 14,391 52,649 39,060
Other fee income 13,184 7,918 38,447 28,219
Gain on sale of investment securities, net 133,890 13,445 352,136 47,036
Other operating income 11,277 7,252 53,331 48,334
----------------------------------------------------
Total other income 175,910 43,006 496,563 162,649
----------------------------------------------------
Other expense:
Salaries and employee benefits 403,296 324,314 1,134,888 986,946
Deposit insurance expense 2,219 2,095 6,635 4,216
Data processing expense 53,931 37,184 146,653 103,117
Directors' fees 24,656 15,865 55,310 53,645
Legal and professional fees 66,602 42,225 199,669 159,891
Other operating expenses 207,280 197,016 584,695 539,935
----------------------------------------------------
Total other expense 757,984 618,699 2,127,850 1,847,750
----------------------------------------------------
Income before taxes 446,044 264,004 1,377,878 850,935
Income taxes 164,700 92,300 495,100 311,400
----------------------------------------------------
Net income $ 281,344 $ 171,704 $ 882,778 $ 539,535
====================================================
Earnings per common share, basic $ 0.20 $ 0.13 $ 0.64 $ 0.39
====================================================
Earnings per common share, assuming dilution $ 0.20 $ 0.13 $ 0.62 $ 0.39
====================================================
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
Net
Unrealized
Common Holding Gain Employee
stock Additional on Available- Stock
Common purchased Paid-in Retained for-sale Ownership
Stock under RRP Capital Earnings Securities Plan Loan Total
------- ---------- ----------- ---------- ------------- ---------- -----------
Balance, September 30, 1996 as
restated $14,547 $13,729,102 $8,856,291 $143,685 $(829,208) $21,914,417
ESOP compensation expense 15,173 15,173
Principal payments on ESOP loan 30,490 30,490
Dividends declared (205,774) (205,774)
Net Income 539,535 539,535
Net change in unrealized gain on
available-for-sale securities 116,404 116,404
------------------------------------------------------------------------------------------
Balance, June 30, 1997 as restated $14,547 $ -- $13,744,275 $9,190,052 $260,089 $(798,718) $22,410,245
==========================================================================================
Balance, September 30, 1997 as
restated $14,547 $13,782,498 $9,334,011 $416,383 $(741,923) $22,805,516
Employee Stock Ownership Plan 73,931 73,931
Principal payments on ESOP loan 65,839 65,839
Net income 882,778 882,778
Dividends declared (234,694) (234,694)
Accrual for RRP 131,544 131,544
Purchase of shares to fund awards
under RRP $(293,142) (293,142)
Net change in unrealized gain on
available-for-sale securities 199,092 199,092
------------------------------------------------------------------------------------------
Balance, June 30, 1998 $14,547 $(293,142) $13,987,973 $9,982,095 $615,475 $(676,084) $23,630,864
==========================================================================================
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine months ended
June 30,
(in thousands)
--------------------
1998 1997
-------- --------
Operating activities:
Net income $ 883 $ 540
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Disposal of fixed assets 27 10
Provision for possible loan losses 16 --
Amortization of investment securities, net 42 8
Change in unearned income (24) (22)
(Gain) loss on sales of investment securities, net (352) (47)
Depreciation 128 53
(Increase) decrease in other assets 95 (26)
Increase (decrease) in other liabilities (92) 153
--------------------
Net cash provided by (used in) operating activities 723 669
--------------------
Investing activities:
Purchases of available-for-sale securities (4,178) (9,457)
Purchases of held-to-maturity securities -- (2,000)
Proceeds from sales of available-for-sale securities 7,501 2,434
Proceeds from maturities of available-for-sale securities 5,884 7,451
Proceeds from maturities of held-to-maturity securities 4,398 11,440
Net increase in loans (24,901) (10,304)
Purchase of FHLB stock (158) (104)
Net increase in short term investments -- 107
Increase in Co-operative Central Bank deposit (110) --
Purchase of premises and equipment (1,585) (492)
--------------------
Net cash provided by (used in) investing activities (13,149) (925)
--------------------
Financing activities:
ESOP loan (742) --
Advances/borrowings from FHLB 6,155 --
Common stock purchased under RRP, net of accrual (162) --
ESOP compensation expense 74 15
Dividends paid (235) (206)
Net increase in repurchase agreements 469 --
Net increase (decrease) in demand deposits, savings
accounts, and NOW deposits 4,781 4,111
Net increase (decrease) in time deposits 2,669 (422)
--------------------
Net cash provided by (used in) financing activities 13,009 3,498
--------------------
Increase (decrease) in cash and cash equivalents 583 3,242
Cash and cash equivalents at beginning of period 3,916 1,172
--------------------
Cash and cash equivalents at end of period $ 4,499 $ 4,414
====================
Supplemental disclosures:
Interest paid $ 2,293 $ 2,043
====================
Income taxes paid $ 630 $ 340
====================
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
Notes to Unaudited Consolidated Financial Statements
Note 1 - Basis of Presentation
The financial statements of Falmouth Bancorp, Inc. (the "Company") and
its subsidiaries presented herein are unaudited and should be read in
conjunction with the financial statements of the Falmouth Co-operative Bank
(the "Bank") as of June 30, 1998 and September 30, 1997. The results of
operations for the three month and nine month periods ended June 30, 1998 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. The financial statements prior to October 14, 1997 include only
the accounts of the Bank unless otherwise adjusted. In the opinion of
management, the financial statements reflect all adjustments (consisting solely
of normal recurring adjustments) necessary for a fair presentation of results
for the interim periods.
Note 2 - Accounting Policies
The accounting and reporting policies of the Company conform to generally
accepted accounting principles and prevailing practices within the banking
industry. The interim financial information should be read in conjunction with
the Company's 1997 Annual Report contained on Form 10-KSB.
Management is required to make estimates and assumptions that affect amounts
reported in the financial statements. Actual results could differ significantly
from those estimates.
Note 3 - Reorganization
The Company was organized in November, 1996 and was reorganized on
October 14, 1997 at the direction of the Stockholders and the Directors of the
Falmouth Co-operative Bank, whereby the Company became the sole owner of the
Bank. Upon completion of the reorganization, Falmouth Bancorp, Inc. issued
1,454,750 shares of common stock at $.01 par value in exchange for all the
Bank's 1,454,750 issued and outstanding shares of $.10 par value common stock
on a share for share basis. In addition, the Company replaced the Bank as the
issuer listed on the American Stock Exchange (AMEX) retaining the symbol "FCB".
At this time the Company conducts business as a Massachusetts
Co-operative Bank and the principal business of the Company consists of the
operation of its wholly owned subsidiary, the Bank.
Note 4 - Earnings per Share
In February 1997, the FASB issued Statement 128 "Earnings Per Share."
Statement 128 supersedes APB Opinion No. 15, "Earnings Per Share," and
specifies the computation, presentation and disclosure requirements for
earnings per share (EPS) for entities with publicly held common stock or
potential common stock. It replaces the presentation of primary EPS with the
presentation of basic EPS, and replaces fully diluted EPS with diluted EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS calculation. EPS for the
quarter ended June 30, 1998 has been calculated according to the guidelines of
Statement 128 and EPS for the quarter ended June 30, 1997 has been restated to
conform with 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 of the basic and
diluted per share comparisons for net income are as follows:
(Numerator) (Denominator) Amount
----------- ------------- ------
Quarter ended June 30, 1998
Basic EPS
- ---------
Net income and income available to common stockholders $ 281,344 $ 1,380,557 $ .20
Effect of dilutive securities options and warrants -- 37,799
--------------------------
Diluted EPS
- -----------
Income available to common stockholders $ 281,344 $ 1,418,356 .20
==========================
Quarter Ended June 30, 1997 - As restated
Basic EPS
- ---------
Net income and income available to common stockholders $ 171,704 1,371,829 .13
Effect of dilutive securities options and warrants -- --
--------------------------
Diluted EPS
- -----------
Income available to common stockholders $ 171,704 $1,371,829 .13
==========================
Note 5 - Dividends
On May 19, 1998, the Board of Directors of the Company declared a
quarterly cash dividend of $0.06 per share of common stock which was paid on
June 22, 1998.
Note 6 - Recent Developments
On October 21, 1997, the Company announced a repurchase program to
proceed as soon as practical and continue for a period of up to 12 months. The
Repurchase program authorizes the Company to repurchase into treasury stock up
to 72,738 shares, or five percent, of its 1,454,750 outstanding shares of
common stock. During the quarter ended June 30, 1998, the Company did not
repurchase any shares of the Company's common stock.
Part I. Item 2.
Management's Discussion and
Analysis of Financial Condition
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. The Bank
converted to stock form on March 28, 1996, and issued 1,454,750 shares of
common stock at $10.00 per share (the "Conversion"). On October 14, 1997, the
Company acquired all of the capital stock of Bank and stockholders of the Bank
became stockholders of the Company in a share for share exchange pursuant to a
plan of reorganization approved by the Bank's stockholders on January 21, 1997
(the "Reorganization"). At June 30, 1998, there were 14,454,750 shares
outstanding. The Company's stock trades on the American Stock Exchange under
"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 using these funds to originate mortgage
loans secured by one to four-family residences located primarily 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 well-capitalized, profitable and independent community bank dedicated to
financing home ownership and consumer needs in its market area and to provide
quality service to its customers. The Bank has one subsidiary, Falmouth
Securities Corporation, a Massachusetts corporation, which was established
solely for the purpose of acquiring and holding investments which are
permissible for banks to hold under Massachusetts law.
Comparison of Financial Condition at June 30, 1998 and September 30, 1997.
The Company's total assets increased by $14.1 million or 14.66% for the
nine months ended June 30, 1998 from $96.4 million at September 30, 1997 to
$110.5 million at June 30, 1998. Total deposits increased $7.4 million or
10.32% from $72.2 million at September 30, 1997, to $79.6 million at June 30,
1998. This increase was due, in part, by the success of two branch offices
added during the past 18 months. Total net loans were $78.8 million or 98.9% of
total deposits at June 30, 1998 as compared to $53.9 million or 74.6% of total
deposits at September 30, 1997, representing an increase of $24.9 million in
net loans since September 30, 1997. This is due partly to the Bank's continued
focus on increasing its market share in residential mortgages and the continued
strong local real estate market. Investment securities were $23 million or
20.8% of total assets at June 30, 1998 as compared to $36 million or 37.3% of
total assets at September 30, 1997. The proceeds from maturing securities were
primarily redeployed to fund an increased volume of loan production. The Bank's
investment in real estate has become the new location of the East Falmouth
office and the leasehold interest in the former location of the East Falmouth
office has been included in the "Premises and equipment" account on the balance
sheet.
Borrowings from the Federal Home Loan Bank of Boston in the amount of
$6.2 million were used to supplement the funding of loan originations. New
products involving sweep accounts for commercial deposit accounts provide for
repurchase agreements in the amount of $469,000.
Stockholders' equity was $23.6 million at June 30, 1998 as compared to
$22.8 million at September 30, 1997, an increase of $825,000 which includes an
increase in unrealized gain on available-for-sale securities of $199,000 from
$416,000 to $615,000 at June 30, 1998.
The ratio of the loan loss reserves to total loans was .66%. 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. Due to the substantial increase in net loans, however, the
Bank may periodically make additional provisions as deemed necessary to
maintain a sufficient loan loss reserve to total loan ratio. Additionally,
existing provisions may be allocated to acknowledge any credit risks identified
by our Year 2000 analysis. The Bank increased its loan loss provisions by
$16,000 during the nine months ended June 30, 1998.
Comparison of Operating Results
Three Months Ended June 30, 1998 and 1997.
Net Income. The Company's net income for the three months ended June 30,
1998 was $281,000 as compared to $172,000 at June 30, 1997, an increase of
$110,000 or 64%. Interest and fee income on loans increased 50% due to the
greater loan activity at the Bank. Gains on the sale of investments grew from
$13,000 to $134,000, an increase of $121,000 as compared to the same quarter of
the previous year.
Interest Income. Total interest and dividend income for the three months
ended June 30, 1998 was $1,841,000 an increase of $319,000, as compared to
$1,522,000 for the three months ended June 30, 1997. Interest and dividend
income is attributable to continued growth in the loan portfolio which showed
and increase in interest and fee income of $478,000. This was partially offset
by a decrease in income on investment securities of $139,000. Some maturing
securities were used to fund the increase in loans. Management expects income
derived from loan assets to increase, while income from investment securities
assets to remain relatively constant as the Bank will try to maintain its
securities portfolio at the current level and fund loans with matched
borrowings from the Federal Home Loan Bank of Boston.
Interest Expense. Interest expense for the three months ended June 30,
1998 was $807,000, which includes $64,000 interest paid on short and long term
borrowings, an increase of $125,000 over the three months ending June 30, 1997.
The increase was due to increases in both interest bearing deposit liabilities
and borrowings. Management expects some interim borrowings as the Bank
continues to restructure its balance sheet by matching its borrowings to loans,
increasing deposits and maintaining its current level of securities.
Net Interest Income. Net interest income for the three months ended June
30, 1998 was $1,034,000 as compared with $840,000 for the three months ended
June 30, 1997. The increase of $194,000 was the result of loan growth. The net
interest margin for the three months ended June 30, 1998 was 3.94%, an increase
of 27 basis points as compared to 3.67% for the three months ended June 30,
1997. The annualized return on average assets (ROA) for the three months ended
June 30, 1998 was 1.03%, an increase of 28 basis points as compared to 75 basis
points for the same period of the prior year. The primary reason for the
increase in the ROA was the deployment of proceeds from maturing securities
into an increased volume of residential loans originated during the reporting
period.
Provision for Loan Losses. The Bank added $6,000 to its provision for
loan loss account to compensate for the increase in the dollar amount of the
loan portfolio. Management believes the provision of $517,000 to be adequate
and believes the level of credit risk to be comparable to the prior reporting
period. As of the reporting date, the Bank had no loan assets classified as
doubtful or loss. Existing provisions of $42,000 have been allocated to address
the potential credit risk that may be present in the commercial loan portfolio
due to year 2000 considerations. Other Income. Other income for the three
months ended June 30, 1998 was $176,000 as compared to $43,000 for the three
months ended June 30, 1997. The $133,000 increase is primarily the result of
realized gains on the sale of investment securities and a 60% increase in other
fee income from $8,000 to $13,000 at June 30, 1998.
Operating Expenses. Operating expenses for the three months ended June
30, 1998 were $758,000 as compared to $619,000 for the three months ended June
30, 1997. The $139,000 increase was primarily due to an increase in salaries
and employee benefits of $79,000, an increase in data processing expense of
$17,000, legal and professional fees of $25,000, directors' fees of $9,000, and
other operating expenses of $10,000, which includes a loss on the sale of
equipment in the amount of $14,000. The increase in expenses is due mainly to
the Company's overall growth. Commissions paid for loan originations represent
the major portion of the increase in salary costs. An increase in personnel was
necessary due to the branch expansion. The increase in data processing costs is
due primarily to the expanded number of teller terminals operating at our new
branch locations and the implementation of On Call a "bank by phone" system
which will be fully operational in the fourth quarter. The ratio of operating
expenses to average total assets for the three months ended June 30, 1998 is
2.74% as compared to 2.63% for the three months ended June 30, 1997, a 4.2%
increase.
Nine months Ended June 30, 1998 and 1997.
Net Income. The Company's net income for the nine months ended June 30,
1998 was $883,000 as compared to $540,000 at June 30, 1997, an increase of
$343,000 or 64%.. Interest and fee income on loans was up 40% due to the
increased loan activity at the Bank. Gains on the sale of investments was
$352,000, up from $47,000 for the same period last year. The current economic
environment has facilitated Bank management's goal to increase mortgage loans
funded by investment securities and low cost matched borrowings.
Interest Income. Total interest and dividend income for the nine months
ended June 30, 1998 was $5.3 million, an increase of $740,000 as compared to
$4.6 million for the nine months period ended June 30, 1997. The increase in
interest and dividend income is attributable to growth in the loan portfolio
which realized an increase in interest and fee income of $1.1 million. This was
partially offset by a decrease in income on investment securities of $385,000.
Management expects income derived from loan assets to continue to increase with
interest on investments remaining relatively constant while interest on matched
borrowings will increase as a result of the use of FHLB advances to fund loans.
Interest Expense. Interest expense for the nine months ending June 30,
1998 was $2.3 million which includes $117,000 in interest on borrowings, an
increase of $251,000 from $2.0 million for the nine months ended June 30, 1997.
The increase was due to increases in both interest bearing deposit liabilities
and borrowings. Management expects some additional interim borrowings as the
bank continues to restructure its balance sheet.
Net Interest Income. Net interest income for the nine month period ending
June 30, 1998 was $3.0 million as compared with $2.5 million for the nine
months ended June 30, 1997. The increase of $489,000 was the result of
increased interest and fees on loans realized from the increased dollar amount
of the loan portfolio, partially offset by a decrease in interest and dividend
income from investment securities. The net interest margin for the nine months
ending June 30, 1998 was 4.04%, an increase of 23 basis points as compared to
3.81% for the nine months ended June 30, 1997. The annualized return on average
assets (ROA) for the nine months period ended June 30, 1998 was 1.15%, an
increase of 35 basis points as compared to 80 basis points for the same period
of the prior year. The primary reason for the increase in the ROA was the
deployment of proceeds from maturing securities into an increased volume of
residential loans originated and overall growth during the reporting period.
Provision for Loan Losses. The Bank added $16,000 to its provision for
loan loss account to compensate for the increase in the dollar amount of the
loan portfolio. Management believes the provision to be adequate and believes
the level of credit risk to be comparable to the prior reporting period.
However, resources have been allocated in the current period toward potential
Year 2000 credit risk problems. The Bank will continue to increase the reserve
as the portfolio warrants.
Other Income. Other income for the nine months ended June 30, 1998 was
$497,000 as compared to $163,000 for the nine months ended June 30, 1997. The
$334,000 increase is primarily the result of realized gains on the sale of
investment securities. Sales have been made and gains taken on several equity
securities when the market was favorable to do so.
Operating Expenses. Operating expenses for the nine months ended June 30,
1998 were $2.1 million as compared to $1.8 million for the nine months ended
June 30, 1997. The $280,000 increase is primarily due to an increase in
salaries and employee benefits of $148,000, an increase in data processing
expense of $44,000 and an increase in legal and professional fees of $40,000.
The ratio of annualized operating expenses to average total assets for the nine
months ended June 30, 1998 is 2.76% as compared to 2.68% for the nine month
period ended June 30, 1997.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment and
prepayment of loans and mortgaged-backed securities, Federal Home Loan Bank
advances, 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, 1998 was
22.68%.
A major portion of the Bank's liquidity consists of short-term U.S.
Government obligations as well as other marketable assets. The level of these
assets is dependent on the Bank's operating, investing, lending and financing
activities during any given period. At June 30, 1998, regulatory liquidity
totaled $19.0 million. The primary investing activities of the Bank include
origination of loans and 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
FHLB of Boston. At June 30, 1998, the Bank had an outstanding advances from the
FHLB of Boston in the amount of $6.2 million in short and long term borrowings.
As these advances mature, the Bank will continue to rewrite them as longer term
matched borrowings which will assist the match of rate sensitive assets to rate
sensitive liabilities.
At June 30, 1998, the Bank had $12.0 million in outstanding commitments
to fund and originate loans. The Bank anticipates that it may not have
sufficient funds available to meet its current loan commitments without further
matched borrowing from the Federal Home Loan Bank of Boston. It is anticipated
that further matched borrowings will be made as needed. Certificates of deposit
which are scheduled to mature in one year or less totaled $32.6 million at June
30, 1998. Based on historical experience, management believes that a
significant portion of such deposits will remain with the Bank.
At June 30, 1998, the Bank exceeded all of its regulatory capital
requirements.
Year 2000
All of the material data processing of the Bank that could be affected by
the potential Year 2000 problem is provided by a third party service bureau.
The service bureau of the Bank has advised the Bank that it expects to resolve
any Year 2000 issues by December 31, 1998. However, if the service bureau is
unable to solve this potential problem in time, the Bank would likely
experience significant data processing delays, mistakes or failures. These
delays, mistakes or failures could have a significant adverse impact on the
financial condition and results of operation of the Bank.
Internally, the Bank has determined that continued monitoring of the
progress made by outside vendors will be key to a successful move into the next
millennium. The Bank does not believe that the costs associated with its
actions and those of its vendors will be material.
The Bank has created a Year 2000 Steering Committee (the "Committee")
comprised of representatives of the Bank's lending, branch administration, and
operations areas. The Committee is chaired by the Bank's Vice President &
Treasurer. The Committee meets on a regular basis to monitor and discuss
continuing developments and to ensure that certain milestones will be met in
accordance with the Bank's Year 2000 Plan.. The Committee also acts as a
sounding board and resource for Bank customers, vendors, regulators and
employees.
The Committee has completed a Year 2000 applications inventory that
identified and classified all hardware, software and vendors with a grading
system. For each identified application, the assigned committee member
completed a product listing sheet that details Year 2000 status, date of
compliance, actions required, estimated costs, and contingency plan. All
identified vendors have been contacted and products sheets are periodically
updated when additional information is received. Hardware and personal
computers have been inventoried and tested.
The Board of Directors, management, employees, vendors customers and the
public in general are being kept informed of the issues regarding the Year
2000. With the support of the Directors and Senior management, the Committee
has mailed letters to business relationships informing them of the Bank's
commitment to Year 2000 issues and requesting information regarding theirs.
Newsletters, stuffers, general and personal mailings, statement messages and
other means of communication have been utilized to increase awareness and
obtain information.
Falmouth Bancorp, Inc. believes that it is substantially compliant at
this time. Vendors and correspondents have been contacted and follow ups have
been scheduled. Changes in hardware, software, and procedures have been and
will continue to be developed to assist the Bank and its customers to operate
successfully in the Year 2000 and beyond.
A testing plan has been developed with the Bank's service provider and
the systems will be tested "on-line" beginning in the first quarter of fiscal
1999. The service provider will also be testing with third party interfaces,
such as automated clearing houses, during this period. The Bank recently
installed its Year 2000 compliant record retention and retrieval system and is
currently testing it parallel to the non-Year 2000 compliant system.
Additionally, all controlling PCs such as gateways and file servers have been
upgraded to Pentium II processors and are now Year 2000 compliant.
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) Exhibit 27 - Financial Data Schedule*
(b) Reports on 8-K
None
* Submitted only with filing in electronic format.
Falmouth Bancorp, Inc. is a publicly owned bank holding company and the parent
corporation of Falmouth Co-operative Bank, a Massachusetts chartered stock
co-operative bank offering traditional products and services. The Bank conducts
business through its main office located at 20 Davis Straits, Falmouth,
Massachusetts 02540, and its two branch locations in North and East Falmouth.
The telephone number is (508) 548-3500.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
FALMOUTH BANCORP, INC.
(Registrant)
Date: August 10, 1998 By: /s/ Santo P. Pasqualucci
------------------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: August 10, 1998 By: /s/ George E. Young, III
------------------------------------------
George E. Young, III
Vice President and Chief Financial Officer