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, 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 March 31, 1998
----- --------------
Common Stock, Par Value $.01 1,454,750
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
March 31, 1998 and September 30, 1997
Consolidated Statements of Income 2-3
For Three Months Ended March 31, 1998 and 1997
For Six Months Ended March 31, 1998 and 1997
Consolidated Statements of Changes in Stockholders' Equity 4
For Six Months Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows 5
For Six Months Ended March 31, 1998 and 1997
Notes To Consolidated Financial Statements 6-7
Item 2 Management's Discussion and Analysis of Financial Condition 8-13
PART II. OTHER INFORMATION
Item 1 Legal Proceedings 14
Item 2 Changes in Securities and Use of Proceeds 14
Item 3 Defaults Upon Senior Securities 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Other Information 14
Item 6 Exhibits and Reports on 8-K 15-16
Signatures 17
Part I. Item I. FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
March 31, SEPTEMBER 30,
1998 1997
-----------------------------
(unaudited)
<S> <C> <C>
Assets
Cash and due from banks $ 695,167 $ 2,563,517
Federal funds sold 4,011,594 1,352,403
----------------------------
Total cash and cash equivalents 4,706,761 3,915,920
Investment securities 27,261,843 35,996,739
Federal Home Loan Bank stock, at cost 562,800 405,200
Loans, net 68,922,033 53,881,171
Premises and equipment 1,583,501 999,707
Investments in real estate 791,522 --
Accrued interest receivable 594,448 614,289
Cooperative Central Bank Reserve Fund Deposit 285,680 285,680
Other assets 432,671 292,478
----------------------------
Total assets $105,141,259 $96,391,184
============================
Liabilities and Stockholders' Equity:
Liabilities:
Demand deposits $ 4,048,399 $ 3,136,116
Savings and NOW deposits 33,530,585 31,922,355
Time deposits 40,494,150 37,132,618
----------------------------
Total deposits 78,073,134 72,191,089
Repurchase agreements 573,838 --
Other liabilities 938,234 652,656
Advances from FHLB 2,000,000 --
Employee Stock Ownership Plan loan -- 741,923
----------------------------
Total liabilities 81,585,206 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 (227,458) --
Paid-in capital 13,935,334 13,782,498
Retained earnings 9,783,584 9,334,011
Employee Stock Ownership Plan loan (698,280) (741,923)
Net unrealized holding gain on available-for-sale securities 748,326 416,383
----------------------------
Total stockholders' equity 23,556,053 22,805,516
----------------------------
Total liabilities and stockholders' equity $105,141,259 $96,391,184
============================
</TABLE>
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,241,583 $ 910,882
Interest and dividends on investment securities 438,942 584,779
Interest on short-term investments 60,030 26,224
----------------------------
Total interest and dividend income 1,740,555 1,521,885
----------------------------
Interest expense:
Interest expense on deposits 722,874 668,610
Interest expense on borrowings 36,328 --
----------------------------
Total interest expense 759,202 668,610
----------------------------
Net interest and dividend income 981,353 853,275
Provision for possible loan losses 10,000 --
----------------------------
Net interest income after provision for possible
loan losses 971,353 853,275
----------------------------
Other income:
Service charges 16,157 12,367
Other fee income 14,901 11,166
Gain (loss) on sale of investment securities, net 120,394 33,591
Other operating income 7,011 8,971
----------------------------
Total other income 158,463 66,095
----------------------------
Other expense:
Salaries and employee benefits 387,823 331,974
Deposit insurance expense 2,230 1,621
Data processing expense 48,209 36,170
Directors' fees 12,318 21,930
Legal and professional fees 88,259 55,505
Other operating expenses 195,417 188,111
----------------------------
Total other expense 734,256 635,311
----------------------------
Income before income taxes 395,560 284,059
Income taxes 142,400 106,000
----------------------------
Net income $ 253,160 $ 178,059
============================
Earnings per common share $ 0.18 $ 0.13
============================
Earnings per common share, assuming dilution $ 0.18 $ 0.13
============================
</TABLE>
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended March 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $2,372,318 $1,763,227
Interest and dividends on investment securities 996,766 1,242,867
Interest on short-term investments 108,158 50,534
--------------------------
Total interest and dividend income 3,477,242 3,056,628
--------------------------
Interest expense:
Interest expense on deposits 1,432,910 1,360,288
Interest expense on borrowings 53,285 --
--------------------------
Total interest expense 1,486,195 1,360,288
--------------------------
Net interest and dividend income 1,991,047 1,696,340
Provision for possible loan losses 10,000 --
--------------------------
Net interest income after provision for possible
loan losses 1,981,047 1,696,340
--------------------------
Other income:
Service charges 35,090 24,669
Other fee income 25,263 20,301
Gain (loss) on sale of investment securities, net 218,246 33,590
Other operating income 42,054 41,082
--------------------------
Total other income 320,653 119,642
--------------------------
Other expense:
Salaries and employee benefits 731,592 662,632
Deposit insurance expense 4,416 2,121
Data processing expense 92,722 65,933
Directors' fees 30,654 40,780
Legal and professional fees 133,067 117,666
Other operating expenses 377,415 339,918
--------------------------
Total other expense 1,369,866 1,229,050
--------------------------
Income before income taxes 931,834 586,932
Income taxes 330,400 219,100
--------------------------
Net income $ 601,434 $ 367,832
==========================
Earnings per common share $ 0.44 $ 0.27
==========================
Earnings per common share, assuming dilution $ 0.42 $ 0.27
==========================
</TABLE>
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Net
Common Unrealized Employee
Stock Holding Stock
Purchased Additional Gain on Ownership
Common Under Paid-in Retained Available-for Plan
Stock RRP Capital Earnings Sale Securities Loan Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1996
as restated $14,547 $ $13,729,102 $8,856,291 $143,685 $(829,208) $21,914,417
ESOP compensation expense 3,709 3,709
Dividends declared (137,183) (137,183)
Net Income 367,832 367,832
Net change in unrealized holding
gain on available-for-sale
securities (77,742) (77,742)
------------------------------------------------------------------------------------------------
Balance, March 31, 1997
as restated $14,547 $ $13,732,811 $9,086,940 $ 65,943 $(829,208) $22,071,033
================================================================================================
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 48,508 48,508
Principal payments on Employee
Stock Ownership Plan loan 43,643 43,643
Net income 601,434 601,434
Dividends declared (151,861) (151,861)
Accrual for RRP 104,328 104,328
Purchase of shares to fund
awards under RRP (227,458) (227,458)
Net change in unrealized holding
gain on available-for-sale
securities 331,943 331,943
------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $14,547 $(227,458) $13,935,334 $9,783,584 $748,326 $(698,280) $23,556,053
================================================================================================
</TABLE>
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(unaudited)
Six months ended March 31,
--------------------------
1998 1997
--------------------------
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 601 $ 368
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Disposal of fixed assets -- 10
Provision for possible loan losses 10 --
Amortization of investment securities, net 30 7
Change in unearned income (17) --
(Gain) loss on sales of investment securities, net (218) (33)
Depreciation 81 30
(Increase) Decrease in other assets (120) 42
Increase (Decrease) in other liabilities 124 (145)
--------------------------
Net cash provided by (used in) operating activities 491 279
--------------------------
Investing activities:
Purchases of available-for-sale securities (3,666) (2,432)
Purchases of held-to-maturity securities -- (1,000)
Proceeds from sales of available-for-sale securities 6,496 1,509
Proceeds from maturities of available-for-sale securities 3,210 4,589
Proceeds from maturities of held-to-maturity securities 3,253 5,671
Net increase in loans (15,023) (6,304)
Purchase of FHLB stock -- (104)
Net increase in short-term investments -- (775)
Purchase of investment in real estate (797) --
Purchase of premises and equipment (660) (439)
--------------------------
Net cash provided by (used in) investing activities (7,187) 715
--------------------------
Financing activities:
ESOP Loan (742) --
Advances from FHLB 2,000 --
Common stock purchased under RRP, net of accrual (123) --
ESOP compensation expense 49 4
Dividends paid (152) (137)
Net increase in repurchase agreements 574 --
Net increase (decrease) in demand deposits, savings,
and NOW deposits 2,520 797
Net increase (decrease) in time deposits 3,361 (36)
--------------------------
Net cash provided by (used in) financing activities 7,487 628
--------------------------
Increase (decrease) in cash and cash equivalents 791 1,622
Cash and cash equivalents at beginning of period 3,916 1,172
--------------------------
Cash and cash equivalents at end of period $ 4,707 $ 2,794
==========================
Supplemental disclosures:
Interest paid on deposits $ 1,486 $ 1,306
==========================
Income taxes paid $ 422 $ 345
==========================
</TABLE>
See Notes to Consolidated Condensed Financial Statements
FALMOUTH BANCORP, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
Note 1 - Basis of Presentation
The financial information of Falmouth Bancorp, Inc. (the "Company") and its
subsidiaries included herein is unaudited and should be read in conjunction
with the financial statements of the Falmouth Co-operative Bank (the
"Bank"), as of March 31, 1998 and September 30, 1997. The results of
operations for the three and six-month periods ended March 31, 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. 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 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 March 31, 1998 has been
calculated according to the guidelines of Statement 128 and EPS for the
quarter ended March 31, 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 comparison for net income are as follows:
<TABLE>
<CAPTION>
Income Shares Per-Share
(Numerator) (Denominator) Amount
-----------------------------------------
<S> <C> <C> <C>
Quarter ended March 31, 1998
Basic EPS
Net income and income available to
income 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
=========================
Quarter Ended March 31, 1997 - As restated
Basic EPS
Net income and income available to
income common stockholders $178,059 1,371,829 .13
Effect of dilutive securities
options and warrants -- --
-------------------------
Diluted EPS
Income available to common stockholders $178,059 1,371,829 .13
=========================
</TABLE>
Note 5 - Dividends
On February 17, 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
March 26, 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 March 31, 1998, the Company did not
repurchase any shares of the its 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 March 31, 1998,
there were 1,454,750 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 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 March 31, 1998 and September 30, 1997.
The Company's total assets increased by $8.7 million or 9.08% for the
six months ended March 31, 1998 from $96.4 million at September 30, 1997 to
$105.1 million at March 31, 1998. Total deposits increased 8.15%, in part,
by the success of two branch offices added during the past 15 months. Total
net loans were $68.9 million or 88.3% of total deposits at March 31, 1998 as
compared to $53.9 million or 74.6% of total deposits at September 30, 1997,
representing an increase of $15 million in net loans since September 30,
1997. This is due in part 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 $27.3 million or 25.9% of total
assets at March 31, 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 the increased volume of loan production. The Bank's
investment in real estate will be utilized as the new home of the East
Falmouth office in the second quarter of 1998, which will be classified as
bank premises at that time. Additional borrowings from the Federal Home
Loan Bank of Boston in the amount of $2 million were used to supplement the
funding of loans originated during the quarter.
New products involving sweep accounts for commercial deposit accounts
provides for repurchase agreements in the amount of $574,000. Total
deposits were $78.1 million at March 31, 1998 as compared to $72.2 million
at September 30, 1997. Total deposits have increased $5.9 million or 8.2%
from September 30, 1997 through March 31, 1998.
Stockholders' equity was $23.6 million at March 31, 1998 as compared
to $22.8 million at September 30, 1997, an increase of $751,000 which
includes an increase in unrealized gain on available-for-sale securities of
$332,000.
The ratio of the allowance for loan losses to total loans was 0.74%.
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. Additionally, existing provisions may be allocated to
acknowledge any credit risks identified by our Year 2000 analysis.
Comparison of Operating Results
Three Months Ended March 31, 1998 and 1997.
Net Income. The Company's net income for the three months ended March
31, 1998 was $253,000 as compared to $178,000 at March 31, 1997, an increase
of 42% or $75,000. Interest and fee income on loans were up 36% due to the
increased loan activity at the Bank. Gains on the sale of investments was
up from $34,000 at March 31, 1997 to $120,000 at March 31, 1998, an increase
of $86,000 as compared to the same quarter of the previous year.
Interest Income. Total interest and dividend income for the three
months ended March 31, 1998 was $1,741,000 an increase of $219,000 as
compared to $1,522,000 for the three month period ending March 31, 1997.
The increase in interest and dividend income is attributable to continued
growth in the loan portfolio, which showed an increase in interest and fee
income of $330,000. This increase was partially offset by a decrease in
income on investment securities of $146,000. The Bank used these securities
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. The Bank will try to maintain its current securities
portfolio and fund loans with matched borrowings from the Federal Home Loan
Bank of Boston.
Interest Expense. Interest expense for the three months ending March
31, 1998 was $759,000, which includes $36,000 interest on short term
borrowings, an increase of $91,000 over interest expense of $668,600 for the
three months ending March 31, 1997. The increase was in both interest
bearing deposit liabilities and borrowings.
Net Interest Income. Net interest income for the three month period
ending March 31, 1998 was $971,000, as compared with $853,000 for the three
months ending March 31, 1997. The increase of $118,000 was the result of
loan growth. The net interest margin for the three months ending March 31,
1998 was 3.88%, an increase of .02% as compared to 3.86% for the three
months ended March 31, 1997. The annualized return on average assets (ROA)
for the three month period ending March 31, 1998 was 0.99%, an increase of
0.19%, as compared to 0.80% 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 the loan portfolio to meet the increased
volume of residential loans originated during the reporting period.
Provision for Loan Losses. The Bank added $10,000 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. As
of the reporting date, the bank has no loan assets classified as doubtful or
impaired. Existing provisions of $42,000 have been allocated to address the
potential credit risk that may be present in the commercial loan portfolio.
Other Income. Other income, for the three month period ending March
31, 1998 was $158,000 as compared to $66,000 for the three months ended
March 31, 1997. The $92,000 increase is primarily the result of realized
gains on the sale of investment securities.
Operating Expenses. Operating expenses for the three months ended
March 31, 1998 were $734,000 as compared to $635,000 for the three months
ended March 31, 1997. The $99,000 increase was primarily due to an increase
in salaries and employee benefits $56,000, an increase in other operating
expenses of $7,000, an increase in data processing expense of $12,000 and an
increase in legal and professional fees of $33,000. The increase in
expenses is due mainly to the Company's overall growth. Commissions paid
for loan originations represents the major portion of the increase in salary
costs. The increase in data processing costs was due primarily to the
expanded number of teller terminals operating at the Bank's new branch
locations. The ratio of operating expenses to average total assets for the
three months ending March 31, 1998 is 2.89% as compared to 2.78% for the
three month period ending March 31, 1997, a 4% increase.
Six Months Ended March 31, 1998 and 1997.
Net Income. The Company's net income for the six months ended March
31, 1998 was $601,000 as compared to $368,000 at March 31, 1997, an increase
of 64% or $234,000. Interest and fee income on loans was up 35% due to the
increased loan activity at the Bank. Gains on the sale of investments was
$218,000, up from $34,000 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 borrowings.
Interest Income. Total interest and dividend income for the six
months ended March 31, 1998 was $3.5 million, an increase of $421,000 as
compared to $3.1 million for the six months period ended March 31, 1997.
The increase in interest and dividend income is attributable to growth in
the loan portfolio, which produced an increase in interest and fee income of
$609,000. This was partially offset by a decrease in income on investment
securities of $246,000. 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 six months ending March
31, 1998 was $1.5 million which includes $53,000 interest on borrowings, an
increase of $126,000 from $1.4 million for the six months ended March 31,
1997. The increase was in both interest bearing deposit liabilities and
borrowings.
Net Interest Income. Net interest income for the six month period
ending March 31, 1998 was $2.0 million as compared with $1.7 million for the
six months ended March 31, 1997. The increase of $285,000 was the result of
increased interest and fees on loans due to the increased dollar amount of
the loan portfolio, which was partially offset by a decrease in interest and
dividend income from investment securities. The net interest margin for the
six months ending March 31, 1998 was 4.09%, an increase of 0.21% as compared
to 3.88% for the six months ended March 31, 1997. The annualized return on
average assets (ROA) for the six month period ended March 31, 1998 was
1.22%, an increase of .39% as compared to .83% 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 in the loan portfolio to
meet the increased volume of residential loans originated during the
reporting period and the overall growth of the Bank.
Provision for Loan Losses. The Bank added $10,000 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
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.
Other Income. Other income, for the six month period ending March 31,
1998 was $321,000 as compared to $120,000 for the six months ended March 31,
1997. The $201,000 increase is primarily the result of realized gains on
the sale of investment securities due to favorable market conditions.
Operating Expenses. Operating expenses for the six months ended March
31, 1998 were $1.4 million as compared to $1.2 million for the six months
ended March 31, 1997. The $141,000 increase was primarily due to an
increase in salaries and employee benefits $69,000, an increase in other
operating expenses of $37,000, an increase in data processing expense of
$27,000 and an in legal and professional fees of $15,000. The ratio of
annualized operating expenses to average total assets for the six months
ended March 31, 1998 is 2.77% as compared to 2.72% for the six month period
ended March 31, 1997.
Liquidity and Capital Resources
The Bank's primary sources of funds consist of deposit, 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 on March
31, 1998 was 30.99%.
A major portion of the Bank's liquidity consists of short-term U.S.
Government obligations. The level of these assets is dependent on the
Bank's operating, investing, lending and financing activities during any
given period. On March 31, 1998, regulatory liquidity totaled $80 million.
The primary investing activities of the Bank include originations 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 form the
FHLB of Boston. At March 31, 1998, the Bank had outstanding advances from
the FHLB of Boston in the amount of $2 million in short 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.
On March 31, 1998, the Bank had $12.6 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 they are
needed. Certificates of deposit which are scheduled to mature in one year
or less totaled $33.5 million at March 31, 1998. Based on historical
experience, management believes that a significant portion of such deposits
will remain with the Bank.
On March 31, 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
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 customers and vendors informing
them of the Bank's commitment to Year 2000 issues and requesting information
regarding their Year 2000 plan. Newsletters, 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.
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 20, 1998. All of the proposals submitted to the
stockholders at the Meeting were approved. 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 was as
follows:
<TABLE>
<CAPTION>
Nominee For Withheld Broker Non-Votes
-------------------------------------------------------------------
<S> <C> <C> <C>
John J. Lynch, Jr. 1,271,096 10,882 0
Walter A. Murphy 1,271,096 10,882 0
William E. Newton 1,271,596 10,382 0
Santo P. Pasqualucci 1,271,596 10,382 0
</TABLE>
2. Ratification of the appointment of Shatswell MacLeod & Co.,
P.C. as independent auditors for fiscal year ending
September 30, 1998.
The number of votes cast with respect to this matter was as
follows:
<TABLE>
<CAPTION>
For Against Withheld Broker Non-Vote
-----------------------------------------------------
<S> <C> <C> <C>
1,269,683 800 11,495 0
</TABLE>
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 14, 1998 By: /s/ Santo P. Pasqualucci
-------------------- ------------------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer
Date: May 11, 1998 By: /s/ George E. Young, III
-------------------- ------------------------------------------
George E. Young, III
Vice President and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated condensed statement of financial condition and the consolidated
statements of income and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 695,167
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 4,011,594
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 20,884,115
<INVESTMENTS-CARRYING> 7,226,208
<INVESTMENTS-MARKET> 7,254,995
<LOANS> 68,922,033
<ALLOWANCE> 511,437
<TOTAL-ASSETS> 105,141,259
<DEPOSITS> 78,073,134
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,512,072
<LONG-TERM> 2,000,000
0
0
<COMMON> 14,547
<OTHER-SE> 23,541,506
<TOTAL-LIABILITIES-AND-EQUITY> 105,141,259
<INTEREST-LOAN> 1,241,583
<INTEREST-INVEST> 438,942
<INTEREST-OTHER> 60,030
<INTEREST-TOTAL> 1,740,555
<INTEREST-DEPOSIT> 722,874
<INTEREST-EXPENSE> 759,202
<INTEREST-INCOME-NET> 981,353
<LOAN-LOSSES> 10,000
<SECURITIES-GAINS> 120,394
<EXPENSE-OTHER> 734,256
<INCOME-PRETAX> 395,560
<INCOME-PRE-EXTRAORDINARY> 395,560
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 253,160
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
<YIELD-ACTUAL> 6.89
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 501,437
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 511,437
<ALLOWANCE-DOMESTIC> 390,937
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 120,500
</TABLE>
