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, 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 June 30, 1999
----- -------------
Common Stock, Par Value $.01 1,194,244
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 1
June 30, 1999 and September 30, 1998
Consolidated Statements of Income 2
For Three Months Ended June 30, 1999 and 1998
For Nine Months Ended June 30, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity 3
For Nine Months Ended June 30, 1999 and 1998
Consolidated Statements of Cash Flows 4-5
For Nine Months Ended June 30, 1999 and 1998
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
---------------------------
June 30, 1999 and September 30, 1998
------------------------------------
June 30, September 30,
1999 1998
-------- -------------
(unaudited)
ASSETS
- ------
Cash and due from banks $ 2,337,129 $ 1,705,345
Federal funds sold 6,608,999 5,581,233
-----------------------------
Total cash and cash equivalents 8,946,128 7,286,578
Investments in available-for-sale securities
(at fair value) 17,379,745 16,923,523
Investments in held-to-maturity securities
(fair values of $7,272,518 as of June
30, 1999 and $7,078,556 as of September 30,
1998) 7,273,774 7,037,287
Federal Home Loan Bank stock, at cost 720,700 562,800
Loans, net 76,726,537 77,654,939
Premises and equipment 2,061,675 2,108,344
Accrued interest receivable 601,378 631,590
Cooperative Central Bank Reserve Fund Deposit 395,395 395,395
Other assets 125,384 192,170
-----------------------------
Total assets $114,230,716 $112,792,626
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Demand deposits $ 7,953,363 $ 5,334,868
Savings and NOW deposits 37,948,087 34,239,783
Time deposits 41,911,632 41,944,116
-----------------------------
Total deposits 87,813,082 81,518,767
Securities sold under agreements to repurchase 1,090,142 1,080,554
Advances from Federal Home Loan Bank of Boston 5,554,310 7,599,000
Other liabilities 298,599 352,815
-----------------------------
Total liabilities 94,756,133 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
1,193,744 shares as of June 30, 1999 and 1,401,784 shares
as of September 30, 1998 14,547 14,547
Paid-in capital 13,857,583 13,899,014
Retained earnings 10,550,414 10,204,737
Unallocated Employee Stock Ownership Plan shares (587,899) (654,038)
Treasury stock (261,006 shares as of 6/30/99;
52,966 shares as of 9/30/98) (4,319,953) (952,668)
Unearned compensation (443,284) (594,417)
Accumulated other comprehensive income 403,175 324,315
-----------------------------
Total stockholders' equity 19,474,583 22,241,490
-----------------------------
Total liabilities and stockholders's equity $114,230,716 $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 Nine Months Ended
----------------------- ------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------- ---------- ---------- ----------
Interest and dividend income:
Interest and fees on loans $1,459,126 $1,442,919 $4,380,724 $3,815,237
Interest and dividends on securities:
Taxable 282,852 282,780 790,817 1,078,726
Dividends on marketable equity securities 25,416 39,298 75,708 121,504
Dividends on Cooperative Bank Investment
and Liquidity Funds 41,947 44,288 127,138 154,153
Other interest 68,051 31,980 211,796 148,887
----------------------------------------------------
Total interest and dividend income 1,877,392 1,841,265 5,586,183 5,318,507
----------------------------------------------------
Interest expense:
Interest on deposits 721,889 743,056 2,239,442 2,175,966
Interest on securities sold under agreement
to repurchase 11,343 6,311 36,588 13,694
Interest on FHLB advances 76,304 57,780 244,842 103,682
Interest on other borrowings -- -- -- --
----------------------------------------------------
Total interest expense 809,536 807,147 2,520,872 2,293,342
----------------------------------------------------
Net interest and dividend income 1,067,856 1,034,118 3,065,311 3,025,165
Provision for loan losses 12,000 6,000 30,000 16,000
----------------------------------------------------
Net interest income after provision
for loan losses 1,055,856 1,028,118 3,035,311 3,009,165
----------------------------------------------------
Other income:
Service charges on deposit accounts 26,530 17,559 79,559 52,649
Securities gains, net 5,982 133,890 73,166 352,136
Gains on mortgages sold, net 31,532 -- 88,908 --
Other income 46,609 24,461 136,682 91,778
----------------------------------------------------
Total other income 110,653 175,910 378,315 496,563
----------------------------------------------------
Other expense:
Salaries and employee benefits 395,636 403,296 1,191,069 1,134,888
Occupancy expense 49,577 56,279 143,107 153,747
Equipment expense 41,717 32,730 121,598 104,127
Write-down on impairment of long lived assets -- -- -- --
Data processing expense 61,280 48,209 181,933 146,653
Directors' fees 13,250 24,656 38,950 55,310
Legal and professional fees 41,085 66,602 135,664 199,669
Other expenses 147,483 126,212 390,868 333,456
----------------------------------------------------
Total other expenses 750,028 757,984 2,203,189 2,127,850
----------------------------------------------------
Income before income taxes 416,481 446,044 1,210,437 1,377,878
Income taxes 177,300 164,700 592,000 495,100
----------------------------------------------------
Net income $ 239,181 $ 281,344 $ 618,437 $ 882,778
====================================================
Comprehensive income $ 323,677 $ 448,493 $ 697,297 $1,081,868
====================================================
Earnings per common share $ 0.19 $ 0.20 $ 0.50 $ 0.64
====================================================
Earnings per common share, assuming dilution $ 0.19 $ 0.20 $ 0.50 $ 0.62
====================================================
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 ($.23
per share) (314,350) (314,350)
Purchase of treasury stock (952,668) (952,668)
Comprehensive income:
Net income 1,185,076
Net change in unrealized
holding gain on available-
for-sale securities (92,068)
Comprehensive income 1,093,008
-----------------------------------------------------------------------------------------------------
Balance, September 30, 1998 14,547 13,899,014 10,204,737 (654,038) (952,668) (594,417) 324,315 22,241,490
Employee Stock
Ownership Plan 35,962 35,962
ESOP shares released 66,139 66,139
Recognition and
retention plan 86,763 86,763
Distribution of RRP shares (160,691) 160,691 0
Purchased of shares for RRP (9,558) (9,558)
Purchase of treasury stock (3,385,060) (3,385,060)
Sale of treasury stock (4,255) 17,775 13,520
Tax benefit on sale of
treasury stock 790 790
Dividends declared ($.21
per share) (272,760) (272,760)
Comprehensive income:
Net income 618,437
Net change in unrealized
holding gain on available-
for-sale securities 78,860
Comprehensive income 697,297
-----------------------------------------------------------------------------------------------------
Balance, June 30, 1999 $ 14,547 $13,857,583 $10,550,414 $(587,899) $(4,319,953) $(443,284) $403,175 $19,474,583
=====================================================================================================
The accompanying notes are an integral part 3 of these
consolidated financial statements.
FALMOUTH BANCORP, INC. AND SUBSIDIARIES
---------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
For the nine months
ended June 30,
1999 1998
---- ----
Cash flows from operating activities
Net income $ 618,437 $ 882,778
Adjustments to reconcile net income to net cash
provided by operating activities:
Recognition and retention plan (RRP) 86,873 --
Disposal of fixed assets -- 26,914
Write-down of impairment of long lived assets -- --
Loss on sale of equipment -- --
Loss on trade-in of equipment -- --
Provision for loan loss 30,000 16,000
(Accretion) amortization of investment securities, net 101,609 41,844
Change in unearned income (32,605) (23,650)
Gain on sales of investment securities, net (73,166) (352,136)
Deferred tax (benefit) expense 44,416 --
Depreciation and amortization 123,878 128,004
(Increase) decrease in accrued interest receivable 30,212 --
(Increase) decrease in other assets (56,490) 95,109
Increase (decrease) in other liabilities (33,709) (91,843)
-------------------------
Net cash provided by operating activities 839,455 723,020
-------------------------
Cash flows from investing activities
Purchase of available-for-sale securities (9,360,067) (4,336,578)
Proceeds from sales of available-for-sale securities 2,708,957 7,501,293
Proceeds from maturities of available-for-sale securities 6,243,319 5,883,569
Purchase of held-to-maturity securities (5,611,651) --
Proceeds from maturities of held-to-maturity securities 5,346,630 4,398,519
Purchase of Federal Home Loan Bank stock (157,900) --
Increase in deposit with Cooperative Central Bank Reserve Fund -- (109,715)
Net increase in loans 931,007 (24,901,566)
Capital expenditures (77,209) (1,585,175)
Proceeds from sale of equipment -- --
-------------------------
Net cash used in investing activities 25,086 (13,149,653)
-------------------------
Cash flows from financing activities:
Dividends paid (272,760) (234,694)
Employee Stock Ownership Plan 86,763 73,931
Payment of Employee Stock Ownership Plan loan -- (741,923)
Adjustment of costs incurred on issuance of common stock -- --
Purchase of treasury stock (3,385,060) --
Sale of treasury stock, net of tax benefit 14,310 --
Unallocated ESOP shares released 102,101 --
Purchase of company shares for RRP Trust (9,558) (161,598)
Net increase (decrease) in demand deposits, NOW and
savings accounts 6,326,799 4,780,646
Net increase (decrease) in time deposits (32,484) 2,668,660
Net increase in securities sold under agreements to repurchase 9,588 469,149
Proceeds from Federal Home Loan Bank advances 4,772,000 6,155,000
Repayments of Federal Home Loan Bank advances (6,816,690) --
-------------------------
Net cash provided by financing activities 795,009 13,009,171
-------------------------
Increase (decrease) in cash and cash equivalents 1,659,550 582,537
Cash and cash equivalents at beginning of period 7,286,578 3,915,920
-------------------------
Cash and cash equivalents at end or period $8,946,128 $ 4,498,457
=========================
Supplemental disclosures
Interest paid $2,520,872 $ 2,293,342
=========================
Income taxes paid $ 784,923 $ 422,359
=========================
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 Company as of June 30, 1999
and September 30, 1998. The results of operations for the three month period
ended June 30, 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 June 30, 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 June 30, 1999
Basic EPS
- ---------
Net income and income available to
common stockholders $239,181 1,231,248 .19
Effect of dilutive securities options and warrants 12,696
-------------------------
Diluted EPS
- -----------
Income available to common stockholders $239,181 1,243,944 .19
==========================
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
==========================
Note 4 - Dividends
On May 18, 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
June 22, 1999.
Note 5 - Recent Developments
On May 27, 1999, the Company announced a third stock repurchase program
which authorizes the Company to repurchase into treasury stock up to 65,693
additional shares, or five percent of its outstanding shares of common stock.
On June 17, 1999, the Company announced a fourth stock repurchase program
which authorized the Company to repurchase into treasury stock up to 62,408
additional shares, or five percent of its outstanding shares of common stock.
During the quarter ended June 30, 1999, the Company repurchased 130,362
shares of its common stock. At June 30, 1999, the Company had 260,506 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 June 30,
1999, there were 1,194,244 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 June 30, 1999 and September 30, 1998.
The Company's total assets increased by $1.4 million or 1.27% for the
nine months ended June 30, 1999, from $112.8 million at September 30, 1998 to
$114.2 million at June 30, 1999. Total deposits increased $6.3 million or
7.72%, from $81.5 million at September 30, 1998 to $87.8 million at June 30,
1999. Deposit growth continues to come primarily from the two branch locations
opened in 1998, in the form of demand deposits and regular savings accounts.
Total net loans were $76.7 million or 87.37% of total deposits at June 30,
1999, as compared to $77.7 million or 95.26% of total deposits at September
30, 1998, representing a decrease of $928,000. This decrease is due, in part,
to the Bank's sale of residential mortgages to the secondary market and the
increase in deposits of $6.3 million. Investment securities were $25.4
million or 22.21% of total assets at June 30, 1999, as compared to $24.5
million or 21.74% of total assets at September 30, 1998. Investment
securities increased slightly due to cash flows from loan sales and savings
deposits. The Bank has established a dollar cost averaging program for the
purchase of equity securities. The program is long-term in scope and is
expected to generate additional net gains and dividends over time.
Borrowed funds from the Federal Home Loan Bank of Boston have been
reduced from $7.6 million at September 30, 1998 to $5.6 million at June 30,
1999. The reduction of $2.0 million was repaid primarily from the growth in
deposits.
Securities sold under an agreement to repurchase (sweep accounts for
commercial depositors) was relatively unchanged at $1.1 million.
Stockholders' equity was $19.5 million at June 30, 1999, as compared to
$22.2 million at September 30, 1998, a decrease of $2.7 million. This change
was primarily the result of an increase in retained earnings of $346,000,
which was off-set by an increase in treasury shares purchased of $3.4 million
under the Company's stock repurchase programs. The ratio of stockholders
equity to total assets was 17.05% at June 30, 1999, and the book value per
share of common stock was $16.31, compared to 19.72% and $15.87, respectively,
at September 30, 1998.
The ratio of the allowance for loan losses to total loans was .73% at
June 30, 1999. Management believes the allowance will be adequate based upon,
among other things, past loss experience, prevailing economic conditions, and
the level of credit risk in the loan portfolio. However, the Bank may
periodically provide additional provisions as deemed necessary to maintain a
sufficient allowance for the loan loss to total loan ratio. The Bank added
$30,000 to the allowance during the nine month period ended June 30, 1999.
The Bank plans to continue to set aside additional specific reserves for
commercial loans and large residential mortgages.
Comparison of Operating Results
Three Months Ended June 30, 1999 and 1998.
Net Income. The Company's net income for the three months ended June
30, 1999 was $239,000 as compared to $281,000 on June 30, 1998. The decrease
in net income of $42,000 was primarily due to a decrease in other income of
$65,000, off-set in part with an increase in net interest and dividend income
of $34,000 and a decrease in other expenses of $8,000. The annualized return
on average assets (ROA) for the three months ended June 30, 1999 was .84%, a
decrease of 19 basis points, as compared to 1.03% for the same period of the
prior year.
Interest and Dividend Income. Total interest and dividend income for
the three months ended June 30, 1999 was $1.9 million, an increase of $36,000,
as compared to $1.8 million for the three month period ended June 30, 1998.
The increase in interest and dividend income is attributable, in part, to the
loan portfolio which provided an increase in interest and fee income of
$16,000. Additionally, there was an increase in other interest income of
$36,000 for the same period due to increased cash management activity
utilizing federal funds. This was, in part, off-set by a decrease in dividends
on marketable equity securities of $14,000. Maturing securities were re-
invested, primarily in the short-term (1 year or less for Year 2000 liquidity
purposes) with an emphasis on US Government guaranteed obligations.
Interest Expense. Interest expense for the three months ended June 30,
1999 was $810,000, which included $88,000 interest on short and long-term
borrowings, an increase of $3,000 over the three months ended June 30, 1998.
The increase was due to the combination of a decrease in interest on deposits
of $21,000, and an increase on short and long-term borrowings of $24,000,
which was attributed to a decrease in the general level of interest rates.
Net Interest and Dividend Income. Net interest and dividend income for
the three month period ended June 30, 1999 was $1.1 million, as compared to
$1.0 million for the three months ended June 30, 1998. The increase of
$34,000 was the result of increased interest and fees on loans and a decrease
in interest expense on deposits. The net interest margin for the three months
ended June 30, 1999 was 3.89%, a decrease of 5 basis points, as compared to
3.94% for the three months ended June 30, 1998. The decline in net interest
margin was primarily the result of $4.0 million growth in earning assets
coupled with a $2.0 million decrease in higher yielding loan holdings
compounded by a $3.0 million increase in lower yielding investment securities
holdings associated with the Bank's Y2K Plan for increased liquidity needs.
Provision for Loan Losses. The Bank added $12,000 to its provision for
loan losses during the quarter ended June 30, 1999, to maintain sufficient
reserves for the loan loss to total loan ratio. 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 the expansion of the
commercial loan portfolio. As of June 30, 1999, the Bank had no loan assets
classified as doubtful or loss.
Other Income. Other income for the three month period ended June 30,
1999 was $111,000, as compared to $175,000 for the three months ended June 30,
1998. The $64,000 decrease was primarily the result of a reduction in the net
gains realized from the sale of investment securities of $128,000, off-set, in
part, by an increase in service charge income of $9,000, an increase in net
gains on the sale of mortgages of $32,000 and an increase in other income of
$23,000.
Operating Expenses. Operating expenses for the three months ended June
30, 1999 were $750,000, as compared to $758,000 for the three months ended
June 30, 1998. The $8,000 decrease was primarily due to the combination of a
decrease in salaries and employee benefits of $7,000, an increase in data
processing expense of $13,000, an increase in equipment expense of $9,000, a
decrease in occupancy expense of $6,000, a decrease in directors fees of
$12,000, an increase in other expense of $21,000, and a decrease in legal and
professional fees of $26,000. The decrease in expenses was due mainly to the
Company's improved control of operating costs. Generally, compensation
expenses have remained level. The increase in data processing costs was due
primarily to the operation of an expanded number of teller terminals operating
at our new branch locations and the recent installation of On Call, our "bank
by phone" system. The ratio of operating expenses to average total assets for
the three months ended June 30, 1999 was 2.64%, as compared to 2.74% for the
three month period ended June 30, 1998, a decrease of 10 basis points.
Nine Months Ended June 30, 1999 and 1998.
Net Income. The Company's net income for the nine months ended June 30,
1999 was $618,000 or $0.50 basic and diluted earnings per share, as compared
to $883,000 or $0.64 basic earnings per share and $0.62 diluted earnings per
share for the nine months ended June 30, 1998. The decrease of $265,000 in
net income was due primarily to the decrease of $279,000 in net gains on the
sales of equity securities. The net gains on the sales of securities was
$73,000 for the nine months ended June 30, 1999, as compared to $352,000 for
the same period of the prior year.
Interest Income. Total interest and dividend income for the nine months
ended June 30, 1999 was $5.6 million, an increase of $267,000 as compared to
$5.3 million for the nine months ended June 30, 1998. The increase in
interest and dividend income for the nine months ended June 30, 1999 was due
primarily to a moderate increase in average earning assets, as compared to the
average earning assets for the nine months ended June 30, 1998.
Interest Expense. Interest expense for the nine months ended June 30,
1999 was $2.5 million, which includes $281,000 in interest on borrowed funds,
an increase of $164,000 from $2.3 million for the nine months ended June 30,
1998. The change was due to an increase in both interest on deposit expense
and interest on borrowings. Additional interim borrowings may be utilized as a
source of funding residential loan originations for portfolio.
Net Interest and Dividend Income. Net interest income for the nine
months ended June 30, 1999 was $3.1 million as compared to $3.0 million for
the nine months ended June 30, 1998, an increase of $40,000.This was the
result of the increase of interest and dividend income of $268,000, off-set by
an increase in interest expense of $228,000 . The net interest margin for the
nine months ended June 30, 1999 was 3.75%, a decrease of 29 basis points as
compared to 4.04% for the nine months ended June 30, 1998. The annualized
return on average assets (ROA) for the nine months ended June 30, 1999 was
.73%, a decrease of 42 basis points, as compared to 1.15% for the same period
of the prior year. The decrease in the ROA was due primarily to the decrease
of $279,000 in net gains on sales of securities for the nine months ended June
30, 1999.
Provision for Loan Losses. The Bank added $30,000 to its allowance for
loan loss reserve for the nine months ended June 30, 1999, as compared to
$16,000 for the nine month period ended June 30, 1998. Management may
periodically provide additional provisions as deemed necessary to maintain a
sufficient allowance for the loan loss to total loan ratio.
Other Income. Other income for the nine months ended June 30, 1999 was
$378,000 as compared to $497,000 for the nine months ended June 30, 1998. The
$119,000 decrease was primarily the result of $73,000 in realized gains on the
sale of investment securities taken during the nine months ended June 30,
1999, as compared to $352,000 for the nine months ended June 30, 1998. The
period ended June 30, 1999 also showed gains of $89,000 on the sale of single
family residential loans originated to be sold. There were no gains on the
sale of loans for the same period of the previous year.
Operating Expenses. Operating expenses for the nine months ended June
30, 1999 were $2.2 million as compared to $2.1 million for the nine months
ended June 30, 1998, an increase of 3.57%. The $75,000 increase was primarily
due to an increase in salaries and employee benefits of $56,000, an increase
in other operating expenses of $58,000, an increase in data processing expense
of $35,000, an increase in equipment expense of $17,000, off-set, in part, by
a decrease in legal and professional fees of $64,000, a decrease in directors'
fees of $16,000, and a decrease in occupancy and equipment expenses of
$11,000. The ratio of annualized operating expenses to average total assets
for the nine months ended June 30, 1999 was 2.59% as compared to 2.76% for the
nine months ended June 30, 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 June 30, 1999 was
33.57%. It is anticipated that 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 June 30, 1999, regulatory liquidity totaled $90.7 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 June 30, 1999, the Bank had outstanding advances from the
FHLB of Boston in the amount of $5.6 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.
At June 30, 1999, the Bank had $11.7 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 $35.2 million at June 30, 1999. Based on historical experience,
management believes that a significant portion of such deposits will remain
with the Bank.
At June 30, 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 was re-posted on each critical date recognized, such as 1/1/2000,
2/29/2000, 9/9/1999, and others.
The Implementation Phase, establishes 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 has been 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, on an
on-going basis, 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 June 30, 1999, the Bank had incurred costs of approximately
$67,000 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 $30,000.
The Steering Committee is currently finalizing details and testing 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 is 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. Additional
operational procedures, that will improve off-line operation should it become
necessary, are being planned with the Bank's on-line processor. 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
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: By: /s/ Santo P. Pasqualucci
----------------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: By: /s/ George E. Young, III
----------------------------------------
George E. Young, III
Vice President and Chief Financial Officer