Edgar Filing: FALMOUTH BANCORP INC

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-KSB

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 30, 2001

Commission File No.: 01-13465

FALMOUTH BANCORP, INC.
(Name of small business issuer in its charter)

Delaware 04-3337685
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

20 Davis Straits, Falmouth, Massachusetts 02540
(Address of principal executive offices)
(508) 548-3500
(Issuer's Telephone Number)

Securities registered pursuant to section 12(b) of the Exchange Act:

Name of Each Exchange
Title of each class on Which Registered:
------------------- -----------------------
Common Stock, par value $0.01 per share American Stock Exchange

Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
--- ---

Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [X]

The revenues for the issuer's fiscal year ended September 30, 2001
were $10,341,488.

State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, as of a specified date within the last 60 days.
On December 1, 2001: $24,503,955.

State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date. The Company had 929,007
shares outstanding as of December 1, 2001.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement pursuant to Regulation 14A,
which was delivered to the Commission for filing on December 14, 2001, and
the 2001 Annual Report to Stockholders for the fiscal year ended September
30, 2001, are incorporated by reference into Part II and III of this report.

Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---

TABLE OF CONTENTS

Page
----

PART I

ITEM 1. BUSINESS............................................. 1
ITEM 2. DESCRIPTION OF PROPERTY.............................. 35
ITEM 3. LEGAL PROCEEDINGS.................................... 35
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.. 35

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.................................. 35
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................. 35
ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS.................... 36
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.................. 36

PART III

ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY...... 36
ITEM 10. EXECUTIVE COMPENSATION............................... 36
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT........................................... 36
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS....... 36
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K..................... 36

SIGNATURES.......................................................... 39

EXHIBITS............................................................ 40

PART I

ITEM 1. BUSINESS

General

Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware
corporation, is the holding company for Falmouth Co-operative Bank (the
"Bank"), 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. On October 14, 1997, the Company acquired
all of the capital stock of the 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") whereby the Bank became the wholly-owned subsidiary
of the Company. At September 30, 2001, there were 938,007 shares
outstanding. 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 Company's common stock trades
on the American Stock Exchange under the symbol "FCB." Unless otherwise
disclosed, the information presented in this Report on Form 10-KSB
represents the activity of the Bank for fiscal 1997 and the period prior to
the Reorganization, and the consolidated activity of Falmouth Bancorp, Inc.
and subsidiaries thereafter. The Company had total assets of $147.4 million
as of September 30, 2001.

The Bank conducts its business through an office located in Falmouth,
Massachusetts, where it was originally founded in 1925 as a Massachusetts
chartered mutual co-operative Bank, and two branches located in East
Falmouth and North Falmouth, Massachusetts. The Bank's deposits are
currently insured up to applicable limits by the Bank Insurance Fund of the
Federal Deposit Insurance Corporation ("FDIC") and the Share Insurance Fund
of the Co-operative Central Bank of Massachusetts. The Bank has one
subsidiary, Falmouth Capital Corporation, a real estate investment trust.

The Bank's principal business 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.

Business Strategy

The Bank's business strategy is to operate as a profitable and
independent community bank dedicated primarily to financing home ownership
and consumer needs in its market area and to provide quality service to its
customers. The Bank has implemented this strategy by: (i) closely monitoring
the needs of customers and providing quality service; (ii) emphasizing
consumer-oriented banking by originating residential mortgage loans and
consumer loans, and by offering checking accounts and other financial
services and products; (iii) focusing on expanding lending activities to
produce moderate increases in loan originations; (iv) maintaining asset
quality; (v) maintaining capital in excess of regulatory requirements; and
(vi) producing stable earnings.

The Bank serves its primary market area, the Massachusetts communities
of Falmouth and Mashpee located in the Cape Cod region of Massachusetts,
through its three offices in Falmouth, North Falmouth and East Falmouth,
Massachusetts. The Bank continues to offer traditional retail and commercial
banking services as well as electronics services such as its toll free Voice
Response System "ON CALL," which enables its customers to access current
balance information and transfer funds between accounts by telephone, its
new Internet Banking and Bill Paying product on its web site at
www.falmouthbank.com, and three on-site, as well as three off-site ATMs.
The newest ATMs are located at the Woods Hole, Martha's Vineyard and
Nantucket Steamship Authority's terminals located at Vineyard Haven on
Martha's Vineyard and Woods Hole. The Bank competes with fifteen branches
of financial institutions (including national banks, savings banks, savings
and loans and credit unions), which are headquartered outside its market
area. The Bank is the only independent financial institution headquartered
in Falmouth.

To a lesser extent, the Bank also makes commercial real estate loans,
commercial and industrial, and consumer loans, including passbook loans,
automobile, home equity and other consumer loans. The Bank originates both
fixed-rate and adjustable-rate loans and emphasizes the origination of
residential real estate mortgage loans with adjustable interest rates, and
makes other investments which allow the Bank to more closely match the
interest rate and maturities of its assets and liabilities.

Market Area

The Bank considers its primary market area to be the communities of
Falmouth and Mashpee in Barnstable County, which is located in the Cape Cod
region of Massachusetts, approximately 72 miles south of Boston. The year-
round population of Barnstable County is over 200,000. The majority of the
Bank's lending has been in Falmouth and Mashpee. The Cape Cod region is a
major recreational resort/retirement community, with seasonal tourism being
the most significant economic activity. Falmouth's year-round population of
29,585 (1996 census) increases to a summer population of approximately
70,000. Falmouth is the second most populous and second largest town on the
Cape. Visitors find accommodations in the many motels, hotels and inns in
the area. Falmouth has approximately 44 miles of ocean and lake shoreline.
There are nine harbors and inlets, some with docking and most with mooring
facilities. Two major harbors offer access, via ferry, to the island of
Martha's Vineyard with service to the island of Nantucket during the summer
months from Woods Hole. In addition to swimming, boating, fishing and other
forms of water recreation, Falmouth also has four public and two private
golf courses.

The major employers in the Falmouth area are the Woods Hole
Oceanographic Institute, with approximately 800 employees, Falmouth
Hospital, with 750 employees and Woods Hole, Martha's Vineyard and Nantucket
Steamship Authority, with 500 employees. Other major employers include
Marine Biological Laboratories.

Employees

At September 30, 2001, the Bank employed 31 full-time and 5 part-time
employees. The Bank's employees are not represented by a collective
bargaining agreement, and the Bank considers its relationship with its
employees to be good.

Lending Activities

General. The principal lending activity of the Bank is the
origination of conventional mortgage loans for the purpose of purchasing or
refinancing owner-occupied, one- to four-family residential properties in
its designated community reinvestment area of the Massachusetts towns of
Falmouth and Mashpee. To a lesser extent, the Bank also originates consumer
loans including home equity and passbook loans and commercial loans. The
Bank also originates and retains in its loan portfolio adjustable-rate loans
and fixed-rate loans with maturities of up to 30 years. Traditionally,
fixed-rate loans with terms in excess of 30 years are originated and sold in
the secondary market. Loan originations for the year ended September 30,
2001, achieved the level of $54.7 million and were primarily single-family
residential loans. During this period, the Bank was ranked by Banker and
Tradesman as one of the largest producers of residential mortgage loans in
the Falmouth market. The mortgage market in the Falmouth area was vigorous
in both the purchase money and refinance categories during fiscal 2001. The
Bank is a qualified seller/servicer for Federal National Mortgage
Corporation ("FNMA") and was servicing $10.8 million in loans for FNMA and
$2.2 million for other investors at September 30, 2001.

Loan Portfolio. The following table presents selected data relating
to the composition of the Bank's loan portfolio by type of loan on the dates
indicated.

At September 30,
-------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
---------------- ---------------- ---------------- ---------------- -----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ --------
(Dollars in thousands)

Residential mortgage loans... $ 94,084 79.63% $ 88,647 79.50% $ 67,709 81.02% $ 69,967 87.56% $ 48,367 87.14%
Commercial real estate loans. 10,406 8.81 11,865 10.64 8,488 10.16 4,054 5.07 2,425 4.37
Consumer loans............... 546 .46 527 .47 577 .69 566 .71 877 1.58
Home equity loans............ 8,486 7.18 7,143 6.41 4,621 5.53 3,897 4.88 2,756 4.96
Commercial loans............. 4,634 3.92 3,331 2.98 2,175 2.60 1,422 1.78 1,079 1.95
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Gross loans.................. 118,156 100.00% 111,513 100.00% 83,570 100.00% 79,906 100.00% 55,504 100.00%
======== ====== ======== ====== ======== ====== ======== ====== ======== ======

Less:
Unearned income (cost), net.. (362) (190) (19) 45 97
Unadvanced principal........ 5,019 5,216 2,533 1,679 1,025
Allowance for loan losses... 945 755 569 527 501
-------- -------- -------- -------- --------
Loans, net................... $112,554 $105,732 $ 80,487 $ 77,655 $ 53,881
======== ======== ======== ======== ========

One- to Four-Family Residential Real Estate Lending. The primary
emphasis of the Bank's lending activity is the origination of conventional
mortgage loans secured by one- to four-family residential dwellings located
in the Bank's primary market area. As of September 30, 2001, loans on one-
to four-family residential properties accounted for 79.6% of the Bank's loan
portfolio.

The Bank's mortgage loan originations are for terms of up to 30 years,
amortized on a monthly basis with interest and principal due each month.
Residential real estate loans often remain outstanding for significantly
shorter periods than their contractual terms as borrowers may refinance or
prepay loans at their option, without penalty. Conventional residential
mortgage loans granted by the Bank customarily contain "due-on-sale" clauses
that permit the Bank to accelerate the indebtedness of the loan upon
transfer of ownership of the mortgaged property.

The Bank makes conventional mortgage loans and it uses standard FNMA
documents to allow for the sale of loans in the secondary mortgage market.
The Bank's lending policies generally limit the maximum loan-to-value ratio
on mortgage loans secured by owner-occupied properties to 95% of the lesser
of the appraised value or purchase price of the property, with the condition
that private mortgage insurance is required on loans with a loan-to-value
ratio in excess of 80%.

The Bank, since the early 1980s, has offered adjustable-rate mortgage
loans with terms of up to 30 years. Adjustable-rate loans offered by the
Bank include loans which reprice every one, three, five and seven years and
provide for an interest rate which is based on the interest rate paid on
United States Treasury securities of a corresponding term, plus a margin of
2.75%. The Bank currently offers adjustable-rate loans with initial rates
below those that would prevail under the foregoing computations, based upon
the Bank's determination of market factors and competitive rates for
adjustable-rate loans in its market area. For adjustable-rate loans,
borrowers are qualified at the initial rate plus an anticipated upward
adjustment of 200 basis points.

The Bank retains all adjustable-rate mortgages it originates. The
Bank's adjustable-rate mortgages include caps on increases or decreases of
2% per year, and 6% over the life of the loan (2% per adjustment, and 5%
over the life of the loan for five-year adjustable-rate loans). The
retention of adjustable-rate mortgage loans in the Bank's loan portfolio
helps reduce the Bank's exposure to increases in interest rates. However,
there are unquantifiable credit risks resulting from potential increased
costs to the borrower as a result of repricing of adjustable-rate mortgage
loans. It is possible that during periods of rising interest rates, the risk
of default on adjustable-rate mortgage loans may increase due to the upward
adjustment of interest cost to the borrower.

During the year ended September 30, 2001, the Bank originated $6.4
million in adjustable-rate mortgage loans and $27.6 million in fixed-rate
mortgage loans for portfolio. Approximately 20.9% of all loan originations
during fiscal 2001 were the refinancing of loans already in the Bank's loan
portfolio. At September 30, 2001, the Bank's loan portfolio included $27.9
million in adjustable-rate one- to four-family residential mortgage loans,
or 23.6% of the Bank's total loan portfolio, and $61.5 million in fixed-rate
one- to four-family residential mortgage loans, or 52.0% of the Bank's total
loan portfolio.

The Bank engages in a limited amount of construction lending generally
for the construction of single-family residences. Most are
construction/permanent loans structured to

become permanent loans upon the completion of construction. All construction
loans are secured by first liens on the property. Loan proceeds are
disbursed as construction progresses and inspections warrant. Loans
involving construction financing present a greater risk than loans for the
purchase of existing homes, since collateral values and construction costs
can only be estimated at the time the loan is approved. Due to the small
amount of construction loans in the Bank's portfolio, the risk in this area
is limited.

Commercial Real Estate Loans. At September 30, 2001, the Bank's
commercial real estate loan portfolio totaled $10.4 million, or 8.8% of
total loans. The Bank's largest loan is a commercial loan with an
outstanding balance of $1.4 million at September 30, 2001 secured by a golf
course located in Falmouth, Massachusetts.

Commercial real estate lending entails additional risks compared with
one- to four-family residential lending. For example, commercial real estate
loans typically involve large loan balances to single borrowers or groups of
related borrowers and the payment experience on such loans is typically
dependent on the successful operation of a real estate project and/or the
collateral value of the commercial real estate securing the loan. At
September 30, 2001, all of the Bank's commercial real estate loans were
performing.

Home Equity Loans. The Bank also originates home equity loans, which
are loans, secured by available equity based on the appraised value of one-
to four-family residential property. Home equity loans will be made for up
to 80% of the tax assessed or appraised value of the property (less the
amount of the first mortgage). Home equity loans have an adjustable
interest rate which ranges from 0% to 1% above the prime rate as reported in
The Wall Street Journal and have terms of twenty years or less. At September
30, 2001, the Bank had $18.7 million in home equity loans with unused credit
available to existing borrowers of $10.2 million.

Consumer Loans. The Bank's consumer loans consist of passbook loans,
and other consumer loans, including automobile loans. At September 30,
2001, the consumer loan portfolio totaled $546,000 or .46% of total loans.
Consumer loans generally are offered for terms of up to five years at fixed
interest rates. Consumer loans do not exceed $15,000 individually.
Management expects to continue to promote consumer loans as part of its
strategy to provide a wide range of personal financial services to its
customers and as a means to increase the yield on the Bank's diversified
loan portfolio.

The Bank makes loans up to 90% of the amount of the depositor's
savings account balance. The interest rate on the loan is 4.0% higher than
the rate being paid on regular savings accounts and 3% higher than the rate
being paid on certificates of deposit. The Bank also makes other consumer
loans, which may or may not be secured. The terms of such loans usually
depend on the collateral. At September 30, 2001, the total amount of
passbook and other consumer loans, including overdraft lines of credit, was
$337,000.

The Bank makes loans for automobiles, both new and used, directly to
the borrowers. The loans are generally limited to 80% of the purchase price
or the retail value listed by the National Automobile Dealers Book. The
terms of the loans are determined by the age and condition of the
collateral. Collision insurance policies are required on all these loans. At
September 30, 2001, the total amount of automobile loans was $209,000.

Consumer loans generally are originated at higher interest rates than
residential mortgage loans but also tend to have a higher credit risk than
residential loans due to the loan being unsecured or secured by rapidly
depreciable assets. Despite this risk, the Bank's level of consumer loan
delinquencies generally has been low. No assurance can be given, however,
that the Bank's delinquency rate on consumer loans will continue to remain
low in the future, or that the Bank will not incur future losses on these
activities.

Commercial Loans. The Bank employs a commercial loan officer with
over 20 years of experience in commercial lending in the Falmouth market.
The Bank is pursuing on a selective basis the origination of commercial
loans to meet the working capital and short-term financing needs of
established local businesses. Unless otherwise structured as a mortgage on
commercial real estate, such loans are generally being limited to terms of
five years or less. Substantially all such commercial loans have variable
interest rates tied to the prime rate as reported in The Wall Street
Journal. Whenever possible, the Bank collateralizes these loans with a lien
on commercial real estate, or alternatively, with a lien on business assets
and equipment and the personal guarantees from principals of the borrower.
Commercial loans do not presently comprise a significant portion of the
Bank's loan portfolio. At September 30, 2001 the Bank's non-real estate
commercial loan portfolio totaled $4.6 million.

Commercial business loans generally are considered to involve a higher
degree of risk than residential mortgage loans because the collateral may be
in the form of intangible assets and/or inventory subject to market
obsolescence. Commercial loans also may involve relatively large loan
balances to single borrowers or groups of related borrowers, with the
repayment of such loans typically dependent on the successful operation and
income stream of the borrower. Such risks can be affected significantly by
economic conditions. In addition, commercial business lending generally
requires substantially greater oversight efforts compared to residential
real estate lending.

Loan Commitments. The Bank makes a 60-day loan commitment to
borrowers. At September 30, 2001, the Bank had $2.1 million in loan
commitments outstanding for the origination of one- to four-family
residential real estate loans.

Loan Solicitation Origination and Loan Fees. The Bank originates
loans through its main office located in Falmouth, Massachusetts and two
branch offices located in East and North Falmouth. Loan originations are
derived from a number of sources, including the Bank's existing customers,
referrals, realtors, advertising and "walk-in" customers at the Bank's
offices.

The Bank has one full-time residential loan originator who is
compensated by salary and commission. The originator meets with applicants
at their convenience and location and is in regular contact with real estate
brokers, attorneys, accountants, building contractors, developers and others
in the Bank's local market area. The Bank increased its advertising in
locally distributed newspapers and has utilized local radio advertising to
increase market share of residential loan originations.

Upon receipt of a loan application from a prospective borrower, a
credit report and verifications are ordered to verify specific information
relating to the loan applicant's employment, income and credit standing.
For all mortgage loans, an appraisal of real estate intended to secure the
proposed loan is obtained from an independent fee appraiser who has been

approved by the Bank's Board of Directors. Fire, casualty and sometimes
flood insurance are required on all loans secured by improved real estate.

Insurance on other collateral is required unless waived by the loan
committee. The Board of Directors of the Bank has the responsibility and
authority for the general supervision over the loan policies of the Bank.
The Board has established written lending policies for the Bank. All
applications for residential and commercial real estate mortgages and
commercial business loans must be ratified by the Bank's Board of Directors.
In addition, certain designated officers of the Bank have limited authority
to approve consumer loans.

Interest rates charged by the Bank on all loans are primarily
determined by competitive loan rates offered in its market area and the Bank
generally charges an origination fee on new mortgage loans. The origination
fees, net of direct origination costs, are deferred and amortized into
income over the life of the loan.

Loan Maturities. The following table sets forth certain information
at September 30, 2001 regarding the dollar amount of loans maturing in the
Bank's portfolio based on their contractual terms to maturity, including
scheduled repayments of principal. Demand loans, loans having no stated
schedule of repayments and no stated maturity, and overdrafts are reported
as due in one year or less.

At September 30, 2001(1)
------------------------------------
Real Consumer Total
Estate and Other Loans
-------- --------- --------
(In thousands)

Total loans scheduled to mature:
In one year or less...................... $ 8,450 $ 1,070 $ 9,520
After one year through five years........ 7,509 3,088 10,597
Beyond five years........................ 92,342 1,040 93,382
-------- -------- --------
Total................................ $108,301 $ 5,198 $113,499
======== ======== ========
Loan balance by type scheduled to
mature after one year:
Fixed.................................... $ 62,629 $ 2,623 $ 65,252
Adjustable............................... $ 37,222 $ 1,505 $ 38,727

__________________

Net of unearned income and unadvanced principal.

Originations and Sales of Loans. The following table sets forth
information with respect to originations and sales of loans during the
periods indicated. In recent years, the Bank has been retaining more of its
fixed-rate residential loans in excess of 15-year term with the intent of
selling such loans service retained.

Years Ended September 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)

Beginning balance(1)............. $106,487 $ 81,056 $ 78,182 $ 54,382 $ 40,735
-------- -------- -------- -------- --------
Mortgage loan originations(2).... 44,141 39,853 28,279 41,356 18,712
Consumer loan originations....... 8,999 5,318 4,323 2,015 3,145
Commercial loan originations..... 1,519 1,619 2,249 1,752 1,710
Less:
Amortization and payoffs(3).... (38,734) (21,299) (24,193) (14,286) (9,920)
Transfers to OREO.............. - - - - -
-------- -------- -------- -------- --------
Net loans originated........... 15,925 25,491 10,658 30,837 13,647
-------- -------- -------- -------- --------
Total loans sold................. (8,913) (60) (7,784) (7,037) -
-------- -------- -------- -------- --------
Ending balance(1)................ $113,499 $106,487 $ 81,056 $ 78,182 $ 54,382
======== ======== ======== ======== ========

_________________

Net of unearned income and unadvanced principal.
Includes residential and commercial real estate loans.
Includes unadvanced principal.

Non-Performing Assets, Asset Classification and Allowances for Losses.
Loans are reviewed on a regular basis and are placed on a non-accrual status
when, in the opinion of management, the collection of principal and interest
are doubtful. The level established for the provision for loan losses is
determined by management in its effort to maintain an allowance for loan
losses that is adequate for the size and composition of its loan portfolio
and reflects the Bank's historical record of loan losses. Loans with
deviations in their quality are monitored on the Bank's "watch list" and be
assigned specific reserve allocations, such as commercial loans

and construction loans, which are weighted heaver than owner occupied 1-4
family residential loans, warrant increased provisions on an on-going basis.
The Bank's non-real estate commercial loans totaled $4.6 million at
September 30, 2001, as compared to $3.3 million at September 30, 2000.

Management routinely reviews the risk weighting applied to each loan
type. These are estimates that can increase or decrease the provision.
Several risk weightings were increased slightly during the twelve month
period ended September 30, 2001. On September 30, 2001 the Bank had no
delinquent loans, no non-performing loans and one loan totaling $71,000 with
a specific reserve.

Real estate acquired by the Bank as a result of foreclosure is
classified as real estate owned until such time as it is sold. When such
property is acquired, it is recorded at the lower of the unpaid principal
balance or its fair value. Any required write-down of the loan to its fair
value is charged to the allowance for loan losses.

At September 30,
--------------------------------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(Dollars in thousands)

Loans 30-89 days past due
(not included in non-
performing loans)................ $ - $ - $ 57 $ 65 $290
Loans 30-89 days past due as a
percent of total loans........... -% -% .07% .08% .53%
Non-performing loans:
(90 days past due)............... $ - $ - $ - $ - $ 30
OREO.............................. $ - $ - $ - $ - $ -
Total non-performing assets....... $ - $ - $ - $ - $ 30
Non-performing loans as a percent
of total loans................... -% -% -% -% .06%
Non-performing assets as a
percent of total assets.......... -% -% -% -% .03%

During the year ended September 30, 2001, no gross interest income
would have been recorded on loans accounted for on a non-accrual basis if
the loans had been current throughout the period. No interest on such loans
was included in income during the respective periods. At September 30, 2001,
management was not aware of any loans not currently classified as non-
accrual, 90 days past due or restructured but which may be so classified in
the near future because of concerns over the borrower's ability to comply
with repayment terms.

Federal and state regulations require each banking institution to
classify its asset quality on a regular basis. In addition, in connection
with examinations of such banking institutions, federal and state examiners
have authority to identify problem assets and, if appropriate, classify
them. An asset is classified substandard if it is determined to be
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any. As a general rule, the Bank
will classify a loan as substandard if the Bank can no longer rely on the
borrower's income as the primary source for repayment of the indebtedness
and must look to secondary sources such as guarantors or collateral. An
asset is classified as doubtful if full collection is highly questionable or
improbable. An asset is classified as loss if it is considered
uncollectible, even if a partial recovery could be expected in the future.
The regulations also

provide for a special mention designation, described as assets which do not
currently expose a banking institution to a sufficient degree of risk to
warrant classification but do possess credit deficiencies or potential
weaknesses deserving management's close attention. Assets classified as
substandard or doubtful require a banking institution to establish general
allowances for loan losses. If an asset or portion thereof is classified
loss, a banking institution must either establish specific allowances for
loan losses in the amount of the portion of the asset classified loss, or
charge off such amount. Examiners may disagree with a banking institution's
classifications and amounts reserved. If a banking institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the FDIC Regional Director. At September 30, 2001, the
Bank had no assets classified as special mention or doubtful, no assets
designated as substandard, and none classified as loss.

In originating loans, the Bank recognizes that credit losses will
occur and that the risk of loss will vary with, among other things, the type
of loan being made, the creditworthiness of the borrower over the term of
the loan, general economic conditions and, in the case of a secured loan,
the quality of the security for the loan. It is management's policy to
maintain an adequate general allowance for loan losses based on, among other
things, the Bank's and the industry's historical loan loss experience,
evaluation of economic conditions and regular reviews of delinquencies and
loan portfolio quality. Further, after properties are acquired following
loan defaults, additional losses may occur with respect to such properties
while the Bank is holding them for sale. The Bank increases its allowances
for loan losses and losses on real estate owned by charging provisions for
losses against the Bank's income. Specific reserves also are recognized
against specific assets when warranted.

Results of recent examinations by bank regulators indicate that these
regulators may be applying more conservative criteria in evaluating real
estate market values, requiring significantly increased provisions for
potential loan losses. While Falmouth believes it has established its
existing allowances for loan losses in accordance with generally accepted
accounting principles, there can be no assurance that regulators, in
reviewing the Bank's loan portfolio, will not request the Bank to increase
its allowance for loan losses, thereby negatively affecting the Bank's
financial condition and earnings.

The banking regulatory agencies, including the FDIC, have a policy
statement regarding maintenance of an adequate allowance for loan and lease
losses and an effective loan review system. This policy includes an
arithmetic formula for checking the reasonableness of an institution's
allowance for loan loss estimate compared to the average loss experience of
the industry as a whole. Examiners will review an institution's allowance
for loan losses and compare it against the sum of (i) 50% of the portfolio
that is classified doubtful; (ii) 15% of the portfolio that is classified as
substandard; and (iii) for the portions of the portfolio that have not been
classified (including those loans designated as special mention), estimated
credit losses over the upcoming twelve months given the facts and
circumstances as of the evaluation date. This amount is considered neither a
"floor" nor a "safe harbor" of the level of allowance for loan losses an
institution should maintain, but examiners will view a shortfall relative to
the amount as an indication that they should review management's policy on
allocating these allowances to determine whether it is reasonable based on
all relevant factors.

The following table analyzes activity the Bank's allowance for loan
losses for the periods indicated.

Year Ended September 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(Dollars in thousands)

Average loans, net................. $111,573 $ 94,315 $ 77,657 $ 69,258 $ 47,288
======== ======== ======== ======== ========
Period-end total loans(1).......... $113,499 $106,487 $ 81,056 $ 78,182 $ 54,382
======== ======== ======== ======== ========
Allowance for loan losses at
beginning of period............... $ 755 $ 569 $ 527 $ 501 $ 498
Loans charged-off.................. - 4 - - -
Recoveries......................... - 1 - - 3
Provision charged to operations.... 190 189 42 26 -
-------- -------- -------- -------- --------
Allowance for loan losses at
end of period..................... $ 945 $ 755 $ 569 $ 527 $ 501
======== ======== ======== ======== ========
Ratios:
Allowance for loan losses as a
percentage of period end total
loans............................. .83% .71% .70% .68% .92%
Allowance for loan losses as a
percentage of non-performing
loans............................. - -% -% -% 1,670.00%
Net charge-offs to average loans,
net............................... - - - - -
Net charge-offs to allowance for
loan losses....................... - .40% - - -

_________________________

Net of unearned income and unadvanced principal.

The following table sets forth a breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis. These
allocations are not necessarily indicative of future losses and do not
restrict the use of the allowance to absorb losses in any loan category.

At September 30,
-----------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------- ------------------- ------------------- ------------------- -------------------
Percent of Percent of Percent of Percent of Percent of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category to Category to Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ ----------- ------ ----------- ------ -----------

Real estate
mortgage:
Residential....... $532 78.79% $436 78.53% $282 80.42% $315 87.28% $363 86.88%
Commercial........ 201 9.17 181 11.14 171 10.47 113 5.19 64 4.46
Commercial loans,
other.............. 119 4.08 76 3.13 62 2.70 44 1.82 38 1.98
Consumer, including
home equity loans.. 93 7.96 62 7.20 54 6.41 55 5.71 36 6.68
---- ------ ---- ------ ---- ------ ---- ------ ---- ------
Total allowance
for loan losses.... $945 100.00% $755 100.00% $569 100.00% $527 100.00% $501 100.00%
==== ====== ==== ====== ==== ====== ==== ====== ==== ======

Investment Activities

General. The Bank is required to maintain an amount of liquid assets
appropriate for its level of net withdrawals from savings accounts and
current borrowings. It has been generally the Bank's policy to maintain a
liquidity portfolio in excess of regulatory requirements. At September 30,
2001, the Bank's liquidity ratio was 22.93%. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives,
management's judgment as to the attractiveness of the yields then available
in relation to other opportunities, management's expectations of the level
of yield that will be available in the future and management's projections
as to the short-term demand for funds to be used in Falmouth's loan
origination and other activities.

Interest income from investments in various types of liquid assets
provides a significant source of revenue for the Bank. In the late 1980s,
the Bank maintained its conservative underwriting standards in an effort to
avoid asset quality problems and chose instead to invest excess liquidity in
its investment portfolio. The Bank's short-term investments include United
States Treasury securities and United States Agency securities, commercial
paper, equity securities, short-term corporate debt securities and overnight
federal funds. The balance of the securities investments maintained by the
Bank in excess of regulatory requirements reflects management's historical
objective of maintaining liquidity at a level that assures the availability
of adequate funds, taking into account anticipated cash flows and available
sources of credit, for meeting withdrawal requests and loan commitments and
making other investments.

The Bank purchases securities through a primary dealer of United
States Government obligations or such other securities dealers authorized by
the Board of Directors and requires that the securities be delivered to the
safekeeping agent (Investors Bank & Trust Company) before the funds are
transferred to the broker or dealer. The Bank purchases investment
securities pursuant to an investment policy established by the Board of
Directors.

All securities and investments are recorded on the books of the Bank
in accordance with generally accepted accounting principles. The Bank does
not purchase securities and investments for trading. Available-for-sale
securities are reported at fair value with unrealized gains or losses
reported as a separate component of net worth. All purchases of securities
and investments conform to the Bank's interest rate risk policy.

The following table sets forth the scheduled maturities, average
yields, amortized cost and market value for the Bank's investment securities
at September 30, 2001.

September 30, 2001
---------------------------------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years Total Investment Portfolio
------------------ ------------------ ------------------ ------------------- ---------------------------
Amortized Average Amortized Average Amortized Average Amortized Average Amortized Average Market
Cost Yield Cost Yield Cost Yield Cost Yield Cost Yield Amount
--------- ------- --------- ------- --------- ------- --------- ------- --------- ------- ------
(Dollars in thousands)

U.S. Government
Obligations...... $3,532 4.17% $1,026 3.60% $ - -% $ - -% $ 4,558 4.04% $ 4,605
Mortgage-backed
Securities....... - - 3 8.50 505 7.47 835 7.44 1,343 7.45 1,402
Corporate Notes
and Bonds........ 5,945 5.45 4,727 5.46 - - - - 10,672 5.45 10,781
------ ------ ---- ---- ------- -------
Total......... $9,477 4.97 $5,756 5.13 $505 7.47 $835 7.44 16,573 5.23 16,788
====== ====== ==== ====
Marketable Equity
Securities....... 3,432 1.88 2,630
FHLB Stock........ 878 5.47 878
------- -------
Total Invest-
ment Portfolio $20,883 4.64 $20,296
======= =======

The following tables set forth information regarding the investment
portfolio at the dates indicated.

September 30, 2001
---------------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
------------------------------------------ ------------------------------------------
Amortized Cost Market Value Percent(1) Amortized Cost Market Value Percent(2)
-------------- ------------ ---------- -------------- ------------ ----------
(Dollars in thousands)

Investment securities(3):
U.S. government obligations..... $ 2,049 $2,072 22.1% $2,509 $ 2,533 25.2%
Other bonds and obligations..... 3,474 3,524 37.6 7,198 7,257 72.4
Marketable equity securities.... 3,432 2,630 28.0 - - -
Mortgage-backed securities(4)... 1,101 1,156 12.3 242 246 2.4
------- ------ ----- ------ ------- -----
Total Investment Portfolio.. $10,056 $9,382 100.0% $9,949 $10,036 100.0%
======= ====== ===== ====== ======= =====

September 30,
------------------------------------------------------------
2001 2000 1999
------------------ ------------------ ------------------
Carrying Carrying Carrying
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in thousands)

Investment securities at carrying amount(3):
U.S. government obligations............... $ 4,581 23.7% $ 2,999 16.1% $10,254 38.3%
Other bonds and obligations............... 10,722 55.5 10,026 54.0 10,478 39.1
Marketable equity securities.............. 2,630 13.6 3,870 20.8 4,070 15.2
Mortgage-backed securities(4)............. 1,398 7.2 1,689 9.1 1,984 7.4
------- ----- ------- ----- ------- -----
Total Investment Portfolio.............. $19,331 100.0% $18,584 100.0% $26,786 100.0%
======= ===== ======= ===== ======= =====

___________________________

As a percentage of total market value.
As a percentage of total amortized cost.
Does not include federal funds sold of $7.3 million or Federal Home
Loan Bank Stock of $878,000.
Consists of GNMA, FHLMC and FNMA certificates.

Deposit Activity and Other Sources of Funds

General. Deposits are the primary source of the Bank's funds for
lending and other investment purposes. In addition to deposits, the Bank
derives funds from principal repayments and interest payments on loans and
investments as well as other sources arising from operations in the
production of net earnings. Loan repayments and interest payments are a
relatively stable source of funds, while deposit inflows and outflows are
significantly influenced by general interest rates and money market
conditions. Borrowings may be used on a short-term basis to compensate for
reductions in the availability of funds from other sources, or on a longer-
term basis for general business purposes.

Deposits. Deposits are attracted principally from within the Bank's
primary market area through the offering of a broad selection of deposit
instruments, including passbook savings, NOW accounts, demand deposits,
money market accounts and certificates of deposit. Deposit account terms
vary, with the principal differences being the minimum balance required, the
time periods the funds must remain on deposit and the interest rate.

The Bank's policies are designed primarily to attract deposits from
local residents and businesses rather than to solicit deposits from areas
outside its primary market. The Bank does not accept deposits from brokers
due to the volatility and rate sensitivity of such deposits. Interest rates
paid, maturity terms, service fees and withdrawal penalties are established
by the Bank on a periodic basis. Determination of rates and terms are
predicated upon funds acquisition and liquidity requirements, rates paid by
competitors, growth goals and federal regulations.

The following table sets forth the various types of deposit accounts
at the Bank and the balances in these accounts at the dates indicated.

Savings deposits........... $ 18,683 15.3% $ 19,380 17.2% $ 17,782 19.1% $ 16,583 20.3% $ 15,828 21.9%
NOW accounts............... 9,637 7.9 10,095 9.0 9,389 10.1 6,601 8.1 6,983 9.7
Money market deposits...... 19,413 15.9 16,462 14.7 14,188 15.3 11,056 13.6 9,111 12.6
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total.................... 47,733 39.1 45,937 40.9 41,359 44.5 34,240 42.0 31,922 44.2
Demand deposits............ 16,147 13.2 14,243 12.6 8,091 8.7 5,335 6.5 3,136 4.4
Certificates of deposit.... 58,296 47.7 52,194 46.5 43,436 46.8 41,944 51.5 37,133 51.4
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total deposits........... $122,176 100.0% $112,374 100.0% $ 92,886 100.0% $ 81,519 100.0% $ 72,191 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====

For more information on the Bank's deposit accounts, see Note 6 of
Notes to Financial Statements.

The following table indicates the amount of the Bank's certificates of
deposit of $100,000 or more by time remaining until maturity at September
30, 2001.

Certificates of
Maturity Period Deposit
------------------------------------- ---------------
(In thousands)

Within three months.................. $ 4,086
After three but within six months.... 3,068
After six but within twelve months... 2,619
After twelve months.................. 3,703
-------
Total................................ $13,476
=======

The following table sets forth the deposit activity of the Bank for
the periods indicated.

Years Ended September 30,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
(In thousands)

Deposits..................... $551,960 $448,303 $344,310 $306,288 $179,923
Withdrawals.................. 546,278 432,244 335,933 299,905 176,904
-------- -------- -------- -------- --------
Net increase (decrease)
before interest credited.. 5,682 16,059 8,377 6,383 3,019
Interest credited............ 4,120 3,429 2,990 2,945 2,728
-------- -------- -------- -------- --------
Net increase
in deposits............... $ 9,802 $ 19,488 $ 11,367 $ 9,328 $ 5,747
======== ======== ======== ======== ========

Borrowings. Savings deposits historically have been the primary source
of funds for the Bank's lending and investment activities and for its
general business activities. The Bank is authorized, however, to use
advances from the FHLB of Boston to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB are
secured by the Bank's stock in the FHLB and a portion of the Bank's mortgage
loans. The Bank had $7.3 million of FHLB advances outstanding at September
30, 2001.

The FHLB of Boston functions as a central reserve bank providing
credit for savings institutions and certain other financial institutions. As
a member, the Bank is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain
of its home mortgages and other assets (principally, securities which are
obligations of, or guaranteed by the United States) provided certain
standards related to creditworthiness have been met.

Competition

The Bank experiences substantial competition both in attracting and
retaining savings deposits and in the making of mortgage and other loans.
Direct competition for savings deposits primarily comes from larger
commercial banks and other savings institutions located in or near the
Bank's primary market area that generally have significantly greater
financial and technological resources than the Bank. Additional significant
competition for savings deposits

comes from credit unions, money market funds and brokerage firms. The
primary factors in competing for loans are interest rates and loan
origination fees and the range of services offered by the various financial
institutions. Competition for origination of real estate loans normally
comes from commercial banks, other thrift institutions, mortgage bankers,
mortgage brokers and insurance companies. Management considers the Bank's
competitors in its market area to consist of 15 branches of financial
institutions headquartered outside of its market area. The Bank is the only
independent financial institution headquartered in Falmouth.

FEDERAL AND STATE TAXATION

Federal Taxation

General. The following is intended only as a discussion of material
federal income tax matters and does not purport to be a comprehensive
description of the federal income tax rules applicable to the Bank or the
Company. The Bank's federal income tax return was last audited for the tax
year ended September 30, 1975. For federal income tax purposes, the Company
and the Bank, as members of the same affiliated group, file consolidated
income tax returns on a September 30 fiscal year basis using the accrual
method of accounting and are subject to federal income taxation in the same
manner as other corporations with some exceptions, including particularly
the Bank's tax reserve for bad debts, discussed below.

Bad Debt Reserves. The Bank, as a "small bank" (one with assets
having an adjusted tax basis of $500 million or less) is permitted to
maintain a reserve for bad debts with respect to "qualifying loans," which,
in general, are loans secured by certain interests in real property, and
to make, within specified formula limits, annual additions to the reserve
which are deductible for purposes of computing the Bank's taxable income.
Pursuant to the Small Business Job Protection Act of 1996, the Bank is now
recapturing (taking into income) over a multi-year period a portion of the
balance of its bad debt reserve as of September 30, 1996. See Note 9 to the
consolidated financial statements.

Distributions. To that the extent that the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's "base year reserve," i.e., its reserve as of
September 30, 1988, and then from the Bank's supplemental reserve for losses
on loans, to the extent thereof, and an amount based on the amount
distributed (but not in excess of the amount of such reserves) will be
included in the Bank's income. Non-dividend distributions include
distributions in excess of the Bank's current and accumulated earnings and
profits, as calculated for federal income tax purposes, distributions in
redemption of stock, and distributions in partial or complete liquidation.
Dividends paid out of the Bank's current or accumulated earnings and profits
will not be so included in the Bank's income.

The amount of additional taxable income created from a non-dividend
distribution is an amount that, when reduced by the tax attributable to the
income, is equal to the amount of the distribution. Thus, if the Bank makes
a non-dividend distribution to the Company, approximately one and one-half
times the amount of such distribution (but not in excess of the amount of
such reserves) would be includible in income, assuming a 34% federal
corporate income tax rate. The Bank does not intend to pay dividends that
would result in a recapture of any portion of its bad debt reserves.

Corporate Alternative Minimum Tax. The Code imposes a tax ("AMT") on
alternative minimum taxable income ("AMTI") at a rate of 20%. Only 90% of
AMTI can be offset by net operating loss carryovers of which the Bank
currently has none. AMTI is also adjusted by determining the tax treatment
of certain items in a manner that negates the deferral of income resulting
from the regular tax treatment of those items. The Bank does not expect to
be subject to the AMT.

Elimination of Dividends; Dividends Received Deduction. The Company
may exclude from its income 100% of dividends received from the Bank as a
member of the same affiliated group of corporations. The corporate
dividends-received deduction is generally 70% in the case of dividends
received from unaffiliated corporations with which the Company and the Bank
will not file a consolidated tax return, except that if the Company or the
Bank owns more than 20% of the stock of a corporation distributing a
dividend, then 80% of any dividends received may be deducted.

State Taxation

Massachusetts Taxation. The Bank currently files a separate
Massachusetts excise tax return, based on net income. Under state laws,
Massachusetts-based financial institutions may apportion income earned in
other states. However, the Massachusetts bank excise (income) tax applies
to non-bank entities and out-of-state financial institutions as well as
Massachusetts-based financial institutions. The Massachusetts excise tax
rate for co-operative banks is currently 10.50% of federal taxable income,
adjusted for certain items. Taxable income includes gross income as defined
under the Code, plus interest from bonds, notes and evidences of
indebtedness of any state, including Massachusetts, less deductions, but not
the credits, allowable under the provisions of the Code. Carry forwards and
carry backs of net operating losses are not allowed.

The Bank's active subsidiary, Falmouth Capital Corporation, was
established solely for the purpose of acquiring and holding assets that are
permissible for banks to hold under Massachusetts law. Falmouth Capital
Corporation is a real estate investment trust, a subsidiary of the Bank,
designed to enhance the after-tax earnings by reducing state income tax
liabilities. Falmouth Securities Corporation, a subsidiary formerly
established to perform a function similar to the Falmouth Capital
Corporation, was dissolved on September 28, 2001.

The Bank and the Company are not permitted to file a combined
Massachusetts excise tax return. The Company will be subject to
Massachusetts corporate excise tax, which is determined by two measures:
(1) the income measure, a tax of 9.5% on net income attributable to
Massachusetts; and (2) the non-income measure, a tax of $2.60 per $1,000
imposed on either (a) tangible property, if the corporation is a tangible
property corporation, or (b) net worth, if the corporation is an intangible
property corporation. Unlike the definition of net income for purposes of
the Bank's taxation, net operating loss carryovers and a 95% dividends
received deduction for intercompany dividends is permissible for
corporations.

For additional information regarding taxation, see Note 9 of the Notes
to Financial Statements.

Delaware Taxation. As a Delaware holding company not earning income
in Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to
the State of Delaware.

REGULATION AND SUPERVISION

General

As a co-operative bank chartered by the Commonwealth of Massachusetts,
whose deposits are insured by the Bank Insurance Fund of the FDIC, the Bank
is subject to extensive regulation under state law with respect to many
aspects of its banking activities; this state regulation is administered by
the Division of Banks ("Division"). In addition, the FDIC levies
assessments or deposit insurance premiums on the Bank and is vested with
authority to supervise the Bank and to exercise a broad range of enforcement
powers. Finally, the Bank is required to maintain reserves against deposits
according to a schedule established by the Federal Reserve System. These
laws and regulations have been established primarily for the protection of
depositors and the deposit insurance fund, not the Company's stockholders.

The Company, as the bank holding company controlling Falmouth Co-
operative Bank, is subject to the Bank Holding Company Act of 1956, as
amended and its rules and regulation promulgated by the Federal Reserve
Board. The Company is also subject to certain Massachusetts banking laws
applicable to bank holding companies.

The following references to the laws and regulations under which the
Company and the Bank are regulated are brief summaries thereof, do not
purport to be complete and are qualified in their entirety by reference to
such laws and regulations.

Financial Services Modernization Legislation

On November 12, 1999, President Clinton signed into law the Gramm-
Leach-Bliley Financial Services Modernization Act of 1999 ("GLB Act"). This
federal legislation was intended to modernize the financial services
industry by establishing a comprehensive framework to permit affiliations
among commercial banks, insurance companies, securities firms and other
financial service providers

Bank holding companies are now permitted to engage in a wider variety
of financial activities than permitted under prior law, particularly with
respect to insurance and securities activities if such companies elect to be
regulated as a financial holding company. In addition, in a change from
prior law, bank holding companies will be in a position to be owned,
controlled or acquired by any company engaged in financially related
activities.

Federal Banking Regulations

Capital Requirements. FDIC regulations require BIF-insured banks,
such as the Bank, to maintain minimum levels of capital. The FDIC
regulations define two tiers, or classes, of capital.

Tier 1 Capital or Core Capital is defined in Part 325 and means the
sum of:

* common stockholders' equity (common stock and related surplus,
undivided profits, disclosed capital reserves, foreign currency
translation adjustments, less net unrealized losses on available-for-
sale equity securities with readily determinable fair values);
* noncumulative perpetual preferred stock;
* minority interests in consolidated subsidiaries;

minus

* all intangible assets (other than limited amounts of mortgage
servicing rights and purchased credit card relationships and certain
grandfathered supervisory goodwill;
* identified losses (to the extent that Tier 1 capital would have been
reduced if the appropriate accounting entries to reflect the
identified losses had been recorded on the institution's books);
* investments in certain securities subsidiaries; and
* deferred tax assets in excess of the limit set forth in the
regulations.

Tier 2 Capital consists of:

* allowances for loan and lease losses, up to a maximum of 1.25 percent
of risk-weighted assets;
* cumulative perpetual preferred stock, long-termed preferred stock
(original maturity of at least 20 years) and any related surplus;
* perpetual preferred stock (where the dividend is reset periodically);
* hybrid capital instruments, including mandatory convertible debt;
* term subordinated debt and intermediate-term preferred stock; and
* up to 45% of the pretax net unrealized holding gains on available for
sale equity securities in Tier 2 capital.
Overall, the amount of Tier 2 capital that may be included in total capital
cannot exceed 100% of Tier 1 capital.

The FDIC regulations establish a minimum leverage capital requirement
for banks in the strongest financial and managerial condition, with a rating
of 1 (the highest examination rating of the FDIC for banks) under the
Uniform Financial Institutions Rating System, of not less than a ratio of
3.0% of Tier 1 capital to total assets. For all other banks, the minimum
leverage capital requirement is 4.0%, unless a higher leverage capital ratio
is warranted by the particular circumstances or risk profile of the
depository institution.

The FDIC regulations also require that savings banks meet a risk-based
capital standard. The risk-based capital standard requires the maintenance
of a ratio of total capital (which is defined as the sum of Tier 1 capital
and Tier 2 capital) to risk-weighted assets of at least 8% and a ratio of
Tier 1 capital to risk-weighted assets of at least 4%. In determining the
amount of risk-

weighted assets, all assets, plus certain off balance sheet items, are
multiplied by a risk-weight of 0% to 100%, based on the risks the FDIC
believes are inherent in the type of asset or item.

The federal banking agencies, including the FDIC, have also adopted
regulations to require an assessment of an institution's exposure to
declines in the economic value of a bank's capital due to changes in
interest rates when assessing the bank's capital adequacy. Under such a
risk assessment, examiners will evaluate a bank's capital for interest rate
risk on a case-by-case basis, with consideration of both quantitative and
qualitative factors. According to the agencies, applicable considerations
include:

* the quality of the bank's interest rate risk management process;
* the overall financial condition of the bank; and
* the level of other risks at the bank for which capital is needed.

Institutions with significant interest rate risk may be required to
hold additional capital. The agencies also issued a joint policy statement
providing guidance on interest rate risk management, including a discussion
of the critical factors affecting the agencies' evaluation of interest rate
risk in connection with capital adequacy.

The following table shows the Bank's leverage capital ratio, its Tier
1 risk-based capital ratio, and its total risk-based capital ratio, at
September 30, 2001:

At September 30, 2001
--------------------------------------------------
Capital Percent of Capital Percent of
Amount Assets(1) Requirement Assets(1)
------- ---------- ----------- ----------
(Dollars in thousands)

Tier 1 leverage capital,............ $14,793 10.12% $5,845 > or =4.0%
Tier 1 risk-based capital........... $14,793 15.92% $3,716 > or =4.0%
Total risk-based capital............ $15,738 16.94% $7,433 > or =8.0%

___________________

For purposes of calculating the Tier 1 leverage capital ratio, assets
include adjusted total average assets. In calculating Tier 1 risk-
based capital and total risk-based capital ratio, assets include total
risk-weighted assets.

As the table shows, the Bank exceeded the minimum capital adequacy
requirements at September 30, 2001.

Enforcement

The FDIC has extensive enforcement authority over insured co-operative
banks, including the Bank. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease and
desist orders and to remove directors and officers. In general, these
enforcement actions may be initiated in response to violations of laws and
regulations and to unsafe or unsound practices.

The FDIC has authority under federal law to appoint a conservator or
receiver for an insured bank under certain circumstances. The FDIC is
required, with certain exceptions, to

appoint a receiver or conservator for an insured state bank if that bank is
"critically undercapitalized." For this purpose, "critically
undercapitalized" means having a ratio of tangible capital to total assets
of less than 2%. The FDIC may also appoint a conservator or receiver for a
state bank on the basis of the institution's financial condition or upon the
occurrence of certain events.

Deposit Insurance

The FDIC has adopted a risk-based deposit insurance assessment system.
The FDIC assigns an institution to one of three capital categories based on
the institution's financial information, as of the reporting period ending
seven months before the assessment period, consisting of (1) well
capitalized, (2) adequately capitalized or (3) undercapitalized, and one of
three supervisory subcategories within each capital group. The supervisory
subgroup to which an institution is assigned is based on a supervisory
evaluation provided to the FDIC by the institution's primary federal
regulator and information that the FDIC determines to be relevant to the
institution's financial condition and the risk posed to the deposit
insurance funds. An institution's assessment rate depends on the capital
category and supervisory category to which it is assigned. Assessment rates
for BIF deposits currently range from 0 basis points to 27 basis points.
The Bank's assessment rate is currently 0 basis points. The FDIC is
authorized to raise the assessment rates in certain circumstances, including
maintaining or achieving the designated reserve ratio of 1.25%, which
requirement the BIF currently meets. The FDIC has exercised its authority
to raise rates in the past and may raise insurance premiums in the future.
If the FDIC takes such action, it could have an adverse effect on the
earnings of the Bank.

Under the Deposit Insurance Funds Act of 1996 (the "Funds Act"), the
assessment base for the payments on the FICO bonds was expanded to add,
beginning January 1, 1997, the deposits of BIF-insured institutions, such as
the Bank. Until December 31, 1999, or such earlier date on which the last
savings association ceases to exist, the rate of assessment for BIF-
assessable deposits shall be one-fifth of the rate imposed on SAIF-
assessable deposits. For the fourth quarter 2001, the annual rates of
assessment for the FICO bonds is 0.0184% for BIF-assessable deposits.

Under the Federal Deposit Insurance Act (the "FDI Act"), insurance of
deposits may be terminated by the FDIC upon a finding that the institution
has engaged in unsafe or unsound practices, is in an unsafe or unsound
condition to continue operations or has violated any applicable law,
regulation, rule, order or condition imposed by the FDIC or the Division.
The management of the Bank does not know of any practice, condition or
violation that might lead to termination of deposit insurance.

Transactions with Affiliates and Insiders

Transactions between state non-member banks and any affiliate are
governed by Sections 23A and 23B of the Federal Reserve Act. An affiliate
of a bank is any company or entity that controls, is controlled by or is
under common control with the bank. Currently, a subsidiary of a bank that
is not also a depository institution is not treated as an affiliate of the
bank for purposes of Sections 23A and 23B, but the FRB has proposed treating
any subsidiary of a bank that is engaged in activities not permissible for
bank holding companies under the BHCA as an affiliate for purposes of
Sections 23A and 23B. Generally, Section 23A:

* limits the extent to which the bank or its subsidiaries may engage in
"covered transactions" with any one affiliate to an amount equal to
10% of such bank's capital and surplus, and contains an aggregate
limit on all such transactions with all affiliates to an amount equal
to 20% of such capital and surplus; and
* requires that all such transactions be on terms that are consistent
with safe and sound banking practices.

The term "covered transaction" includes the making of loans, purchase of
assets, issuance of guarantees and similar other types of transactions. In
addition, most extensions of credit by a bank to any of its affiliates must
be secured by collateral in amounts ranging from 100% to 130% of the loan
amounts, depending on the type of collateral. Section 23B requires that any
covered transaction, and certain other transactions, including the bank's
sale of assets and purchase of services from an affiliate must be on terms
that are substantially the same, or at least as favorable, to the
institution as those that would prevail in a comparable transaction with a
non-affiliate.

Banks are also subject to the restrictions contained in Section 22(h)
of the Federal Reserve Act and the FRB's Regulation O thereunder on loans to
executive officers, directors and principal stockholders. Under Section
22(h), loans to a director, an executive officer or a holder of more than
10% of the shares of a bank, as well as certain affiliated interests of such
persons, may not exceed, together with all other outstanding loans to such
person and affiliated interests, the loans-to-one-borrower limit applicable
to national banks (generally 15% of an institution's unimpaired capital and
surplus) and all loans to all such persons in the aggregate may not exceed
an institution's unimpaired capital and unimpaired surplus. Regulation O
also prohibits the making of loans in an amount greater than the lesser of
$25,000 or 5% of capital and surplus but in any event over $500,000, to a
director, executive officer and greater than 10% stockholder of a bank, and
the respective affiliates of such a person, unless such loans are approved
in advance by a majority of the board of directors of the bank, with any
"interested" director not participating in the voting. Further, the FRB
pursuant to Regulation O requires that loans to directors, executive
officers and principal stockholders (a) be made on terms substantially the
same as those that are offered in comparable transactions to persons not
affiliated with the bank and (b) follow credit underwriting procedures not
less stringent than those prevailing for comparable transactions with
persons not affiliated with the bank. Regulation O also prohibits a
depository institution from paying, with certain exceptions, an overdraft of
any of the executive officers or directors of the institution or any of its
affiliates unless the overdraft is paid pursuant to written pre-authorized
extension of interest-bearing extension of credit or transfer of funds from
another account at the bank.

State chartered non-member banks are further subject to the
requirements and restrictions against certain tying arrangements and on
extensions of credit involving correspondent banks. Specifically, a
depository institution is prohibited from extending credit to or offering
any other service, or fixing or varying the consideration for such extension
of credit or service, on the condition that the customer obtain some
additional service from the institution or certain of its affiliates or not
obtain services of a competitor of the institution, subject to certain
exceptions. In addition, a depository institution with a correspondent
banking relationship with another depository institution is prohibited from
extending credit to the executive officers, directors, and holders of more
than 10% of the stock of the other depository institution, unless such
extension

of credit is on substantially the same terms as those prevailing at the time
for comparable transactions with other persons and does not involve more
than the normal risk of repayment or present other unfavorable features.

Real Estate Lending Policies

Under FDIC regulations, state-chartered non-member banks must adopt
and maintain written policies that establish appropriate limits and
standards for extensions of credit that are secured by liens or interest in
real estate or are made for the purpose of financing permanent improvements
to real estate. These policies must establish loan portfolio
diversification standards, prudent underwriting standards, including loan-
to-value limits that are clear and measurable, loan administration
procedures and documentation, approval and reporting requirements. The real
estate lending policies must reflect consideration of the Interagency
Guidelines for Real Estate Lending Policies (the "Interagency Guidelines")
that have been adopted by the federal bank regulators.

The Interagency Guidelines, among other things, call upon a depository
institution to establish internal loan-to-value limits for real estate loans
that are not in excess of the following supervisory limits:

* for loans secured by raw land, the supervisory loan-to-value limit is
65% of the value of the collateral;
* for land development loans (i.e., loans for the purpose of improving
unimproved property prior to the erection of structures), the
supervisory limit is 75%;
* for loans for the construction of commercial, multi-family or other
nonresidential property, the supervisory limit is 80%;
* for loans for the construction of one- to four-family properties, the
supervisory limit is 85%; and
* for loans secured by other improved property (e.g., farmland,
completed commercial property and other income-producing property
including non-owner-occupied, one- to four-family property), the limit
is 85%.

Although no supervisory loan-to-value limit has been established for
owner-occupied, one- to four-family and home equity loans, the Interagency
Guidelines state that for any such loan with a loan-to-value ratio that
equals or exceeds 90% at origination, an institution should require
appropriate credit enhancement in the form of either mortgage insurance or
readily marketable collateral.

Community Reinvestment Act

Under the Community Reinvestment Act, any insured depository
institution, including Falmouth Co-operative Bank, has a continuing and
affirmative obligation consistent with its safe and sound operation to help
meet the credit needs of its entire community, including low and moderate
income neighborhoods. The Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor
does it limit an institution's discretion to develop the types of products
and services that it believes are best suited to its particular community.
The Community Reinvestment Act requires the FDIC, in connection with its
examination of a bank, to assess the depository institution's record of
meeting the credit needs

of its community and to take such record into account in its evaluation of
certain applications by such institution, including applications for
additional branches and acquisitions.

Community Reinvestment Act regulations rates an institution based on
its actual performance in meeting community needs. In particular, the
evaluation system focuses on three tests:

* a lending test, to evaluate the institution's record of making loans
in its service areas;
* an investment test, to evaluate the institution's record of investing
in community development projects, affordable housing, and programs
benefitting low or moderate income individuals and businesses; and
* a service test, to evaluate the institution's delivery of services
through its branches, ATMs and other offices.

The Community Reinvestment Act requires the FDIC to provide a written
evaluation of an institution's Community Reinvestment Act performance
utilizing a four-tiered descriptive rating system and requires public
disclosure of an institution's Community Reinvestment Act rating. The Bank
received a "satisfactory" rating in its Community Reinvestment Act
examination conducted by the FDIC on January 17, 1999.

Standards for Safety and Soundness

Under federal law, each federal banking agency is required to
prescribe, by regulation, safety and soundness standards for institutions
under its authority. The federal banking agencies, including the FDIC, have
adopted standards covering internal controls, information systems and
internal audit systems, loan documentation, credit underwriting, interest
rate exposure, asset growth, employee compensation, employee benefits, fees,
asset quality and earnings sufficiency. These standards are in the form of
broad guidelines for performance that generally leave to each institution
the methods for achieving the objectives. The Bank believes it meets the
FDIC's safety and soundness standards.

Federal Home Loan Bank System

The Bank is a member of the FHLB System, which consists of 12 regional
Federal Home Loan Banks subject to supervision and regulation by the Federal
Housing Finance Board ("FHLB"). The Federal Home Loan Banks provide a
central credit facility primarily for member institutions. As a member of
the FHLB, the Bank is required to acquire and hold shares of capital stock
in the FHLB in an amount at least equal to 1% of the aggregate unpaid
principal of its home mortgage loans, home purchase contracts, and similar
obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. Falmouth was in
compliance with this requirement with an investment in FHLB of Boston stock
at September 30, 2001, of $878,000.

The FHLB of Boston serves as a reserve or central bank for its member
institutions within its assigned region. It is funded primarily from
proceeds derived from the sale of consolidated obligations of the FHLB
System. It offers policies and procedures established by the FHFB and the
Board of Directors of the FHLB of Boston. Long-term advances may only be
made for the purpose of providing funds for residential housing finance.

Federal Reserve System

Under FRB regulations, the Bank is required to maintain noninterest-
earning reserves against its transaction accounts (primarily NOW and regular
checking accounts). The FRB regulations generally require that reserves of
3% must be maintained against aggregate transaction accounts of $41.3
million or less (subject to adjustment by the FRB) and an initial reserve of
$1.2 million plus 10% (subject to adjustment by the FRB between 8% and 14%)
against that portion of total transaction accounts in excess of $41.3
million. The first $5.5 million of otherwise reservable balances (subject
to adjustments by the FRB) are exempted from the reserve requirements. As
of September 30, 2001, the Bank met its reserve requirements.

Massachusetts Banking Laws and Supervision

Massachusetts's co-operative banks such as the Bank are also regulated
and supervised by the Division of Banks. The Division of Banks is required
to regularly examine each state-chartered bank. The approval of the
Division of Banks is required to establish or close branches, to merge with
another bank, to form a bank holding company, to issue stock or to undertake
many other activities. Any Massachusetts bank that does not operate in
accordance with the regulations, policies and directives of the Division of
Banks is subject to sanctions. The Division of Banks may under certain
circumstances suspend or remove directors or officers of a bank who have
violated the law, conducted a bank's business in a manner which is unsafe,
unsound or contrary to the depositors' interests, or been negligent in the
performance of their duties.

All Massachusetts-chartered co-operative banks are required to be
members of the Co-operative Central Bank and are subject to its assessments.
The Co-operative Central Bank maintains the Share Insurance Fund, a private
deposit insurer, which insures all deposits in member banks in excess of
FDIC deposit insurance limits. In addition, the Co-operative Central Bank
acts as a source of liquidity to its members in supplying them with low-cost
funds, and purchasing certain qualifying obligations from them.

The powers which Massachusetts-chartered co-operative banks can
exercise are virtually identical to those of state-chartered commercial
banks. These powers are summarized below.

Lending Activities. A wide variety of mortgage loans may be made.
Fixed-rate loans, adjustable-rate loans, variable-rate loans, participation
loans, graduated payment loans, construction loans, condominium and co-
operative loans, second mortgage loans and other types of loans may be made
in accordance with applicable regulations. Mortgage loans may be made on
real estate in Massachusetts or in another New England state if the bank
making the loan has an office there or under certain other circumstances.
In addition, certain mortgage loans may be made on improved real estate
located anywhere in the United States. Commercial loans may be made to
corporations and other commercial enterprises with or without security.
With certain exceptions, such loans may be made without geographic
limitations. Consumer and personal loans may be made with or without
security and without geographic limitations. Loans to individual borrowers
generally will be limited to 20% of the total of the Bank's capital accounts
and stockholders' equity.

Investments Authorized. Massachusetts-chartered co-operative banks
have broad investment powers under Massachusetts law, including so-called
"leeway" authority for

investments that are not otherwise specifically authorized. The investment
powers authorized under Massachusetts law are restricted by federal law to
permit only investments of the kinds that would be permitted for national
banks. The Bank has authority to invest in all of the classes of loans and
investments that are permitted by its existing loan and investment policies.

Payment of Dividends. A co-operative bank only may pay dividends on
its capital stock from net profits and no dividends may be declared,
credited or paid so long as there is any impairment of the capital stock.
No dividends may be declared on the Bank's common stock so long as there is
any period other than for which dividends are declared upon preferred stock,
except as authorized by the Commissioner. The approval of the Commissioner
is also required for a co-operative bank to declare a dividend if the total
of all dividends declared by the Bank in any calendar year exceed the total
of its net profits for that year combined with its retained net profits of
the preceding two years, less any required transfer to surplus or a fund for
the retirement of any preferred stock.

Branches. With the approval of the Division of Banks, bank branches
may be established in any city or town in Massachusetts. In addition, co-
operative banks may operate automated teller machines at any of their
offices or, with the approval of the Division of Banks, anywhere in
Massachusetts. Sharing of ATMs or "networking" is also permitted with the
approval of the Division of Banks. Massachusetts-chartered co-operative
banks may also operate ATMs outside of Massachusetts if permitted to do so
by the law of the jurisdiction in which the ATM is located.

Interstate Banking. An out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by:

* merging with a Massachusetts bank that has been in existence for at
least three years;
* acquiring a branch or branches of a Massachusetts bank without
acquiring the entire bank; or
* opening such branches de novo.

Massachusetts banks' ability to exercise similar interstate banking powers
in other states depends upon the laws of the other states. For example,
according to the law of the bordering state of New Hampshire, out-of-state
banks may acquire New Hampshire banks by merger, but may not establish de
novo branches in New Hampshire.

Community Reinvestment Act. The Bank is also subject to provisions
of the Massachusetts banking laws that, like the provisions of the federal
Community Reinvestment Act, impose continuing and affirmative obligations
upon a banking institution organized in Massachusetts to serve the credit
needs of its local communities. The obligations of the Massachusetts
Community Reinvestment Act are similar to those imposed by the federal
Community Reinvestment Act with the exception of the assigned exam ratings.
Massachusetts banking law provides for an additional exam rating of "high
satisfactory" in addition to the federal Community Reinvestment Act ratings
of "outstanding," "satisfactory," "needs to improve" and "substantial
noncompliance." The Division has adopted regulations to implement the
Massachusetts Community Reinvestment Act that are based on the federal
Community Reinvestment Act. The Division is required to consider a bank's
Massachusetts Community Reinvestment Act rating when reviewing the bank's
application to engage in certain transactions, including mergers, asset
purchases and the establishment of branch offices or automated teller

machines, and provides that such assessment may serve as a basis for the
denial of any such application. The Massachusetts Community Reinvestment
Act requires the Division to assess a bank's compliance with the
Massachusetts Community Reinvestment Act and to make such assessment
available to the public.

Other Powers. Massachusetts-chartered co-operative banks may also
lease machinery and equipment, act as trustee or custodian for tax qualified
retirement plans, establish trust departments and act as professional
trustee or fiduciary, provide payroll services for their customers, issue or
participate with others in the issuance of mortgage-backed securities and
establish mortgage banking companies and discount securities brokerage
operations. Some of these activities require the prior approval of the
Division of Banks.

Loans to Bank's Insiders. The Massachusetts banking laws prohibit any
officer, director or trustee from borrowing, otherwise becoming indebted, or
becoming liable for a loan or other extension of credit by such bank to any
other person, except for any of the following loans or extensions of credit:

* loan or extension of credit, secured or unsecured, to an officer of
the bank in an amount not exceeding $20,000;
* loan or extension of credit intended or secured for educational
purposes to an officer of the bank in an amount not exceeding $75,000;
* loan or extension of credit secured by a mortgage on residential real
estate to be occupied in whole or in part by the officer to whom the
loan or extension of credit is made, in an amount not exceeding
$275,000;
* loan or extension of credit to a director or trustee of the bank who
is not also an officer of the bank in an amount permissible under the
bank's loan-to-one borrower limit.

The loans listed above require approval of the majority of the members of
the bank's executive committee, excluding any member involved in the loan or
extension of credit. No such loan or extension of credit may be granted
with an interest rate or other terms that are preferential in comparison to
loans granted to persons not affiliated with the Bank.

Regulation of Holding Company

Federal Regulation. The Company is subject to examination, regulation
and periodic reporting under the BHCA, as administered by the FRB. The FRB
has adopted capital adequacy guidelines for bank holding companies on a
consolidated basis substantially similar to those of the FDIC for the Bank.

The Company is required to obtain the prior approval of the FRB and
the Massachusetts Board of Bank Incorporation ("BBI") to acquire all, or
substantially all, of the assets or any bank of bank holding company. Prior
FRB and BBI approval would be required for the Company to acquire direct or
indirect ownership or control of any voting securities of any bank or bank
holding company if, after giving effect to such acquisition, it would,
directly or indirectly, own or control more than 5% of any class of voting
shares of such bank or bank holding company.

The Company will be required to give the FRB prior written notice of
any purchase or redemption of its outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the
preceding 12 months, is equal to 10% or more of the Company's consolidated
net worth. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe and unsound
practice, or would violate any law, regulation, FRB order or directive, or
any condition imposed by, or written agreement with, the FRB. Such notice
and approval is not required for a bank holding company that would be
treated as "well capitalized" under applicable regulations of the FRB, both
before and after the redemption, that is well managed, and that is not the
subject of any unresolved supervisory issues.

The status of the Company as a registered bank holding company under
the BHCA will not exempt it from certain federal and state laws and
regulations applicable to corporations generally, including, without
limitation, certain provisions of the federal securities laws.

In addition, a bank holding company which does not qualify as a
financial holding company under the Gramm-Leach-Bliley Act, is generally
prohibited from engaging in, or acquiring 5% or more of any class of voting
securities of any company engaged in, non-banking activities. One of the
principal exceptions to this prohibition is for activities found by the FRB
to be so closely related to banking or managing or controlling banks as to
be a proper incident thereto. Bank holding companies that qualify as a
financial holding company may engage in activities that are financial in
nature or incident to activities that are financial in nature. To date, the
Company has not elected to become regulated as a financial holding company.

Under the Federal Deposit Insurance Act, depository institutions are
liable to the FDIC for losses suffered or anticipated by the FDIC in
connection with the default of a commonly controlled depository institution
or any assistance provided by the FDIC to such an institution in danger of
default. This law would have potential applicability if the Company ever
acquired as a separate subsidiary a depository institution in addition to
the Bank.

Federal Securities Laws

The Company's common stock is registered with the SEC under Section
12(b) of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements under the Exchange Act.

ITEM 2. DESCRIPTION OF PROPERTY

The following table sets forth certain information at September 30,
2001 regarding Falmouth's office facilities, and certain other information
relating to the properties at that date.

Year Completed Square Net Book Value
or Acquired Footage at September 30, 2001
-------------- ------- ---------------------

Main Office:
20 Davis Straits
Falmouth, MA 02540 1978 10,696 $280,311

Branch Offices:
North Falmouth, MA
78 County Rd.
N. Falmouth, MA 02556 1998 1,706 $553,828

East Falmouth, MA
397 E. Falmouth Hwy
E. Falmouth, MA 02536 1998 2,380 $770,209

At September 30, 2001, the net book value of Falmouth's computer
equipment and other furniture, fixtures and equipment at its offices totaled
$327,914. For more information, see Note 5 of Notes to Financial
Statements.

ITEM 3. LEGAL PROCEEDINGS

Although the Bank and the Company, from time to time, are involved in
various legal proceedings in the normal course of business, there are no
material legal proceedings to which the Bank or the Company, its directors
or its officers is a party or to which any of its property is subject as of
the date of this Form 10-KSB.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

The following information included in the Falmouth Bancorp, Inc. 2001
Annual Report to Stockholders (the "Annual Report") is incorporated herein
by reference: "Market for the Company's Common Stock" on page 17 of the
Annual Report.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

The following information included in the Annual Report is
incorporated herein by reference: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Financial Highlights" on
pages 3 through 16 of the Annual Report.

ITEM 7. CONSOLIDATED FINANCIAL STATEMENTS

The following information included in the Annual Report is
incorporated herein by reference: "Consolidated Financial Statements and
Notes to Consolidated Financial Statements" on pages 18 through 45 of the
Annual Report.

ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

PART III

ITEM 9. DIRECTORS AND PRINCIPAL OFFICERS OF THE COMPANY

The following information included in the Company's 2001 Proxy
Statement for the 2002 Annual Meeting of Stockholders ("Proxy Statement") is
incorporated herein by reference: "Election of Directors," "Nominees and
Continuing Directors," "Executive Officers," and "Section 16(a) Beneficial
Ownership Reporting Compliance."

ITEM 10. EXECUTIVE COMPENSATION

The following information included in the Proxy Statement is
incorporated herein by reference: "Proposal 1 - Election of Directors -
Director Compensation," "- Compensation Table," "-Employment Agreements," "
-Stock Option Plan," "-Recognition and Retention Plan," and "- Transactions
with Certain Related Persons."

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following information included in the Proxy Statement is
incorporated herein by reference: "Stock Ownership of Management" and
"Security Ownership of Certain Beneficial Owners."

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The following information included in the Proxy Statement is
incorporated herein by reference: "Transactions with Certain Related
Persons."

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) The following financial statements included in the 2001 Annual
Report are incorporated herein by reference:

Balance Sheets - At September 30, 2001 and 2000;
Statements of Income - Years Ended September 30, 2001, 2000 and
1999;
Statements of Changes in Stockholders' Equity - Years Ended
September 30,

2001, 2000 and 1999;
Statements of Cash Flows - Years Ended September 30, 2001, 2000
and 1999; and
Notes to Financial Statements - Years Ended September 30, 2001,
2000 and 1999

(b) Exhibits. The following exhibits are either filed as part of
this report or are incorporated herein by reference:

3.1 Certificate of Incorporation of Falmouth Bancorp, Inc.(1)
3.2 By-laws of Falmouth Bancorp, Inc.(1)
4.3 Specimen Stock Certificate of Falmouth Bancorp, Inc.(1).
10.1 1997 Stock Option Plan for Outside Directors, Officers
and Employees of Falmouth Bancorp, Inc.(1)
10.2 Amendments to 1997 Stock Option Plan for Outside
Directors, Officers and Employees of Falmouth Bancorp,
Inc. (2)
10.3 1997 Recognition and Retention Plan for Outside
Directors, Officers and Employees of Falmouth Bancorp,
Inc.(1)
10.4 Agreement and Plan of Reorganization by and between
Falmouth Co-operative Bank and Falmouth Bancorp, Inc.,
dated November 25, 1997 (1)
10.5 Employment Agreement by and between Falmouth Co-operative
Bank and Santo P. Pasqualucci. (2)
10.6 Employment Agreement by and between Falmouth Co-operative
Bank and George E. Young III. (2)
10.7 Falmouth Co-operative Bank Employee Stock Ownership
Plan.(1)
10.8 Falmouth Bancorp, Inc. Employee Stock Ownership Trust.(1)
13 Annual Report to Stockholders for the Year Ended
September 30, 2001.
21 Subsidiaries of the Registrant.
23 Consent of Shatswell, MacLeod & Company, P.C.
______________________

(1) Incorporated herein by reference to the Registration Statement on Form
S-4 (Registration No. 333-16931), as filed with the Securities and
Exchange Commission on November 27, 1996.
(2) Incorporated herein by reference to the Annual Report on Form 10-KSB
for the year ended September 30, 2000, as filed with the Securities
and Exchange Commission on December 22, 2000.

None.

This Form 10-KSB contains certain forward-looking statements
consisting of estimates with respect to the financial condition, results of
operations and business of the Company and the Bank that are subject to
various factors which could cause actual results to differ materially from
these estimates. These factors include, but are not limited to: general
and local economic conditions; changes in interest rates, deposit flows,
demand for mortgages and other loans, real estate values, and competition;
changes in accounting principles, policies, or guidelines; changes

in legislation or regulation; and other economic, competitive, governmental,
regulatory, and technological factors affecting our operations, pricing,
products and services.

Any or all of our forward-looking statements in this Form 10-KSB and
in any other public statements we make may turn out to be wrong. They can
be affected by inaccurate assumptions we might make or by known or unknown
risks and uncertainties. Consequently, no forward-looking statement can be
guaranteed.

We undertake no obligation to publicly update forward-looking
statements, whether as a result of new information, future events or
otherwise, except as required by law.

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.

FALMOUTH BANCORP, INC.

By: /s/ Santo P. Pasqualucci
-------------------------------------
Santo P. Pasqualucci
President and Chief Executive Officer

In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities
and on the dates indicated.

Name Title Date
---- ----- ----

/s/ Santo P. Pasqualucci Director, President and December 18, 2001
--------------------------- Chief Executive Officer
Santo P. Pasqualucci (Principal executive officer)

/s/ George E. Young Vice President and Chief December 18, 2001
--------------------------- Financial Officer (Principal
George E. Young, III financial officer)

/s/ John W. Holland Director December 18, 2001
---------------------------
John W. Holland, Jr.

Director December 18, 2001
---------------------------
James A. Keefe

/s/ Wayne C. Lamson Director December 18, 2001
---------------------------
Wayne C. Lamson

/s/ Gardner L. Lewis Director December 18, 2001
---------------------------
Gardner L. Lewis

/s/ John J. Lynch Chairman of the Board December 18, 2001
---------------------------
John J. Lynch, Jr.

/s/ Eileen C. Miskell Director December 18, 2001
---------------------------
Eileen C. Miskell

/s/ Robert H. Moore Director December 18, 2001
---------------------------
Robert H. Moore

Director December 18, 2001
---------------------------
William E. Newton