SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission file number 01-13465
Falmouth Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 Davis Straits, Falmouth, MA 02540
(Address of principal executive offices)
(Zip Code)
(508) 548-3500
(Registrant's telephone number including area code)
NA
(Former name, former address and former fiscal year,
if changed from last Report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding twelve months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirement for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
Outstanding at
Class March 31, 1999
----- --------------
Common Stock, Par Value $.01 1,324,606
Transitional small business disclosure formate:
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 1
December 31, 1998 and September 30, 1998
Consolidated Statements of Income 2
For Three Months Ended December 31, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity 3
For Three Months Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows 4-5
For Three Months Ended December 31, 1998 and 1997
Notes To Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial Condition 8-14
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
(a) Exhibit 27 - Financial Data Schedule*
(b) Reports on 8-K
None
* Submitted only with filing in electronic format
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: changes in general, economic and market
conditions, or the development of an adverse interest rate environment that
adversely affects the interest rate spread or other income anticipated from
the Bank's operations and investments; and the factors described under
"Management's Discussion and Analysis of Financial condition and Results of
Operations - Year 2000."
Part I. Item I. FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
March 31, 1999 and September 30, 1998
-------------------------------------
March 31, September 30,
1999 1998
----------- -------------
(unaudited)
ASSETS
- ------
Cash and due from banks $ 2,267,733 $ 1,705,345
Federal funds sold 5,821,287 5,581,233
-----------------------------
Total cash and cash equivalents 8,089,020 7,286,578
Investments in available-for-sale securities
(at fair value) 18,268,797 16,923,523
Investments in held-to-maturity securities
(fair values of $5,731,879 as of March
31, 1999 and $7,078,556 as of September 30,
1998) 5,712,446 7,037,287
Federal Home Loan Bank stock, at cost 720,700 562,800
Loans, net 76,869,422 77,654,939
Premises and equipment 2,085,084 2,108,344
Accrued interest receivable 671,153 631,590
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 137,980 192,170
-----------------------------
Total Assets $112,949,997 $112,792,626
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Demand deposits $ 5,722,360 $ 5,334,868
Savings and NOW deposits 37,318,479 34,239,783
Time deposits 41,843,793 41,944,116
-----------------------------
Total deposits 84,884,632 81,518,767
Securities sold under agreements to repurchase 1,182,799 1,080,554
Advances from Federal Home Loan Bank of Boston 5,469,041 7,599,000
Other liabilities 116,899 352,815
-----------------------------
Total Liabilities 91,653,371 90,551,136
-----------------------------
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; outstanding
1,324,606 shares as of March 31, 1999 and 1,401,784 shares
as of September 30, 1998. 14,547 14,547
Paid-in capital 13,815,156 13,899,014
Retained earnings 10,401,655 10,204,737
Unallocated Employee Stock Ownership Plan shares (609,945) (654,038)
Treasury stock (130,144 shares 3/31/99; 52,966 shares 9/30/98) (2,209,740) (952,668)
Unearned compensation (433,726) (594,417)
Accumulated other comprehensive income 318,679 324,315
-----------------------------
Total stockholders' equity 21,296,626 22,241,490
-----------------------------
Total liabilities and stockholders's equity $112,949,997 $112,792,626
=============================
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
Three Months Ended Six Months Ended
------------------------ ------------------------
March 31, March 31, March 31, March 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $1,451,950 $1,241,583 $2,921,598 $2,372,318
Interest and dividends on securities:
Taxable 250,638 342,816 507,965 795,945
Dividends on marketable equity securities 24,411 40,776 50,292 82,207
Dividends on Cooperative Bank Investment
and Liquidity Funds 42,569 50,533 85,191 109,865
Other interest 76,621 64,847 143,745 116,907
----------------------------------------------------
Total interest and dividend income 1,846,189 1,740,555 3,708,791 3,477,242
----------------------------------------------------
Interest expense:
Interest on deposits 744,494 722,874 1,517,553 1,432,910
Interest on securities sold under agreement
to repurchase 12,957 5,680 25,245 7,384
Interest on FHLB advances 76,227 30,648 168,538 45,901
Interest on other borrowings - - - -
----------------------------------------------------
Total interest expense 833,678 759,202 1,711,336 1,486,195
----------------------------------------------------
Net interest and dividend income 1,012,511 981,353 1,997,455 1,991,047
Provision for loan losses 12,000 10,000 18,000 10,000
----------------------------------------------------
Net interest income after provision
for loan losses 1,000,511 971,353 1,979,455 1,981,047
----------------------------------------------------
Other income:
Service charges on deposit accounts 24,129 16,157 53,029 35,090
Securities gains, net 44,471 120,394 67,184 218,246
Gains on mortgages sold, net 57,131 - 57,376 -
Other income 33,574 21,912 90,073 67,317
----------------------------------------------------
Total other income 159,305 158,463 267,662 320,653
----------------------------------------------------
Other expense:
Salaries and employee benefits 395,054 387,823 795,433 731,592
Occupancy expense 51,009 50,950 93,530 90,079
Equipment expense 40,738 12,790 79,881 26,340
Writedown on impairment of long lived assets - - - -
Data processing expense 59,129 48,209 120,653 133,067
Directors' fees 13,250 12,318 25,700 30,654
Legal and professional fees 40,633 88,259 94,579 92,722
Other expenses 130,633 133,907 243,385 265,412
----------------------------------------------------
Total other expenses 730,446 734,256 1,453,161 1,369,866
----------------------------------------------------
Income before income taxes 429,370 395,560 793,956 931,834
Income taxes 222,100 142,400 414,700 330,400
----------------------------------------------------
Net income $ 207,270 $ 253,160 $ 379,256 $ 601,434
====================================================
Comprehensive income $ 96,821 $ 398,917 $ 373,620 $ 933,377
====================================================
Earnings per common share $ 0.16 $ 0.18 $ 0.29 $ 0.44
====================================================
Earnings per common share, assuming dilution $ 0.16 $ 0.18 $ 0.29 $ 0.42
====================================================
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
----------------------------------------------------------
Unallocated
Employee
Stock Accumulated
Ownership Other
Common Paid-In Retained Plan Treasury Unearned Comprehensive
Stock Capital Earnings Shares Stock Compensation Income Total
------ ------- ----------- ---------- -------- ------------ ------------- -----
Balance, September 30, 1996 $ 145,475 $13,598,174 $ 8,856,291 $(829,208) $ $ $143,685 $21,914,417
Employee Stock Ownership Plan 41,103 41,103
Adjustment of costs incurred on
issuance of common stock 12,293 12,293
ESOP shares released 87,285 87,285
Dividends declared ($.20 per
share) (274,365) (274,365)
Comprehensive income:
Net income 752,085
Net change in unrealized
holding gain on available-
for-sale securities 272,698
Comprehensive income 1,024,783
-------------------------------------------------------------------------------------------------
Balance, September 30, 1997 145,475 13,651,570 9,334,011 (741,923) - - 416,383 22,805,516
Employee Stock Ownership Plan 94,566 94,566
ESOP shares released 87,885 87,885
Purchase of shares for
recognition and retention
plan (RRP) (751,433) (751,433)
Recognition and retention plan 158,760 158,760
Distribution of RRP shares (157,016) 157,016 0
Tax benefit from RRP 20,206 20,206
Formation of the Holding
Company, change in par value (130,928) 130,928 0
Dividends declared ($.23 per
share) (314,350) (314,350)
Purchase of treasury stock (952,668) (952,668)
Comprehensive income:
Net income 1,185,076
Net change in unrealized
holding gain on available-
for-sale securities (92,068)
Comprehensive income 1,093,008
-------------------------------------------------------------------------------------------------
Balance, September 30, 1998 14,547 13,899,014 10,204,737 (654,038) (952,668) (594,417) 324,315 22,241,490
Employee Stock Ownership Plan 25,866 25,866
ESOP shares released 44,093 44,093
Recognition and retention plan 54,432 54,432
RRP distribution (160,691) 160,691 0
Purchase of treasury stock (1,274,847) (1,274,847)
Sale of treasury stock (4,255) 17,775 13,520
Tax benefit on sale of
treasury stock 790 790
Dividends declared ($.14 per
share) (182,338) (182,338)
Comprehensive income:
Net income 379,256
Net change in unrealized
holding gain on available-
for-sale securities (5,636)
Comprehensive income 373,620
-------------------------------------------------------------------------------------------------
Balance, March 31, 1999 $ 14,547 $13,815,156 $10,401,655 $(609,945) $(2,209,740) $(433,726) $318,679 $21,296,626
=================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
For the six months
ended March 31,
1999 1998
---- ----
Cash flows from operating activities
Net income $ 379,620 $ 601,434
Adjustments to reconcil net income to net cash
provided by operating activites:
Recognition and retention plan (RRP) 54,432 -
Disposal of fixed assets - -
Writedown of impairment of long lived assets - -
Loss on sale of equipment - -
Loss on trade-in of equipment - -
Provision for loan loss 18,000 10,000
(Accretion) amortization of investment securities, net 62,893 30,028
Change in unearned income (19,974) (17,483)
Gain on sales of investment securities, net (67,184) (218,246)
Deferred tax (benefit) expense - -
Depreciation and amortization 80,815 80,853
(Increase) decrease in accrued interest receivable (39,563) -
(Increase) decrease in other assets 54,190 (120,352)
Increase (decrease) in other liabilities (223,299) 124,271
----------------------------
Net cash provided by operating activities 299,930 490,505
----------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (6,438,879) (3,666,103)
Proceeds from sales of available-for-sale securities 726,549 6,495,555
Proceeds from maturities of available-for-sale securities 4,385,695 3,210,378
Purchase of held-to-maturity securities (2,505,795) -
Proceeds from maturities of held-to-maturity securities 3,807,341 3,252,577
Purchase of Federal Home Loan Bank stock (157,900) -
Increase in deposit with Cooperative Central Bank Reserve Fund - -
Net increse in loans 787,490 (15,023,379)
Capital expenditures (57,555) (1,456,169)
Proceeds from sale of equipment - -
----------------------------
Net cash used in investing activities 546,946 (7,187,141)
----------------------------
Cash flows from financing activities:
Dividends paid (182,338) (151,861)
Employee Stock Ownership Plan 44,093 48,508
Payment of Emloyee Stock Ownership Plan loan - (741,923)
Adjustment of costs incurred on issuance of common stock - -
Purchase of treasury stock (1,274,847) -
Sale of treasury stock, net of tax benefit 17,775 -
Unallocated ESOP shares released 25,866 -
Purchase of company shares for RRP Trust - (123,130)
Net increase (decrease) in demand deposits, NOW and
savings accounts 3,466,188 2,520,513
Net increase (decrease) in time deposits (100,323) 3,361,532
Net increase in securities sold under agreements to repurchase 102,245 573,838
Proceeds from Federal Home Loan Bank advances 2,821,000 2,000,000
Repayments of Federal Home Loan Bank advances (4,964,093) -
----------------------------
Net cash provided by financing activities (44,434) 7,487,477
----------------------------
Increase (decrease) in cash and cash equivalents 802,442 790,841
Cash and cash equivalents at beginning of period 7,286,578 3,915,920
----------------------------
Cash and cash equivalents at end or period $ 8,089,020 $ 4,706,761
============================
Supplemental disclosures
Interest paid $ 877,658 $ 726,993
============================
Income taxes paid $ 793,651 $ 206,159
============================
The accompanying notes are an integral part of these
consolidated 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 March 31, 1999 and September 30, 1998. The results of
operations for the three month period ended March 31, 1999 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 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 1998 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 - 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 March 31, 1999 and 1998
have been calculated according to the guidelines of 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 March 31, 1999
Basic EPS
- ---------
Net income and income available to
common stockholders $207,270 1,292,975 .16
Effect of dilutive securities options and warrants 15,499
--------------------------
Diluted EPS
- -----------
Income available to common stockholders $207,270 1,308,474 .16
==========================
Quarter Ended March 31, 1998
Basic EPS
- ---------
Net income and income available to
common stockholders $253,160 1,380,557 .18
Effect of dilutive securities options and warrants 41,261
--------------------------
Diluted EPS
- -----------
Income available to common stockholders $253,160 1,421,818 .18
==========================
Note 4 - Dividends
On February 17, 1999, the Board of Directors of the Company declared
a quarterly cash dividend of $0.07 per share of common stock which was paid
on March 25, 1999.
Note 5 - Recent Developments
On February 1, 1999, the Company announced a second stock repurchase
program which authorizes the Company to repurchase into treasury stock up
to 66,922 additional shares, or five percent, of its outstanding shares of
common stock. During the quarter ended March 31, 1999, the Company
repurchased 63,072 shares of its common stock. At March 31, 1999, the
Company had 130,144 treasury shares.
Part I. Item 2. Management's Discussion and
Analysis of Financial Condition and Operating Results
General
Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank (the
"Bank" or "Falmouth"), a Massachusetts chartered stock co-operative bank.
At March 31, 1999, there were 1,324,606 shares outstanding. The Company's
stock trades on the American Stock Exchange under the symbol "FCB".
The Company's sole business activity is ownership of the Bank. The
Company also makes investments in long and short-term marketable securities
and other liquid investments. The business of the Bank consists of
attracting deposits from the general public and local businesses and using
these funds to originate primarily residential and commercial real estate
loans located in Falmouth, Massachusetts and surrounding areas and to
invest in United States Government and Agency securities. To a lesser
extent, the Bank engages in various forms of consumer and home equity
lending. The Bank's business strategy is to operate as a well-capitalized,
profitable and independent 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 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 March 31, 1999 and September 30, 1998.
The Company's total assets increased by $157,000 or .14% for the
three months ended March 31, 1999, from $112.8 million at September 30,
1998 to $113.0 million at March 31, 1999. Total deposits increased $3.4
million or 4.13%, from $81.5 million at September 30, 1998 to $84.9 million
at March 31, 1999. Deposit growth has come primarily from the two branch
locations opened in 1998. Total net loans were $76.9 million or 90.56% of
total deposits at March 31, 1999, as compared to $77.7 million or 95.26% of
total deposits at September 30, 1998, representing a decrease of $786,000.
This decrease is due partly to the Bank's the sale of residential mortgages
to the secondary market and the increase in deposits of $3.4 million.
Investment securities were $24.7 million or 21.96% of total assets at March
31, 1999, as compared to $24.5 million or 21.74% of total assets at
September 30, 1998. Investment securities remained constant throughout the
quarter with proceeds from loan sales and savings deposits funding new
loans.
Borrowed funds from the Federal Home Loan Bank of Boston have been
reduced from $7.6 million at September 30, 1998 to $5.5 million at March
31, 1999. The reduction of $2.1 million was repaid primarily from the
growth in deposits.
Securities sold under an agreement to repurchase (sweep accounts for
commercial depositors) rose to $1.2 million at March 31, 1999, from $1.1
million at September 30, 1998. This increase is primarily due to the
increased retail commercial customer base and seasonal deposit cash flows.
Stockholders' equity was $21.3 million at March 31, 1999, as compared
to $22.2 million at September 30, 1998, a decrease of $944,000. This change
was primarily the result of an increase in earnings of $207,000 and an
increase in treasury shares purchased of $1.3 million under the Company's
stock repurchase program. The ratio of stockholders equity to total assets
was 18.85% at March 31, 1999, and the book value per share of common stock
was $16.91, compared to 19.72% and $16.75, respectively, at September 30,
1998.
The ratio of the allowance for loan losses 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 provide additional provisions
as deemed necessary to maintain a sufficient allowance for loan loss to
total loan ratio. The Bank added $12,000 to the allowance during the past
quarter. Additionally, existing provisions may be allocated to address any
credit risks identified by our Year 2000 analysis. To that end, the Bank
has continued to set aside additional specific reserves for commercial
loans and large residential mortgages.
Comparison of Operating Results
Three Months Ended March 31, 1999 and 1998.
Net Income. The Company's net income for the three months ended
March 31, 1999 was $207,000 as compared to $253,000 on March 31, 1998, a
decrease of 18% or $46,000. The quarter ended March 31, 1999 included a
decrease in operating expenses and an increase in the provision for income
taxes which totaled approximately $76,000 more than the same period of the
prior year. At March 31, 1999, net securities gains were $44,000, as
compared to $120,000 for the three months ended March 31, 1998, a decrease
of $76,000. Securities gains were taken during all four fiscal quarters of
the year ended September 30, 1998, due to favorable market conditions.
Interest and Dividend Income. Total interest and dividend income for
the three months ended March 31, 1999 was $1.8 million, an increase of
$105,000, as compared to $1.7 million for the three month period ended
March 31, 1998. The increase in interest and dividend income is
attributable to continued growth in the loan portfolio which provided an
increase in interest and fee income of $210,000. This was partially offset
by a decrease in interest and dividend income on securities of $100,000.
These securities were used to fund loans, as well as to repay maturing
borrowings from the Federal Home Loan Bank of Boston. Management expects
income derived from loan assets and investment securities assets to remain
relatively constant. In addition, the Bank will try to maintain its
current securities portfolio while it continues to obtain additional fee
income from originating loans for resale.
Interest Expense. Interest expense for the three months ended March
31, 1999 was $834,000, which includes $89,000 interest on short and long
term borrowings, an increase of $75,000 over the three months ended March
31, 1998. The increase was in both interest bearing deposit liabilities
and borrowings. Borrowings decreased $32,000 during the quarter ended
March 31, 1999, while deposits have grown modestly.
Net Interest and Dividend Income. Net interest and dividend income
for the three month period ended March 31, 1999 was $1.0 million, as
compared to $981,000 for the three months ended March 31, 1998. The
increase of $19,000 was the result of increased interest and fees on loans.
The net interest margin for the three months ended March 31, 1999 was
3.76%, a decrease of only 12 basis points, as compared to 3.88% for the
three months ended March 31, 1998. The decline in net interest margin was
primarily the result of a decrease in the yield on interest earning assets
caused by the decline in the general level of interest rates. The
annualized return on average assets (ROA) for the three month period ended
March 31, 1999 was .73%, a decrease of 26 basis points, as compared to .99%
for the same period of the prior year. The primary reason for the decrease
in ROA was the increase in interest expense of $75,000 due to the growth in
deposits and securities sold under agreements to repurchase.
Provision for Loan Losses. The Bank added $12,000 to its provision
for loan losses during the quarter ended March 31, 1999, to compensate for
the increased balance of the loan portfolio. 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. As of March 31, 1999, the Bank has no loan assets
classified as doubtful or loss.
Other Income. Other income for the three month period ending March
31, 1999 was $159,000, as compared to $158,000 for the three months ended
March 31, 1998. The $1,000 increase is primarily the result of a reduction
in the gains realized from the sale of investment securities of $76,000, an
increase in service charge income of $8,000, an increase in gains on the
sale of mortgages of $57,000 and an increase in other income of $12,000.
Operating Expenses. Operating expenses for the three months ended
March 31, 1999 were $730,000, as compared to $734,000 for the three months
ended March 31, 1998. The $4,000 decrease was primarily due to an increase
in salaries and employee benefits $7,000, increases in data processing
expense of $11,000, an increase in equipment expense of $28,000, and a
decrease in legal and professional fees of $47,000. The increase in
expenses is due mainly to the Company's continued growth. General salary
levels and loan commissions represent the major portion of the increase in
salary costs. The increase in data processing costs is due primarily to
the operation of an expanded number of teller terminals operating at our
new branch locations and the routine operation of On Call, a "bank by
phone" system. The ratio of operating expenses to average total assets for
the three months ending March 31, 1999 is 2.56%, as compared to 2.89% for
the three month period ending March 31, 1998, an 11.4% decrease.
Six Months Ended March 31, 1999 and 1998.
Net Income. The Company's net income for the six months ended March
31, 1999 was $379,000 as compared to $601,000 at March 31, 1998, a decrease
of 37% or $222,000. Interest and dividend income increased $232,000, or 7%
due to increased loan activity. This gain was off-set by increases in
interest expense and operating costs. Security gains were taken in excess
of $67,000 for the six months ended March 31, 1999, as compared to $218,000
for the six months ended March 31, 1998, a decrease of $151,000. The
current economic environment has facilitated Bank management's goal to
increase mortgage loans funded by investment securities and low cost
borrowings.
Interest Income. Total interest and dividend income for the six
months ended March 31, 1999 was $3.7 million, an increase of $232,000 as
compared to $3.5 million for the six month period ended March 31, 1998.
The increase in interest and dividend income is attributable to growth in
the loan portfolio which provided for an increase in interest and fee
income of $550,000. This was partially offset by a decrease in income on
investment securities of $345,000. Management expects income derived from
loan assets to continue to increase in the form of interest, fees and gains
on the sale of loans, with interest on investments remaining relatively
constant.
Interest Expense. Interest expense for the six months ending March
31, 1999 was $1.7 million, which includes $169,000 in interest on borrowed
funds, an increase of $225,000 from $1.5 million for the six months ended
March 31, 1998. The increase was in both interest bearing deposit
liabilities and borrowed funds. Additional interim borrowings may be
utilized as a source of loan funding; however it is not expected to be
necessary.
Net Interest and Dividend Income. Net interest income for the six
month period ending March 31, 1999 was $2.0 million as compared with the
same amount for the six months ended March 31, 1998. This was the result
of the increase of interest and fees on loans being the same as the
increase in interest expense on deposits and borrowed funds. The net
interest margin for the six months ended March 31, 1999 was 3.69%, a
decrease of 40 basis points as compared to 4.09% for the six months ended
March 31, 1998. The annualized return on average assets (ROA) for the six
month period ended March 31, 1999 was .67%, a decrease of 55 basis points,
as compared to 1.22% for the same period of the prior year. The primary
reason for the decrease in the ROA was primarily due to the growth of
assets in the loan portfolio during the period.
Provision for Loan Losses. The Bank added $18,000 to its allowance
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 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.
Other Income. Other income for the six month period ending March 31,
1999 was $268,000 as compared to $321,000 for the six months ended March
31, 1998. The $53,000 decrease is primarily the result of $67,000 in
realized gains on the sale of investment securities taken during the six
months ended March 31, 1999, as compared to $218,000 for the six months
ended March 31, 1998. Sales have been made and gains were taken on several
equity securities when the market was favorable to do so. The period ended
March 31, 1999 also showed gains on the sale of loans. There were no gains
on the sale of loans for the same period of the previous year.
Operating Expenses. Operating expenses for the six months ended
March 31, 1999 were $1.5 million as compared to $1.4 million for the six
months ended March 31, 1998. The $83,000 increase was primarily due to an
increase in salaries and employee benefits of $63,000, a decrease in other
operating expenses of $22,000, a decrease in data processing expense of
$12,000 and an increase in occupancy and equipment expenses of $58,000.
The ratio of annualized operating expenses to average total assets for the
six months ended March 31, 1999 was 2.56% as compared to 2.77% for the six
month period ended March 31, 1998.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposits, repayment
and prepayment of loans and mortgaged-backed securities, maturities of
investments and interest-bearing deposits, and funds provided from
operations. While scheduled repayments of loans and mortgage-backed
securities and maturities of investment securities are predictable sources
of funds, deposit flows and loan prepayments are greatly influenced by the
general level of interest rates, economic conditions and competition. The
Bank uses its liquidity resources principally to fund existing and future
loan commitments, to fund net deposit outflows, to invest in other
interest-earning assets, to maintain liquidity, and to meet operating
expenses.
The Bank is required to maintain adequate levels of liquid assets.
This guideline, which may be varied depending upon economic conditions and
deposit flows, is based upon a percentage of deposits and short-term
borrowings. The Bank has historically maintained a level of liquid assets
in excess of regulatory requirements. The Bank's liquidity ratio at March
31, 1999 was 30.33%. The high level of liquidity will allow the Bank to
operate normally through the remainder of 1999, and into the year 2000.
A major portion of the Bank's liquidity consists of short-term
securities obligations. The level of these assets is dependent on the
Bank's operating, investing, lending and financing activities during any
given period. At March 31, 1999, regulatory liquidity totaled $87.4
million. The primary investing activities of the Bank include origination
of loans and the purchase of investment securities.
Liquidity management is both a daily and long-term function of
management. If the Bank requires funds beyond its ability to generate them
internally, the Bank believes that it could borrow additional funds from
the FHLB of Boston. At March 31, 1999, the Bank had outstanding advances
from the FHLB of Boston in the amount of $5.5 million in short and long
term borrowings. As these advances mature, they will be repaid or re-
written as longer term matched borrowings which will assist the match of
rate sensitive assets to rate sensitive liabilities.
At March 31, 1999, the Bank had $13.8 million in outstanding
commitments to fund and originate loans. 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 Federal Home
Loan Bank of Boston. Certificates of deposit which are scheduled to mature
in one year or less totaled $33.4 million at March 31, 1999. Based on
historical experience, management believes that a significant portion of
such deposits will remain with the Bank.
At March 31, 1999 the Bank exceeded all of its regulatory capital
requirements.
Year 2000
The following is a "Year 2000 Readiness Disclosure" made in accordance with
the Federal Year 2000 Information and Readiness Disclosure Act. Pub. L. No
105-271.
The "Year 2000" issue is very pervasive and complex. Commonly
referred to as "Y2K", this issue is common to most business entities,
including banks. Many computer systems will recognize 00 as the year 1900.
The potential impact is that date sensitive calculations would be based on
erroneous data and could cause a system failure. This computation affects
all forms of financial accounting (including interest computation, due
dates, pensions, personnel benefits, investments and legal commitments.)
It can also affect record keeping such as inventory, maintenance, and file
retention. Reliable information is necessary for financial institutions to
continue to conduct business.
The Bank, through its Year 2000 Steering Committee, has created a
Year 2000 Plan which includes five phases of review, testing and
implementation. These phases of Awareness, Assessment, Renovation,
Validation, and Implementation are well under way or have been
substantially completed. The Steering Committee adopted its formal Year
2000 Plan in March 1998. This Plan has been followed, reviewed and updated
as progress has been made on year 2000 issues. In June 1998, the Bank
adopted its Year 2000 Test Plan. The goal of the Test Plan is to provide
testing guidance on all critical applications. It is necessary to provide
reasonable assurance that the applications identified will function
normally in the next millennium. Testing time and resources have been, and
will continue to be, allocated to successfully complete the entire testing
project. It is anticipated that this phase of the Year 2000 readiness plan
will require the most extensive application of Bank resources.
The Awareness Phase, where problems have been defined and overall
strategies developed, has been completed.
The Assessment Phase, where the Steering Committee assesses the size
and complexity of the problems, identifying all systems that will be
affected by the Year 2000 date change has been completed.
The Renovation Phase, where the Bank undertakes hardware and software
changes to systems it controls and obtains vendor certifications of their
Year 2000 readiness has been completed. The Steering Committee will
continue to follow critical vendor readiness programs as they develop and
change. Hardware within the Bank has been upgraded or replaced where
necessary. Vendors have been contacted and their readiness plans requested.
Critical vendors, such as the Bank's on-line service provider, check
clearing and statement rendering servicer, and in-house general ledger
software provider, have been identified and currently have completed their
testing plans.
The Validation Phase, which includes testing and verification of
changes to systems, and the coordination with outside parties, has been
completed. A test bank was established in both cases, for testing.
Transaction scripts were developed and posted to the test banks. The test
scripts consist of an extensive list of transaction types which will fully
test the software. Each test script will be re-posted on each critical
date recognized, such as 1/1/2000, 2/29/2000, 9/9/1999, and others.
The Implementation Phase, provides for critical dates for full
certification of Year 2000 readiness on each application. A predetermined
date for compliance or replacement, known as the "drop dead date" has been
determined and reviewed regularly by the Steering Committee and at least
quarterly by the full Board of Directors. These dates may be changed
slightly as applications are reviewed; but ultimately, each application
must be in compliance or be replaced. The implementation phase is
substantially complete.
Testing and verification of mission critical systems is fundamentally
complete. These systems include the Bank's mortgage origination system,
on-line service provider and internal general ledger program and others.
Testing results were positive with no major Year 2000 issues cited.
Testing issues that were of concern during the on-line service provider
test were found to be related to other system parameters and not Year 2000
error related. The Bank has not identified any system or vendor which
presents a material risk of not being Year 2000 ready or that cannot be
replaced by another application that is Y2K compliant. All other
applications have been deemed substantially compliant. The Bank will
continue to monitor the on-line service provider and other vendors for
future developments; however, no major changes or issues are expected.
Customer awareness is continually addressed utilizing lobby posters,
and frequent mailing of information through statement stuffers and
messages. Commercial customers have been contacted and made aware of the
potential impact Y2K can have on their business. The Bank continues to
monitor commercial relationships as well as mortgage loan and depositor
relationships for potential impact if a problem should arise at year end.
Employee awareness is equally as important and updates are
continually given through the use of memos, staff meetings and newsletters.
As of March 31, 1999, the Bank had incurred costs of approximately
$65,000 related to its Y2K project, of which $36,000 has been capitalized.
The estimated additional cost to complete the project is currently expected
to be approximately $35,000.
The Steering Committee is currently finalizing details of the
business resumption plan. Implementation of each and every phase is
critical in the event of any type of equipment or utility failure at the
turn of the century. Focus will be on continued processing of accounts
with minimal inconvenience to the customer. Alternate processing
procedures are being formulated and will be tested and verified for
accuracy and reasonableness. Safety and security are also being addressed
in the event of power failures or brown outs. The Bank has established a
liquidity plan which will insure the Bank's ability to continue with its
daily operation of items from loan funding to the resupply of automatic
teller machines.
The Bank believes it is substantially compliant at this time.
Continued awareness and ongoing monitoring will allow us to keep abreast of
any situations that may arise with time to implement a solution to these
problems. However, as we get closer to the critical date of January 1,
2000, the Year 2000 Steering Committee may identify systems, vendors, or
procedures that do present a material risk to the Bank. The disruption
could include the inability to credit and withdraw from customer accounts,
to credit loan payments, to process loan applications, to record the daily
financial activity of bank transactions or to perform normal banking
activities. Further detail operational procedures are planned and expected
to be completed by June 30, 1999. This will assist the Bank in meeting the
needs of its customers in the event of Year 2000 disruptions. The inherent
risks presented by the Year 2000 problem cannot be predicted with any
certainty. Items such as data processing and transmission and
communications services out of its control can materially effect the Bank's
operations.
OTHER INFORMATION
Part II.
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders ("Meeting")
on January 19, 1999. All of the proposals submitted to
stockholders and the tabulation of votes for each proposal is as
follows:
1. Election of four candidates to the Board of Directors, each
to serve for a term of three years.
The number of votes cast with respect to this matter were as
follows:
Nominee For Withheld Abstain No-votes
------- --- -------- ------- --------
John W. Holland, Jr. 1,173,740 99,718
Garner L. Lewis 1,177,541 95,917
Eileen C. Miskell 1,177,683 95,775
Wayne C. Lamson 1,176,816 96,642
2. Ratification of the appointment of Shatswell, MacLeod & Co.,
P.C. as independent auditors for fiscal year ending
September 30, 1999.
The number of votes cast with respect to this matter were as
follows:
For Against Withheld No-Vote
--- ------- -------- -------
1,259,558 6,500 7,400 0
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: May 5, 1999 By: /s/ Santo P. Pasqualucci
----------------------------------------
President and Chief Executive Officer
Date: May 5, 1999 By: /s/ George E. Young, III
------------------------------------------
Vice President and Chief Financial Officer