SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ____________________ FORM 10-QSB (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission file number 01-13465 Falmouth Bancorp, Inc. (Exact name of registrant as specified in its charter) Delaware 04-3337685 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 Davis Straits, Falmouth, MA 02540 (Address of principal executive offices) (Zip Code) (508) 548-3500 (Registrant's telephone number including area code) NA (Former name, former address and former fiscal year, if changed from last Report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. Yes X No ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date Outstanding at Class March 31, 2002 ----- -------------- Common Stock, Par Value $.01 914,747 Transitional small business disclosure format: Yes No X ----- ----- FALMOUTH BANCORP, INC. AND SUBSIDIARIES INDEX TO FORM 10-QSB PART I. FINANCIAL INFORMATION Page <s> <c> Item 1 Financial Statements Condensed Consolidated Balance Sheets March 31, 2002 and September 30, 2001 1 Condensed Consolidated Statements of Income For Three and Six Months Ended March 31, 2002 and 2001 2 Condensed Consolidated Statements of Changes in Stockholders' Equity For Six Months Ended March 31, 2002 and 2001 3 Condensed Consolidated Statements of Cash Flows For Six Months Ended March 31, 2002 and 2001 4-5 Notes to Unaudited Condensed Consolidated Financial Statements 6-8 Item 2 Management's Discussion and Analysis of Financial Condition and Operating Results 9-13 PART II OTHER INFORMATION Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Use of Proceeds 14 Item 3. Defaults Upon Senior Securities 14 Item 4. Submission of Matters to a Vote of Security Holders 14 Item 5. Other Information 14 Item 6. Exhibits and Reports on Form 8-K 14 ============================================================================ FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements consisting of estimates with respect to the financial condition, results of operations and business of the Company and the Bank that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, 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 the report 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. ============================================================================ Part I. Item I. FALMOUTH BANCORP, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED BALANCE SHEETS ------------------------------------- March 31, 2002 and September 30, 2001 ------------------------------------- March 31, September 30, 2002 2001 --------- ------------- (unaudited) <s> <c> <c> ASSETS - ------ Cash, due from banks, and interest bearing deposits $ 2,476,042 $ 3,521,609 Federal funds sold 5,062,890 7,313,670 ------------ ------------ Total cash and cash equivalents 7,538,932 10,835,279 Investments in available-for-sale securities (at fair value) 12,809,542 9,381,853 Investments in held-to-maturity securities (fair values of $14,965,135 as of March 31, 2002 and $10,036,408 as of September 30, 2001) 14,968,723 9,948,877 Federal Home Loan Bank stock, at cost 878,000 878,000 Loans, net 107,485,301 112,554,093 Premises and equipment 1,864,628 1,897,697 Accrued interest receivable 873,754 830,421 Cooperative Central Bank Reserve Fund Deposit 395,395 395,395 Other assets 824,633 717,147 ------------ ------------ Total Assets $147,638,908 $147,438,762 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ Deposits: Noninterest-bearing $ 14,471,669 $ 16,147,253 Interest-bearing 110,117,173 106,028,583 ------------ ------------ Total deposits 124,588,842 122,175,836 Securities sold under agreements to repurchase 333,009 675,756 Advances from Federal Home Loan Bank of Boston 5,224,638 7,267,948 Other liabilities 241,464 354,534 ------------ ------------ Total Liabilities 130,387,953 130,474,074 ------------ ------------ Minority preferred stockholders' equity in a subsidiary company of Falmouth Co-operative Bank 54,000 54,000 ------------ ------------ Stockholders' equity: Preferred stock, par value $.01 per share, authorized 500,000 shares; none issued Common stock, par value $.01 per share, authorized 2,500,000 shares; issued 1,454,750 shares 14,547 14,547 Paid-in capital 13,838,247 13,901,279 Retained earnings 13,313,803 12,676,198 Unallocated Employee Stock Ownership Plan shares (345,391) (389,483) Treasury stock (540,003 shares as of March 31, 2002; 516,743 shares as of September 30, 2001) (9,256,066) (8,749,737) Unearned compensation - (137,429) Accumulated other comprehensive loss (368,185) (404,687) ------------ ------------ Total stockholders' equity 17,196,955 16,910,688 ------------ ------------ Total liabilities and stockholders' equity $147,638,908 $147,438,762 ============ ============ The accompanying notes are integral part of these condensed consolidated financial statements. 1 FALMOUTH BANCORP, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME ------------------------------------------- (unaudited) Three Months Ended Six Months Ended ------------------------ ----------------------- March 31, March 31, March 31, March 31, 2002 2001 2002 2001 --------- --------- --------- --------- <s> <c> <c> <c> <c> Interest and dividend income: Interest and fees on loans $1,897,389 $2,089,807 $3,918,873 $4,149,246 Interest and dividends on securities: Taxable 215,134 218,700 405,490 464,374 Dividends on marketable equity securities 17,989 26,418 42,722 57,163 Dividends on Cooperative Bank Investment and Liquidity Funds - 7,672 551 15,417 Other interest 20,538 42,491 61,239 95,049 ---------- ---------- ---------- ---------- Total interest and dividend income 2,151,050 2,385,088 4,428,875 4,781,249 ---------- ---------- ---------- ---------- Interest expense: Interest on deposits 764,953 1,050,147 1,663,938 2,111,729 Interest on securities sold under agreement to repurchase 1,285 11,003 3,399 24,175 Interest on Federal Home Loan Bank advances 80,023 91,541 164,538 142,925 ---------- ---------- ---------- ---------- Total interest expense 846,261 1,152,691 1,831,875 2,278,829 ---------- ---------- ---------- ---------- Net interest and dividend income 1,304,789 1,232,397 2,597,000 2,502,420 Provision for loan losses 30,000 30,000 80,000 115,000 ---------- ---------- ---------- ---------- Net interest income after provision for loan losses 1,274,789 1,202,397 2,517,000 2,387,420 ---------- ---------- ---------- ---------- Other income: Service charges on deposit accounts 43,815 34,964 92,771 72,859 Securities gains, net - 77,953 17,062 153,677 Gains (losses) on mortgages sold, net 73,109 (1,532) 259,526 16,330 Other income 67,660 59,854 156,138 135,897 ---------- ---------- ---------- ---------- Total other income 184,584 171,239 525,497 378,763 ---------- ---------- ---------- ---------- Other expense: Salaries and employee benefits 421,653 464,938 851,752 902,200 Occupancy expense 40,641 50,349 82,181 97,391 Equipment expense 50,548 42,568 99,588 86,700 Data processing expense 92,949 76,676 187,713 148,181 Directors' fees 22,050 13,650 35,050 28,550 Legal and professional fees 47,271 64,704 94,718 135,306 Other expenses 165,589 164,602 339,955 339,958 ---------- ---------- ---------- ---------- Total other expenses 840,701 877,487 1,690,957 1,738,286 ---------- ---------- ---------- ---------- Income before income taxes 618,672 496,149 1,351,540 1,027,897 Income taxes 226,425 178,475 492,625 367,038 ---------- ---------- ---------- ---------- Net income $ 392,247 $ 317,674 $ 858,915 $ 660,859 ========== ========== ========== ========== Comprehensive income $ 261,133 $ 208,996 $ 895,417 $ 418,731 ========== ========== ========== ========== Earnings per common share $ 0.45 $ 0.33 $ 0.97 $ 0.67 ========== ========== ========== ========== Earnings per common share, assuming dilution $ 0.43 $ 0.32 $ 0.93 $ 0.67 ========== ========== ========== ========== The accompanying notes are integral part of these condensed consolidated financial statements. 2 FALMOUTH BANCORP, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -------------------------------------------------------------------- Six Months ended March 31, 2002 ------------------------------- (unaudited) Unallocated Employee Stock Accumulated Ownership Other Common Paid-In Retained Plan Treasury Unearned Comprehensive Stock Capital Earnings Shares Stock Compensation Income (Loss) Total ------ ------- -------- -------------- -------- ------------ ------------- ------ <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, September 30, 2001 $14,547 $13,901,279 $12,676,198 $(389,483) $(8,749,737) $(137,429) $(404,687) $16,910,688 Employee Stock Ownership Plan 46,499 46,499 ESOP shares released 44,092 44,092 Recognition and retention plan 36,080 36,080 Distribution of RRP shares (137,429) 137,429 - Purchase of treasury stock (576,195) (576,195) Exercise of stock options and related tax benefit (8,182) 69,866 61,684 Dividends declared (221,310) (221,310) Comprehensive income: Net income 858,915 Net change in unrealized holding gain on available- for-sale securities 36,502 Comprehensive Income 895,417 ------- ----------- ----------- --------- ----------- --------- --------- ----------- Balance, March 31, 2002 $14,547 $13,838,247 $13,313,803 $(345,391) $(9,256,066) - $(368,185) $17,196,955 ======= =========== =========== ========= =========== ========= ========= =========== Six Months ended March 31, 2001 ------------------------------- (unaudited) Unallocated Employee Stock Accumulated Ownership Other Common Paid-In Retained Plan Treasury Unearned Comprehensive Stock Capital Earnings Shares Stock Compensation Income (Loss) Total ------ ------- -------- -------------- -------- ------------ ------------- ------ <s> <c> <c> <c> <c> <c> <c> <c> <c> Balance, September 30, 2000 $14,547 $13,901,452 $11,669,877 $(477,668) $(6,850,722) $(291,097) $ 25,674 $17,992,063 Employee Stock Ownership Plan 20,449 20,449 ESOP shares released 44,092 44,092 Recognition and retention plan 57,457 57,457 Distribution of RRP shares (150,556) 150,556 Purchase of treasury stock (180,532) (180,532) Exercise of stock options and related tax benefit (3,513) 9,781 6,268 Dividends declared (194,754) (194,754) Comprehensive income: Net income 660,859 Net change in unrealized holding gain on available- for-sale securities (242,128) Comprehensive Income 418,731 ------- ----------- ----------- --------- ----------- --------- --------- ----------- Balance, March 31, 2001 $14,547 $13,825,289 $12,135,982 $(433,576) $(7,021,473) $(140,541) $(216,454) $18,163,774 ======= =========== =========== ========= =========== ========= ========= =========== The accompanying notes are integral part of these condensed consolidated financial statements. 3 FALMOUTH BANCORP, INC. AND SUBSIDIARIES --------------------------------------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ----------------------------------------------- For the Six Months Ended March 31, 2002 and 2001 ------------------------------------------------ 2002 2001 ---- ---- (unaudited) (unaudited) <s> <c> <c> Cash flows from operating activities Net income $ 858,915 $ 660,859 Adjustments to reconcile net income to net cash provided by operating activities: Gains on sales of investment securities, net (17,062) (153,677) (Amortization) accretion of investment securities, net 217,777 (1,582) Provision for loan loss 80,000 115,000 Change in unearned income (678) 8,652 Net gains on sales of loans (259,526) (16,330) Depreciation and amortization 101,984 89,432 Loss on disposal of equipment 1,071 - Amortization of mortgage servicing rights 12,706 - Increase in mortgage servicing rights (245,565) - Increase in accrued interest receivable (43,333) (70,920) Increase in prepaid expenses (17,339) (12,147) Decrease in other assets 36 6,605 Recognition and retention plan (RRP) 36,080 57,457 Decrease in accrued expenses (36,599) (111,942) Increase (decrease) in taxes payable 77,238 (17,726) Decrease in accrued interest payable (172) (70) Decrease in other liabilities (90,980) (13,496) ------------ ----------- Net cash provided by operating activities 674,553 540,115 ------------ ----------- Cash flows from investing activities Purchases of available-for-sale securities (4,112,161) (2,789,641) Proceeds from sales of available-for-sale securities 60,868 517,651 Proceeds from maturities of available-for-sale securities 629,203 550,717 Purchases of held-to-maturity securities (12,132,422) (4,636,256) Proceeds from maturities of held-to-maturity securities 7,022,884 7,033,475 Purchase of Federal Home Loan Bank Stock - (157,300) Loan originations and principal collections, net (11,805,518) (8,387,853) Proceeds from sales of loans 17,054,513 2,650,396 Capital expenditures (69,986) (37,290) ------------ ----------- Net cash used in by investing activities (3,352,619) (5,256,101) ------------ ----------- Cash flows from financing activities: Net increase (decrease) in demand deposits, NOW and savings accounts 4,941,686 (4,569,271) Net increase (decrease) in time deposits (2,528,680) 3,458,426 Net decrease in securities sold under agreements to repurchase (342,747) (102,667) Proceeds from Federal Home Loan Bank long-term advances - 4,500,000 Repayments of Federal Home Loan Bank long-term advances (2,043,310) (2,041,760) Net change in Federal Home Loan Bank short-term advances - 2,000,000 Proceeds from exercise of stock options 61,684 6,268 Dividends paid (221,310) (194,754) Employee Stock Ownership Plan 46,499 20,449 Unallocated ESOP shares released 44,092 44,092 Purchase of treasury stock (576,195) (180,532) ------------ ----------- Net cash (used in) provided by financing activities (618,281) 2,940,251 ------------ ----------- Decrease in cash and cash equivalents (3,296,347) (1,775,735) Cash and cash equivalents at beginning of period 10,835,279 6,830,473 ------------ ----------- Cash and cash equivalents at end or period $ 7,538,932 $ 5,054,738 ============ =========== Supplemental disclosures Interest paid $ 1,832,047 $ 2,278,829 Income taxes paid 415,387 434,470 The accompanying notes are integral part of these condensed consolidated financial statements. 4 FALMOUTH BANCORP, INC. ---------------------- AND SUBSIDIARIES ---------------- Notes to Unaudited Condensed Consolidated Financial Statements Note 1 - Basis of Presentation The condensed consolidated financial statements of Falmouth Bancorp, Inc. (the "Company") and its subsidiaries presented herein are unaudited and should be read in conjunction with the consolidated financial statements of the Company for the year ended September 30, 2001. The results of operations for the six-month period ended March 31, 2002 are not necessarily indicative of the results to be expected for the full year. All material intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) necessary for a fair presentation of results for the interim periods. The year-end condensed balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the USA (GAAP). Note 2 - Accounting Policies The accounting and reporting policies of the Company conform to GAAP and prevailing practices within the banking industry. The interim financial information should be read in conjunction with the Company's 2001 Annual Report contained on Form 10-KSB. Management is required to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Actual results could differ significantly from those estimates. Note 3 - Impact of New Accounting Standards In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities". Statement No. 133, as amended by SFAS No. 138, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. The Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133, did not have a material effect on the Company's consolidated financial statements. FASB has issued SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This replaces SFAS No, 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and rescinds SFAS Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001; however, the disclosure provisions are effective for fiscal years ending after December 15, 2000. The effect of this statement did not have a material impact on the Company's financial position or result of operations. Statement of Financial Accounting Standards No. 141, Business Combinations, improves the consistency of the accounting and reporting for business combinations by requiring that all business combinations be 5 accounted for under a single method - the purchase method. Use of the pooling-of-interests method is no longer permitted. Statement No. 141, Goodwill and Other Intangible Assets, requires that the purchase method be used for business combinations initiated after June 30, 2001. Management does not anticipate any impact on the consolidated financial statements upon adoption of this statement. Statement of Financial Accounting Standards No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which for most companies, will be January 1, 2002. Management does not anticipate any impact on the consolidated financial statements upon adoption of this statement. Note 4 - Earnings per Share Earnings per share (EPS) for the three months and six months ended March 31, 2002 and 2001 have been calculated according to the guidelines of FASB Statement 128. ESOP shares are only considered outstanding for earnings per share calculations when they are committed to be released. Reconciliation of the numerators and the denominators in the calculation of basic and diluted earnings per share are as follows: Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- <s> <c> <c> <c> Three Months Ended March 31, 2002 Basic EPS - --------- Net income and income available to common stockholders $392,247 875,806 $0.45 Effect of dilutive securities options and warrants 42,748 -------- ------- Diluted EPS - ----------- Income available to common stockholders $392,247 918,554 $0.43 ======== ======= Three Months Ended March 31, 2001 Basic EPS - --------- Net income and income available to common stockholders $317,674 975,829 $0.33 Effect of dilutive securities options and warrants 22,532 -------- ------- Diluted EPS - ----------- Income available to common stockholders $317,674 998,361 $0.32 ======== ======= Six Months ended March 31, 2002 Basic EPS - --------- Net income and income available to common stockholders $858,915 883,990 $0.97 Effect of dilutive securities options and warrants 37,188 -------- ------- Diluted EPS - ----------- Income available to common stockholders $858,915 921,178 $0.93 ======== ======= 6 Income Shares Per Share (Numerator) (Denominator) Amount ----------- ------------- --------- <s> <c> <c> <c> Six Months Ended March 31, 2001 Basic EPS - --------- Net income and income available to common stockholders $660,859 979,304 $0.67 Effect of dilutive securities options and warrants 14,081 -------- ------- Diluted EPS - ----------- Income available to common stockholders $660,859 993,385 $0.67 ======== ======= Note 5 - Dividends On February 19, 2002, the Board of Directors of the Company declared a quarterly cash dividend of $0.12 per share of common stock, which was paid on March 20, 2002 to stockholders of record on March 6, 2002. Note 6 - Recent Developments During the quarter ended March 31, 2002 the Company repurchased 1,360 shares of its common stock. The Company issued 500 treasury shares due to exercised employee stock options. At March 31, 2002, the Company had 540,003 treasury shares. 7 Part I. Item 2. Management's Discussion and Analysis of Financial Condition and Operating Results General Falmouth Bancorp, Inc. (the "Company" or "Bancorp"), a Delaware corporation, is the holding company for Falmouth Co-operative Bank (the "Bank" or "Falmouth"), a Massachusetts chartered stock co-operative bank. At March 31, 2002, there were 914,747 shares of the common stock of the company outstanding. The Company's stock trades on the American Stock Exchange under the symbol "FCB". The Company's sole business activity is ownership of the Bank. The Company also makes investments in long and short-term marketable securities and other liquid investments. The business of the Bank consists of attracting deposits from the general public and local businesses and using these funds to originate primarily residential and commercial real estate loans located in Falmouth, Massachusetts and surrounding areas and to invest in United States Government and Agency securities. To a lesser extent, the Bank engages in various forms of consumer and home equity lending. The Bank's business strategy is to operate as a profitable community bank dedicated to financing home ownership, small business, and consumer needs in its market area and to provide personal, high quality service to its customers. The Bank has one subsidiary, Falmouth Capital Corporation, a real estate investment trust. The Company had average shares outstanding of 915,087 at March 31, 2002, as compared to 975,829 average shares outstanding at March 31, 2001. The Company has continued with its stock buy-back programs. At March 31, 2002, the Company had repurchased a total of 540,003 shares, or 37.12% of its common stock, leaving 914,747 shares issued and outstanding. Comparison of Financial Condition at March 31, 2002 and September 30, 2001. The Company's total assets increased by $200,000 or 0.1% for the six months ended March 31, 2002, from $147.4 million at September 30, 2001 to $147.6 million at March 31, 2002. Total deposits increased $2.4 million or 2.0%, from $122.2 million at September 30, 2001 to $124.6 million at March 31, 2002. This increase was due, in part to seasonal deposits in NOW accounts, regular savings accounts and Money Market Deposit accounts during the period. Total net loans were $107.5 million or 86.3% of total deposits at March 31, 2002, as compared to $112.6 million or 92.1% of total deposits at September 30, 2001, representing a decrease of $5.1 million for the period. This decrease was due, in part, to the large number of 1-4 family mortgages that were re-written, due to lower market rates, and then sold by the Bank on the secondary market. Investment securities were $28.7 million or 19.4% of total assets at March 31, 2002, as compared to $20.2 million or 13.7% of total assets at September 30, 2001. Investment securities increased $8.5 million or 43.7% due, in part, to the reinvestment of cash flows generated from loan payoffs and sold loans into short-term securities. Borrowed funds from the Federal Home Loan Bank of Boston decreased from $7.3 million at September 30, 2001 to $5.2 million at March 31, 2002. The decrease of $2.1 million was the result of the repayment of maturing debt along with normal amortization of long term borrowings. Securities sold under agreements to repurchase (sweep accounts for commercial depositors) decreased from $675,000 at September 30, 2001 to $333,000 at March 31, 2002. The decrease was attributed to the 8 increased seasonal needs of our commercial demand deposit customers. Stockholders' equity was $17.2 million at March 31, 2002, as compared to $16.9 million at September 30, 2001, an increase of $286,000. This change was primarily the result of net income, net of dividends paid to stockholders, added to retained earnings of $638,000, an increase in accumulated other comprehensive income of $37,000, and the scheduled discharge of liabilities on stock based employee benefit plans of $187,000 (ESOP, RRP, and stock options), off-set in part by the purchase of treasury shares under the Company's stock repurchase programs at a cost of $576,000. The ratio of stockholders' equity to total assets was 11.65% at March 31, 2002, and the book value per share of common stock was $18.80, compared to 11.48% and $18.01, respectively, at September 30, 2001. The ratio of the allowance for loan losses to total loans was .94% at March 31, 2002. Management believes the allowance will be adequate based upon, among other things, past loss experience, prevailing economic conditions, and the level of credit risk in the loan portfolio. However, the Bank may periodically provide additional provisions as deemed necessary to maintain a sufficient allowance for the loan loss to total loan ratio. The Bank plans to continue to set aside additional general reserves as well as specific reserves for commercial loans and large residential mortgages. Three Months Ended March 31, 2002 and 2001 Net Income. The Company's net income for the three months ended March 31, 2002 was $392,000, as compared to $317,000 for the three months ended March 31, 2001. The increase in net income of $75,000 was due, in part, to a decrease in interest and dividend income of $234,000 that was more than offset by a decrease in interest expense of $306,000. Other key factors included an increase in other income of $14,000, a decrease in other expenses of $37,000 and an increase in income taxes of $48,000. The annualized return on average assets (ROA) for the three months ended March 31, 2002 was 1.07%, an increase of 13 basis points, as compared to 0.94% for the same period of the prior year. The annualized return on average equity (ROE) for the three months ended March 31, 2002 was 9.15%, an increase of 216 basis points, as compared to 6.99% for the same period of the previous year. Interest and dividend income decreased, primarily as the result of low interest rates, loan payoffs, and loan sales during the period. The decrease in interest expense was primarily due to a reduction in the general level of interest rates while total deposits rose only slightly. Net Interest and Dividend Income. Net interest and dividend income was $1.3 million for the three-month period ended March 31, 2002 as compared to $1.2 million for the three months ended March 31, 2001. The $72,000 increase was the result of a $234,000 decrease in interest and dividend income, offset by a $306,000 decrease in interest expense. The net interest margin for the three months ended March 31, 2002 was 3.70%, a decrease of 14 basis points, as compared to 3.84% for the three months ended March 31, 2001. The decrease in net interest margin was primarily the result of a decrease in the yield on earning assets. Interest Expense. Total interest expense for the three months ended March 31, 2002 was $846,000, as compared to $1.15 million for the same period of the prior year, a decrease of $304,000. This was the result of decreased FHLB borrowings as well as a reduction in interest rates paid on deposits during the period. Provision for Loan Losses. The Bank added $30,000 to its allowance for loan losses during the quarter ended March 31, 2002, as compared to $30,000 for the quarter ended March 31, 2001. Management believes that, although the provision is deemed adequate based on its delinquency and loan loss record, additional provisions may be added from time to time as the loan portfolio expands by loan type and volume, including 9 expansion in the commercial loan portfolio. The Bank reviews the general and specific reserves allocated to each loan type, both on and off the balance sheet. This review procedure allows management to look at the growth and risk of each loan type. If necessary, additional reserves can be allocated where loss exposure appears to have risen. Where commercial loans traditionally have a greater degree of loss exposure, the amount of the allowance may be greater than that of traditional 1-4 family mortgage loan of the same amount. If losses appear imminent within a loan type or in general, allowances could be increased. General allowances are generally increased as the total loan portfolio increases. Net loans decreased $3.0 million for the three months ended March 31, 2002, primarily due to 1-4 family loan sales. This decrease aided in improving the Bank's allowance for loan loss to .94 % of total loans at March 31, 2002. The Bank's Asset/Liability Committee routinely reviews the risk weighting applied to each type of loan. There have been no changes during the period ended March 31, 2002. As of March 31, 2002, the Bank had no non-performing loans. Other Income. Total other income for the three-month period ended March 31, 2002 was $185,000, as compared to $171,000 for the three months ended March 31, 2001. The $14,000 increase was primarily the result of an increase in service charge income of $9,000, an increase in net gains on mortgages sold of $75,000, and an increase in other income of $8,000. This was offset, in part, by a decrease in net gains realized from the sale of investment securities of $78,000 as no securities were sold during the period. Operating Expenses. Operating expenses for the three months ended March 31, 2002 were $841,000, as compared to $878,000 for the three months ended March 31, 2001. The $37,000 decrease was primarily due to the combination of a decrease in salaries and employee benefits of $43,000, a decrease in occupancy expense of $10,000, and a decrease in legal and professional costs of $17,000, combined with an increase in data processing expense of $16,000, an increase in equipment expense of $8,000, an increase in Directors' fees of $8,000 and an increase in other expenses of $1,000. The annualized ratio of operating expenses to average total assets for the three months ended March 31, 2002 was 2.30%, as compared to 2.58% for the three-month period ended March 31, 2001, a decrease of 28 basis points. The decrease in salary and employee benefits was due, substantially, to the recent elimination of the Bank's defined benefit retirement plan. The decrease in legal and professional cost was due to the absence of third party consultants utilized during the same period of the previous year. Data Processing expense increased, in part, due to the increased operating costs of Internet Banking and bill paying as well as Internet Cash Management and bill paying for our business customers. Six months Ended March 31, 2002 and 2001 Net Income. The Company's net income for the six months ended March 31, 2002 was $859,000 as compared to $661,000 at March 31, 2001, and increase of $198,000, or 30.0%. This was primarily due to a decrease in interest and dividend income of $352,000, offset by a decrease in interest expense of $447,000, and a decrease in the provision for loan losses of $35,000, an increase in other income of $147,000, a decrease on other expenses of $47,000 and an increase in taxes of $126,000. The annualized return on average equity (ROE) for the six months ended March 31, 2002 was 10.04%, an increase of 274 basis points, as compared to 7.30% for the six months ended March 31, 2001. Interest and Dividend Income. Total interest and dividend income for the six months ended March 31, 2002 was $4.4 million, a decrease of $352,000 as compared to $4.7 million for the six-month period ended March 31, 2001. The decrease in interest and dividend income is attributable to lower interest rates on loans and other investments as well as a reduction of loans held for investment from 100.0% of total deposits at March 31, 2001 to 86.3% at March 31, 2002. Although the investment portfolio grew $10.2 million from $18.5 million at March 31, 2001 to $28.7 million at March 31, 2002, investment and other interest income decreased $122,000 due to the decrease in interest rates generally and the Bank's strategy of investing in short term, lower yielding 10 securities in anticipation of rising interest rates. Management believes it is well positioned for a rising rate scenario. In the short term, profitability will remain relatively unchanged as the effects of higher earning assets being replaced with lower earning assets are offset by the effects of higher costing term deposits and borrowings being replaced with lower costing term deposits and borrowings. Interest Expense. Interest expense for the six months ended March 31, 2002 was $1.8 million, including $165,000 in interest on FHLB advances, which is a decrease of $447,000 from $2.2 million for the six months ended March 31, 2001. This was the result of decreased FHLB borrowings as well as a reduction in interest rates paid on deposits during the period. There was a $448,000 decrease in interest on deposits and a $21,000 decrease in interest on borrowed funds and securities sold under agreement to repurchase. Net Interest and Dividend Income. Net interest and dividend income for the six-month period ended March 31, 2002 was $2.5 million as compared to $2.4 million for the six months ended March 31, 2001. The net interest margin for the six months ended March 31, 2002 was 3.70%, a decrease of 14 basis points as compared to 3.84% for the six months ended March 31, 2001. The annualized return on average assets (ROA) for the six-month period ended March 31, 2002 was 1.17%, an increase of 19 basis points, as compared to 0.98% for the same period of the prior year. The reason for the increase in the ROA was primarily due to the increase in gains on sales of current production loans, and decreases in the amount provided for loan loss and other expenses. Provision for Loan Losses. The Bank added $80,000 to its allowance for loan loss account for the six months ended March 31, 2002 which is $35,000 less than the $115,000 added for six months period ended March 31, 2001. The loan loss provision was decreased due to the reduction in the Bank's loan portfolio due to the sale of loans. It had been increased in the previous year to better align the reserve with the size and risk associated with the portfolio at that time. At March 31, 2002, the Bank had no loans 30 days or more delinquent. The Bank's allowance for loan losses was 0.94% of total loans at March 31, 2002. Management believes the provision to be adequate and commensurate with the level of credit risk. Other Income. Total other income for the six-month period ended March 31, 2002 was $525,000 as compared to $379,000 for the six months ended March 31, 2001. The $146,000 increase is primarily the result of an increase of $243,000 in gains on loans sold offset, in part by a decrease of $137,000 in securities gains net, on the sale of investment securities taken during the six months ended March 31, 2002. Other income increased $20,000 during the same six-month comparative. The $20,000 increase consisted of increases in check fees of $2,000, increases in ATM fees collected of $13,000, increases in loan servicing fee income of $15,000 and increases in loan processing fees, wire transfer fees, and prepayment penalty fees of $15,000. These were offset by a decrease in rental income of $18,000 and a decrease in tellers over of $7,000. Operating Expenses. Operating expenses for the six months ended March 31, 2002 were $1.69 million as compared to $1.74 million for the six months ended March 31, 2001. The $47,000 decrease was primarily due to a decrease in salaries and employee benefits expense of $50,000, a decrease in occupancy expense of $15,000, and a decrease in legal and professional fees of $41,000 partially offset by an increase in equipment expense of $13,000, an increase in data processing expense of $40,000, and an increase in directors fees of $6,000. The ratio of annualized operating expenses to average total assets for the six months ended March 31, 2002 was 2.30% as compared to 2.58% for the six-month period ended March 31, 2001. The decrease in salary and employee benefits was due, substantially, to the recent elimination of the Bank's defined benefit retirement plan. The decrease in legal and professional cost was due to the absence of third party consultants utilized during the same period of the previous year. Data Processing expense increased, in part, due to the increased operating costs of Internet Banking and bill paying as well as Internet Cash Management and bill paying for our business customers. 11 Liquidity and Capital Resources The Bank's primary sources of funds consist of deposits, repayment and prepayment of loans and mortgaged-backed securities, maturities of investments and interest-bearing deposits, and funds provided from operations. While scheduled repayments of loans and mortgage-backed securities and maturities of investment securities are predictable sources of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank uses its liquidity resources principally to fund existing and future loan commitments, to fund net deposit outflows, to invest in other interest- earning assets, to maintain liquidity, and to meet operating expenses. The Bank is required to maintain adequate levels of liquid assets. This guideline, which may be varied depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The Bank has historically maintained a level of liquid assets in excess of regulatory requirements. The Bank's liquidity ratio at March 31, 2002 was 27.82%. A major portion of the Bank's liquidity consists of short-term securities obligations. The level of these assets is dependent on the Bank's operating, investing, lending and financing activities during any given period. At March 31, 2002, regulatory liquidity totaled $35.5 million. The primary investing activities of the Bank include origination of loans and the purchase of investment securities. Liquidity management is both a daily and long-term function of management. If the Bank requires funds beyond its ability to generate them internally, the Bank believes that it could borrow additional funds from the Federal Home Loan Bank of Boston (FHLB). At March 31, 2002, the Bank had outstanding advances from the FHLB of Boston in the amount of $5.2 million in short and long-term borrowings. As these advances mature, they will be repaid or re-written as longer term matched borrowings which will assist the match of rate sensitive assets to rate sensitive liabilities as well as reduce interest expense. At March 31, 2002, the Bank had $10.2 million in outstanding residential and commercial commitments to originate loans, as well as $21.0 million in unadvanced loan commitments. If the Bank anticipates that it may not have sufficient funds available to meet its current loan commitments it may commence further matched borrowing from the FHLB. At March 31, 2002, certificates of deposit that are scheduled to mature in one year or less totaled $43.8 million. Based on historical experience, management believes that a significant portion of such deposits will remain with the Bank. At March 31, 2002 the Bank exceeded all of its regulatory capital requirements. 12 OTHER INFORMATION Part II. Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders ("Meeting") on January 15, 2002. All of the proposals submitted to stockholders and the tabulation of votes for each proposal is as follows: 1. Election of three candidates to the Board of Directors to serve for a three-year term. The number of votes cast with respect to this matter were as follows: ------------------------------------------------------- Nominee For % Withhold % ------------------------------------------------------- Wayne C. Lamson 833,141 99.6 3,395 0.4 ------------------------------------------------------- Gardener L. Lewis 832,765 99.5 3,771 0.5 ------------------------------------------------------- Eileen C. Miskell 833,166 99.6 3,370 0.4 ------------------------------------------------------- 2. Ratification of the appointment of Shatswell, MacLeod & Company, P.C. as independent public accountants for the fiscal year ending September 30, 2002. --------------------------------------------------- For % Against % Abstain % --------------------------------------------------- 832,594 99.6 1,082 0.1 2,860 0.3 --------------------------------------------------- There were no broker non-votes with respect to the above proposals. Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K None 13 Falmouth Bancorp, Inc. is a publicly owned bank holding company and the parent corporation of Falmouth Co-operative Bank, a Massachusetts chartered stock co-operative bank offering traditional products and services. The Bank conducts business through its main office located at 20 Davis Straits, Falmouth, Massachusetts 02540, and its two branch locations in North and East Falmouth. The telephone number is (508) 548-3500. SIGNATURES Pursuant to the requirements of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. FALMOUTH BANCORP, INC. (Registrant) Date: May 3, 2002 By: /s/ Santo P. Pasqualucci --------------- ------------------------ Santo P. Pasqualucci President and Chief Executive Officer Date: May 3, 2002 By: /s/ George E. Young, III --------------- ------------------------ George E. Young, III Senior Vice President and Chief Financial Officer 14