**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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** **

**FORM 10-Q**

 

| **(Mark One)** |
|----------------|
|           |
| **ý**     |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.** |
|           |   |   |
|           |   | **FOR THE QUARTER ENDED SEPTEMBER 30, 2003** |
|           |   |   |
|           |   | **or** |
|           |   |   |
| **o**          |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE  SECURITIES EXCHANGE ACT OF 1934.** |

 

**COMMISSION FILE NUMBER: 000-25077**

 

**SEACOAST FINANCIAL SERVICES CORPORATION**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Massachusetts**                                                                |   | **04-1659040**                    |
|----------------------------------------------------------------------------------|--------|-----------------------------------|
| (State of Incorporation)                                                         |   | (IRS Employer Identification No.) |
|                                                                             |   |                              |
| **One Compass Place, New Bedford, Massachusetts**                                |   | **02740**                         |
| (Address of Principal Executive Offices)                                         |   | (Zip Code)                        |
|                                                                             |   |                              |
| **(508) 984-6000**                                                               |
| (Registrant's Telephone Number)                                                  |
|                                                                             |
| **N/A**                                                                          |
| Former Name, Former Address and Former Fiscal Year if Changed Since  Last Report |

 

Indicate by check mark whether the registrant: (1) has filed allreports required to be filed by Section 13 or 15 (d) of the Securities ExchangeAct of 1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   ý  Yes   o  No

 

Indicate by check mark whetherregistrant is an accelerated filer (as defined in Rule 12b-2 of the SecuritiesExchange Act of 1934).   ý  Yes   o  No

 

At November 13, 2003, the Company had25,738,630 shares of common stock outstanding.

 

 

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**SEACOAST FINANCIAL SERVICES CORPORATION**

**INDEX**

 
| **PART I -**                    | **FINANCIAL INFORMATION**                                                               |                                                                                                             |
|---------------------------------|-----------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------|
|                            |                                                                                    |
| Item  1                         | Financial  Statements (Unaudited)                                                       |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
|                            |                                                                                    | Consolidated Balance Sheets  at September 30, 2003and December 31, 2002                                          |   |
|                            |                                                                                    |                                                                                                             |   |
|                            |                                                                                    | Consolidated  Statements of Income for the three months and nine monthsended September 30, 2003 and 2002         |   |
|                            |                                                                                    |                                                                                                             |   |
|                            |                                                                                    | Consolidated  Statements of Changes in Stockholders' Equityfor the nine months ended September 30, 2003 and 2002 |   |
|                            |                                                                                    |                                                                                                             |   |
|                            |                                                                                    | Consolidated  Statements of Cash Flows for the nine months endedSeptember 30, 2003 and 2002                      |   |
|                            |                                                                                    |                                                                                                             |   |
|                            |                                                                                    | Notes to  Consolidated Financial Statements                                                                      |   |
|                            |                                                                                    |                                                                                                             |
| Item 2                          | Management's Discussion and  Analysis of Financial Condition and  Results of Operations |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item  3                         | Quantitative  and Qualitative Disclosures about Market Risk                             |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item 4                          | Controls and  Procedures                                                                |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| **PART II - OTHER INFORMATION** |                                                                                    |
|                            |                                                                                    |                                                                                                             |
| Item 1                          | Legal Proceedings                                                                       |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item  2                         | Changes  in Securities and Use of Proceeds                                              |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item 3                          | Defaults upon  Senior Securities                                                        |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item  4                         | Submission  of Matters to a Vote of Security Holders                                    |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item 5                          | Other Information                                                                       |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| Item 6                          | Exhibits and  Reports on Form 8-K                                                       |                                                                                                             |
|                            |                                                                                    |                                                                                                             |
| **SIGNATURES**                  |                                                                                    |
|                                 |                                                                                         |                                                                                                                  |  |  |

 

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands) (Unaudited)**

** **
|                                                                                                                                 |   | **September 30,  2003** |      | **December 31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-----------|------------------------|--------|
| **ASSETS:**                                                                                                                          |   |                    |      |                   |   |
| Cash and due from banks                                                                                                              |   | $                       | 148,951   |                   | $      | 109,223 |   |
| Federal funds sold                                                                                                                   |   | 187,797                 |      | 11,056                 |   |
| Short-term investments                                                                                                               |   | 10,000                  |      | —                 |   |
| Total cash and cash equivalents                                                                                                      |   | 346,748                 |      | 120,279                |   |
| Investment securities  —                                                                                                   |   |                    |      |                   |   |
| Available-for-sale, at fair value                                                                                                    |   | 327,353                 |      | 426,791                |   |
| Held to maturity, at amortized cost (fair  value $18,865 and $19,448)                                                                |   | 18,197                  |      | 18,721                 |   |
| Restricted equity securities                                                                                                         |   | 55,623                  |      | 44,243                 |   |
| Loans held-for-sale                                                                                                                  |   | 4,738                   |      | 6,183                  |   |
| Loans                                                                                                                                |   | 3,534,439               |      | 2,991,171              |   |
| Less allowance for loan losses                                                                                                       |   | (43,072                 | )         | (34,354                | )      |
| Net loans                                                                                                                            |   | 3,491,367               |      | 2,956,817              |   |
| Accrued interest receivable                                                                                                          |   | 17,859                  |      | 16,055                 |   |
| Banking premises and equipment, net                                                                                                  |   | 63,099                  |      | 53,945                 |   |
| Other real estate owned and repossessed  autos                                                                                       |   | 235                     |      | 1,350                  |   |
| Net deferred tax asset                                                                                                               |   | 5,620                   |      | 9,645                  |   |
| Goodwill (Note 3)                                                                                                                    |   | 113,980                 |      | 33,903                 |   |
| Identifiable intangible assets (Note 3)                                                                                              |   | 7,533                   |      | 1,564                  |   |
| Other assets                                                                                                                         |   | 24,242                  |      | 11,549                 |   |
| Total assets                                                                                                                         |   | $                       | 4,476,594 |                   | $      | 3,701,045 |   |
|                                                                                                                                 |   |                    |      |                   |   |
| **LIABILITIES AND  STOCKHOLDERS’ EQUITY:**                                                                                      |   |                    |      |                   |   |
| Deposits                                                                                                                             |   | $                       | 2,988,479 |                   | $      | 2,403,875 |   |
| Short-term borrowings                                                                                                                |   | 50,211                  |      | 36,128                 |   |
| Federal Home Loan Bank advances                                                                                                      |   | 953,608                 |      | 858,804                |   |
| Other borrowings                                                                                                                     |   | 1,717                   |      | 1,772                  |   |
| Mortgagors’ escrow payments                                                                                                     |   | 927                     |      | 4,489                  |   |
| Accrued expenses and other liabilities                                                                                               |   | 29,302                  |      | 21,626                 |   |
| Total liabilities                                                                                                                    |   | 4,024,244               |      | 3,326,694              |   |
|                                                                                                                                 |   |                    |      |                   |   |
| Guaranteed Preferred Beneficial Interests  in Seacoast Junior Subordinated Deferrable Interest Debentures (Note 6)                   |   | 69,459                  |      | 54,863                 |   |
|                                                                                                                                 |   |                    |      |                   |   |
| Stockholders’ equity (Notes 7, and 8):                                                                                          |   |                    |      |                   |   |
| Preferred stock, par value $.01 per share;  authorized 10,000,000 shares; none issued                                                |   | —                  |      | —                 |   |
| Common stock, par value $.01 per share;  authorized 100,000,000 shares; 30,227,555 shares issued in 2003; 26,758,136  issued in 2002 |   | 302                     |      | 268                    |   |
| Additional paid-in capital                                                                                                           |   | 226,632                 |      | 154,361                |   |
| Retained earnings                                                                                                                    |   | 227,949                 |      | 216,632                |   |
| Treasury stock, at cost (4,490,925 shares  in 2003 and 3,385,562 shares in 2002)                                                     |   | (71,419                 | )         | (49,033                | )      |
| Accumulated other comprehensive income                                                                                               |   | 9,149                   |      | 8,330                  |   |
| Unearned compensation - ESOP and restricted  stock                                                                                   |   | (9,409                  | )         | (10,766                | )      |
| Shares held in employee trust                                                                                                        |   | (313                    | )         | (304                   | )      |
| Total stockholders’ equity                                                                                                      |   | 382,891                 |      | 319,488                |   |
| Total liabilities and stockholders’ equity                                                                                      |   | $                       | 4,476,594 |                   | $      | 3,701,045 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

** **

1

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(In thousands, except per share amounts) (Unaudited)**

 
|                                                                                   |   | **Three Months********Ended September 30,** |   | **Nine Months********Ended September 30,** |   |
|----------------------------------------------------------------------------------------|--------|---------------------------------------------|--------|--------------------------------------------|--------|
|                                                                                   |   | **2003**                                    |   | **2002**                                   |   | **2003** |   | **2002** |   |
| INTEREST AND DIVIDEND INCOME                                                           |   |                                        |   |                                       |   |   |   |   |   |
| Loans                                                                                  |   | $                                           | 54,767 |                                       | $      | 48,339 |   | $ | 153,550 |   | $ | 142,441 |   |
| Investment securities                                                                  |   | 4,446                                       |   | 6,045                                      |   | 14,329 |   | 18,443 |   |
| Federal funds sold and short-term investments                                          |   | 214                                         |   | 686                                        |   | 427 |   | 1,421 |   |
| Total interest and dividend income                                                     |   | 59,427                                      |   | 55,070                                     |   | 168,306 |   | 162,305 |   |
| INTEREST EXPENSE                                                                       |   |                                        |   |                                       |   |   |   |   |   |
| Deposits                                                                               |   | 11,623                                      |   | 13,184                                     |   | 33,937 |   | 39,964 |   |
| Borrowed funds                                                                         |   | 10,536                                      |   | 10,854                                     |   | 31,331 |   | 32,273 |   |
| Total interest expense                                                                 |   | 22,159                                      |   | 24,038                                     |   | 65,268 |   | 72,237 |   |
| Net interest income                                                                    |   | 37,268                                      |   | 31,032                                     |   | 103,038 |   | 90,068 |   |
| PROVISION FOR LOAN LOSSES                                                              |   | 2,197                                       |   | 1,850                                      |   | 6,371 |   | 5,385 |   |
| Net interest income after provision for loan  losses                                   |   | 35,071                                      |   | 29,182                                     |   | 96,667 |   | 84,683 |   |
| NONINTEREST INCOME                                                                     |   |                                        |   |                                       |   |   |   |   |   |
| Deposit and other banking fees                                                         |   | 3,283                                       |   | 2,820                                      |   | 8,834 |   | 7,622 |   |
| Loan servicing fees, net                                                               |   | 72                                          |   | 95                                         |   | 414 |   | 528 |   |
| Merchant card fee income, net                                                          |   | 244                                         |   | 263                                        |   | 506 |   | 595 |   |
| Other loan fees                                                                        |   | 505                                         |   | 508                                        |   | 1,388 |   | 1,075 |   |
| Gain (loss) on investment securities, net                                              |   | 28                                          |   | (71                                        | )      | 349 |   | (163 | ) |
| Gain on sales of loans, net                                                            |   | 149                                         |   | 22                                         |   | 322 |   | 205 |   |
| Other income (loss)                                                                    |   | 425                                         |   | (80                                        | )      | 947 |   | 521 |   |
| Total noninterest income                                                               |   | 4,706                                       |   | 3,557                                      |   | 12,760 |   | 10,383 |   |
| NONINTEREST EXPENSE                                                                    |   |                                        |   |                                       |   |   |   |   |   |
| Salaries and employee benefits                                                         |   | 10,601                                      |   | 9,321                                      |   | 31,535 |   | 28,017 |   |
| Occupancy and equipment expenses                                                       |   | 3,073                                       |   | 2,350                                      |   | 8,592 |   | 6,797 |   |
| Data processing expenses                                                               |   | 2,482                                       |   | 2,124                                      |   | 6,720 |   | 5,624 |   |
| Marketing expenses                                                                     |   | 876                                         |   | 751                                        |   | 2,368 |   | 1,994 |   |
| Professional services expenses                                                         |   | 1,605                                       |   | 526                                        |   | 3,366 |   | 1,757 |   |
| Amortization of identifiable intangibles (Note 3)                                      |   | 506                                         |   | 204                                        |   | 946 |   | 618 |   |
| Other operating expenses                                                               |   | 2,535                                       |   | 1,964                                      |   | 8,785 |   | 6,410 |   |
| Total noninterest expense                                                              |   | 21,678                                      |   | 17,240                                     |   | 62,312 |   | 51,217 |   |
| Minority interest expense (Notes 6, and 10)                                            |   | 1,498                                       |   | 1,222                                      |   | 4,202 |   | 1,629 |   |
| Income before provision for income taxes                                               |   | 16,601                                      |   | 14,277                                     |   | 42,913 |   | 42,220 |   |
| PROVISION FOR INCOME TAXES                                                             |   | 6,901                                       |   | 5,019                                      |   | 22,926 |   | 14,804 |   |
| Net income                                                                             |   | $                                           | 9,700  |                                       | $      | 9,258 |   | $ | 19,987 |   | $ | 27,416 |   |
| EARNINGS PER SHARE  (Note 5)                                                      |   |                                        |   |                                       |   |   |   |   |   |
| Basic                                                                                  |   | $                                           | 0.38   |                                       | $      | 0.41 |   | $ | 0.86 |   | $ | 1.20 |   |
| Diluted                                                                                |   | $                                           | 0.38   |                                       | $      | 0.40 |   | $ | 0.84 |   | $ | 1.17 |   |
| Weighted average common shares outstanding                                             |   | 25,994,579                                  |   | 23,948,700                                 |   | 23,913,539 |   | 24,184,780 |   |
| Weighted average unallocated ESOP shares and  unvested restricted stock                |   | (795,043                                    | )      | (1,154,574                                 | )      | (700,803 | ) | (1,246,700 | ) |
| Weighted average common shares outstanding – basic                                |   | 25,199,536                                  |   | 22,794,126                                 |   | 23,212,736 |   | 22,938,080 |   |
| Diluted effect of common stock equivalents                                             |   | 460,846                                     |   | 541,943                                    |   | 478,808 |   | 558,004 |   |
| Weighted average common and common stock  equivalentshares  outstanding – diluted |   | 25,660,382                                  |   | 23,336,069                                 |   | 23,691,544 |   | 23,496,084 |   |

 

See accompanying notes to the unauditedconsolidated financial statements.

 

2

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITY**

# **FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002**

**(In thousands, except per share amounts) (Unaudited)**

** **
|                                                                                                        |   | **Common********Stock** |   | **Additional********Paid-In********Capital** |   | **Retained********Earnings** |   | **Treasury********Stock** |    | **Accumulated********Other********Comprehensive********Income** |   | **Unearned********Compensation********ESOP********/Restricted********Stock** |   | **Shares-Held********In Employee********Trust** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|----------------------------------------------|--------|------------------------------|--------|---------------------------|---------|-----------------------------------------------------------------|--------|------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|-----------|--------|
| Balance, December 31, 2001                                                                                  |   | $                       | 268    |                                         | $      | 153,216                      |   | $                         | 189,743 |                                                            | $      | (28,185                                                                      | )      | $                                               | 3,531  |      | $      | (12,575 | ) | $ | (274 | ) | $ | 305,724 |   |
| Exercise of stock options                                                                                   |   | —                  |   | 141                                          |   | —                       |   | 273                       |    | —                                                          |   | —                                                                       |   | —                                          |   | 414       |   |
| Repurchase of common stock (Note 7)                                                                         |   | —                  |   | —                                       |   | —                       |   | (9,965                    | )       | —                                                          |   | —                                                                       |   | —                                          |   | (9,965    | )      |
| Net income                                                                                                  |   | —                  |   | —                                       |   | 27,416                       |   | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | 27,416    |   |
|                                                                                                        |   |                    |   |                                         |   |                         |   |                      |    |                                                            |   |                                                                         |   |                                            |   |      |   |
| Other comprehensive income — Change in unrealized  gain on securities available for sale, net of taxes |   | —                  |   | —                                       |   | —                       |   | —                    |    | 3,463                                                           |   | —                                                                       |   | —                                          |   | 3,463     |   |
| Comprehensive income                                                                                        |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | 30,879    |   |
| Cash dividends - $.31 per share                                                                             |   | —                  |   | —                                       |   | (7,200                       | )      | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | (7,200    | )      |
| Amortization of unearned compensation                                                                       |   | —                  |   | 449                                          |   | —                       |   | —                    |    | —                                                          |   | 1,357                                                                        |   | —                                          |   | 1,806     |   |
| Other                                                                                                       |   | —                  |   | (29                                          | )      | —                       |   | —                    |    | —                                                          |   | —                                                                       |   | (24                                             | )      | (53       | )      |
| Balance, September 30, 2002                                                                                 |   | $                       | 268    |                                         | $      | 153,777                      |   | $                         | 209,959 |                                                            | $      | (37,877                                                                      | )      | $                                               | 6,994  |      | $      | (11,218 | ) | $ | (298 | ) | $ | 321,605 |   |
|                                                                                                        |   |                    |   |                                         |   |                         |   |                      |    |                                                            |   |                                                                         |   |                                            |   |      |   |
| Balance, December 31, 2002                                                                                  |   | $                       | 268    |                                         | $      | 154,361                      |   | $                         | 216,632 |                                                            | $      | (49,033                                                                      | )      | $                                               | 8,330  |      | $      | (10,766 | ) | $ | (304 | ) | $ | 319,488 |   |
| Common stock issued: 3,469,419 shares at $20.72                                                             |   | 34                      |   | 71,852                                       |   | —                       |   | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | 71,886    |   |
| Exercise of stock options                                                                                   |   | —                  |   | 54                                           |   | —                       |   | 160                       |    | —                                                          |   | —                                                                       |   | —                                          |   | 214       |   |
| Repurchase of common stock (Note 7)                                                                         |   | —                  |   | —                                       |   | —                       |   | (22,546                   | )       | —                                                          |   | —                                                                       |   | —                                          |   | (22,546   | )      |
| Net income                                                                                                  |   | —                  |   | —                                       |   | 19,987                       |   | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | 19,987    |   |
| Other comprehensive income — Change in unrealized  gain on securities available for sale, net of taxes |   | —                  |   | —                                       |   | —                       |   | —                    |    | 819                                                             |   | —                                                                       |   | —                                          |   | 819       |   |
| Comprehensive income (Note 4)                                                                               |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | 20,806    |   |
| Cash dividends - $.37 per share                                                                             |   | —                  |   | —                                       |   | (8,670                       | )      | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | (8,670    | )      |
| Amortization of unearned compensation                                                                       |   | —                  |   | 414                                          |   | —                       |   | —                    |    | —                                                          |   | 1,357                                                                        |   | —                                          |   | 1,771     |   |
| Amortization of underwriting costs                                                                          |   | —                  |   | (49                                          | )      | —                       |   | —                    |    | —                                                          |   | —                                                                       |   | —                                          |   | (49       | )      |
| Other                                                                                                       |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                                          |   | —                                                                       |   | (9                                              | )      | (9        | )      |
| Balance, September 30, 2003                                                                                 |   | $                       | 302    |                                         | $      | 226,632                      |   | $                         | 227,949 |                                                            | $      | (71,419                                                                      | )      | $                                               | 9,149  |      | $      | (9,409 | ) | $ | (313 | ) | $ | 382,891 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

3

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In thousands) (Unaudited)**

 
|                                                                                                |   | **Nine Months Ended**   |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|--------|
|                                                                                                |   | **September 30,  2003** |   | **September 30,********2002** |   |
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |                    |   |   |   |
| Net income                                                                                          |   | $                       | 19,987 |   | $ | 27,416 |   |
| Adjustments to reconcile net income to net cash provided  by operating activities —            |   |                    |   |   |   |
| Depreciation                                                                                        |   | 3,960                   |   | 3,293 |   |
| Amortization and accretion, net                                                                     |   | 2,075                   |   | 1,213 |   |
| Purchase accounting amortization, net                                                               |   | 414                     |   | 498 |   |
| Stock-based compensation                                                                            |   | 1,771                   |   | 1,805 |   |
| Provision for loan losses                                                                           |   | 6,371                   |   | 5,385 |   |
| (Gain) loss on investment securities, net                                                           |   | (349                    | )      | 163 |   |
| Loss on pension plan curtailment                                                                    |   | —                  |   | 446 |   |
| Other real estate owned income                                                                      |   | —                  |   | (30 | ) |
| (Gain) loss on sale of fixed assets                                                                 |   | 2                       |   | (172 | ) |
| Net (increase) decrease in deferred taxes                                                           |   | 4,025                   |   | (2,351 | ) |
| Originations of loans held-for-sale                                                                 |   | (137,151                | )      | (9,587 | ) |
| Proceeds from sales of loans originated for sale                                                    |   | 138,993                 |   | 21,971 |   |
| Gain on sales of loans, net                                                                         |   | (322                    | )      | (205 | ) |
| Net (increase) decrease in accrued interest  receivable                                             |   | 1,055                   |   | (59 | ) |
| Net decrease in other assets                                                                        |   | 5,862                   |   | 651 |   |
| Net increase (decrease) in accrued expenses and  other liabilities                                  |   | (7,676                  | )      | 9,990 |   |
| Net cash provided by operating activities                                                           |   | 39,017                  |   | 60,427 |   |
|                                                                                                |   |                    |   |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |                    |   |   |   |
| Purchase of securities classified as  available-for-sale                                            |   | (34,933                 | )      | (180,522 | ) |
| Purchase of securities classified as  held-to-maturity                                              |   | (918                    | )      | (1,098 | ) |
| Purchase of restricted equity securities                                                            |   | (2,925                  | )      | (2,597 | ) |
| Proceeds from sales, calls, paydowns and  maturities of securities classified as available-for-sale |   | 137,306                 |   | 164,532 |   |
| Proceeds from calls, paydowns and maturities of  securities classified as held -to-maturity         |   | 1,359                   |   | 2,779 |   |
| Cash paid for acquisition of Bay State Bancorp,  Inc., net of cash acquired                         |   | (36,282                 | )      | — |   |
| Purchase of loans                                                                                   |   | (9,327                  | )      | (12,079 | ) |
| Net increase in loans                                                                               |   | (23,879                 | )      | (290,791 | ) |
| Recoveries of loans previously charged off                                                          |   | 1,063                   |   | 818 |   |
| Proceeds from sales of repossessed assets                                                           |   | 3,082                   |   | 370 |   |
| Proceeds from sales of fixed assets                                                                 |   | —                  |   | 497 |   |
| Purchase of premises and equipment                                                                  |   | (8,183                  | )      | (5,613 | ) |
| Net cash used in investing activities                                                               |   | 26,363                  |   | (323,704 | ) |
|                                                                                                     |        |                         |        |  |  |  |  |

 

**Statement continued on next page.**

 

4

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (Continued)**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002**

**(In thousands) (Unaudited)**

 
|                                                                                                                                                                      |   | **September 30,********2003** |    | **September 30,********2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------------|---------|-------------------------------|--------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                     |   |                          |    |                          |   |
| Increase in NOW, money market deposit and demand  deposit accounts                                                                                                        |   | $                             | 178,223 |                          | $      | 170,754 |   |
| Increase in passbook and other savings accounts                                                                                                                           |   | 33,254                        |    | 36,606                        |   |
| Increase (decrease) in certificates of deposit                                                                                                                            |   | (14,074                       | )       | 33,873                        |   |
| Advances from Federal Home Loan Bank                                                                                                                                      |   | 186,144                       |    | 170,500                       |   |
| Repayments of Federal Home Loan Bank advances                                                                                                                             |   | (216,421                      | )       | (127,067                      | )      |
| Increase in short-term and other borrowings                                                                                                                               |   | 14,007                        |    | 9,036                         |   |
| Increase (decrease) in mortgagors' escrow payments                                                                                                                        |   | (3,562                        | )       | 353                           |   |
| Net proceeds issuance of junior subordinated  deferrable interest debentures                                                                                              |   | 14,520                        |    | 55,017                        |   |
| Exercise of stock options                                                                                                                                                 |   | 160                           |    | 273                           |   |
| Tax benefit of stock awards                                                                                                                                               |   | 54                            |    | 141                           |   |
| Repurchase of common stock                                                                                                                                                |   | (22,546                       | )       | (9,965                        | )      |
| Cash dividends                                                                                                                                                            |   | (8,670                        | )       | (7,200                        | )      |
| Net cash provided by financing activities                                                                                                                                 |   | 161,089                       |    | 332,321                       |   |
|                                                                                                                                                                      |   |                          |    |                          |   |
| Net increase in cash and cash equivalents                                                                                                                                 |   | 226,469                       |    | 69,044                        |   |
| Cash and cash equivalents, beginning of year                                                                                                                              |   | 120,279                       |    | 190,733                       |   |
| Cash and cash equivalents, end of period                                                                                                                                  |   | $                             | 346,748 |                          | $      | 259,777 |   |
|                                                                                                                                                                      |   |                          |    |                          |   |
| Supplemental disclosure of cash flow information:                                                                                                                         |   |                          |    |                          |   |
| Interest paid on deposits and borrowed funds                                                                                                                              |   | 70,049                        |    | 72,584                        |   |
| Income taxes paid                                                                                                                                                         |   | 15,530                        |    | 6,619                         |   |
|                                                                                                                                                                      |   |                          |    |                          |   |
| Supplemental disclosure of noncash transactions:                                                                                                                          |   |                          |    |                          |   |
| Transfers from loans to other real estate owned                                                                                                                           |   | 1,329                         |    | 82                            |   |
| Financed sales of other real estate owned                                                                                                                                 |   | —                        |    | 76                            |   |
|                                                                                                                                                                      |   |                          |    |                          |   |
| In conjunction with the purchase acquisition  detailed in Note 2 to the Consolidated Financial Statements, assets were  acquired andliabilities  were assumed as follows: |   |                          |    |                          |   |
| Fair value of assets acquired                                                                                                                                             |   | $                             | 683,097 |                          | $      | — |   |
| Less liabilities assumed                                                                                                                                                  |   | 548,603                       |    | —                        |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

5

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2003**

**(In thousands, except per share data and as noted)(Unaudited)**

 

**(1)****              BASIS OFPRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

The unaudited consolidated financialstatements of Seacoast Financial Services Corporation and its wholly-ownedsubsidiaries, Compass Bank for Savings ("Compass"), Nantucket Bank,Lighthouse Securities Corporation, and Seacoast Capital Trust I and II(collectively referred to herein as “the Company") presented herein shouldbe read in conjunction with the consolidated financial statements of theCompany as of and for the year ended December 31, 2002 included as part of itsannual report on Form 10-K.

 

In the opinion of management, theaccompanying unaudited financial statements reflect all adjustments (consistingof normal recurring adjustments) and disclosures necessary for a fairpresentation.  Management is required tomake estimates and assumptions that affect amounts reported in the financialstatements.  Actual results could differsignificantly from those estimates.

 

**Summary of Significant Accounting Policies**

 

The Company’s significant accounting policiesare described in Note 1 of the Notes to Consolidated Financial Statements includedin its Form 10-K for the year ended December 31, 2002 filed with the Securitiesand Exchange Commission.  For interimreporting purposes, the Company follows the same significant accountingpolicies.  Certain reclassificationshave been made to prior year balances to conform to the current yearpresentation.

 

**Stock-Based Compensation**

 

The Company applies APB Opinion No. 25 inaccounting for stock options which measures compensation cost for stock basedcompensation plans as the difference between the exercise price of optionsgranted and the fair market value of the Company’s stock at the grantdate.  This generally does not result inany compensation charges to earnings. Below, the Company discloses pro forma net income and earnings per shareas if compensation was measured at the date of grant based on the fair value ofthe award and recognized over the service period.  This is required by SFAS No. 123 for all companies that elect tocontinue using APB Opinion No. 25 for stock option grants.  On May 7, 2003, the FASB concluded thatstock-based compensation should be accounted for using the modified grant-datemeasurement approach as defined in SFAS No. 123.  The FASB plans to issue an exposure draft later this year, whichcould become effective in 2004.  Until anew statement is issued, the provisions of SFAS No. 123 remain in effect.  There were 122,500 and 15,000 stock optiongrants issued during the three months ended September 30, 2003 and 2002,respectively.  During the nine monthsending September 30, 2003 and 2002, stock option grants issued totaled 122,500and 15,000, respectively.

 

Had the Company applied SFAS No. 123 inaccounting for its stock option grants, net income and EPS (basic and diluted)would have been reduced to the pro forma amounts indicated below:

 
|         |   | **Three Months Ended  September 30,** |   | **Nine Months Ended****September 30,** |   |
|--------------|--------|---------------------------------------|--------|----------------------------------------|--------|
|         |   | **2003**                              |   | **2002**                               |   | **2003** |   | **2002** |   |
| Net income:  |   |                                  |   |                                   |   |   |   |   |   |
| As reported  |   | $                                     | 9,700  |                                   | $      | 9,258 |   | $ | 19,987 |   | $ | 27,416 |   |
| Pro forma    |   | 9,589                                 |   | 9,137                                  |   | 19,662 |   | 27,051 |   |
| Basic EPS:   |   |                                  |   |                                   |   |   |   |   |   |
| As reported  |   | 0.38                                  |   | 0.40                                   |   | 0.86 |   | 1.20 |   |
| Pro forma    |   | 0.38                                  |   | 0.40                                   |   | 0.85 |   | 1.18 |   |
| Diluted EPS: |   |                                  |   |                                   |   |   |   |   |   |
| As reported  |   | 0.38                                  |   | 0.40                                   |   | 0.84 |   | 1.17 |   |
| Pro forma    |   | 0.37                                  |   | 0.39                                   |   | 0.83 |   | 1.15 |   |
|              |        |                                       |        |                                        |        |  |  |  |  |  |  |  |  |

 

6

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**(2)****              ACQUISITION**

 

On May 31, 2003, the Company completed theacquisition of Bay State Bancorp, Inc. and its wholly owned banking subsidiary,Bay State Federal Savings Bank (Bay State). The acquisition was accounted for as a purchase and, as such, wasincluded in our results of operations from the date of acquisition.  The following table summarizes theacquisition:

 

**(Dollars and shares in millions)**

** **
| **Balance at****Acquisition Date** |   | **Transaction Related Items** |   |
|------------------------------------|--------|-------------------------------|--------|
| **Assets**                         |   | **Equity**                    |   | **Goodwill** |   | **Other****IdentifiableIntangibles** |   | **Cash****Paid** |   | **Shares  Issued** |   | **Total  Purchase****Price** |   |
| $                                  | 579.2  |                          | $      | 48.8 |   | $ | 81.6 |   | $ | 6.9 |   | $ | 61.0 |   | 3.5 |   | $ | 134.5 |   |
|                                    |        |                               |        |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **

The following table summarizes the estimatedfair value of the assets acquired and liabilities assumed for Bay State at thedate of acquisition.

 
| **Assets:**               |   |    |    |
|---------------------------|--------|---------|---------|
| Investments               |   | $       | 27,415  |   |
| Loans, net                |   | 511,651 |    |
| Premises and equipment    |   | 4,789   |    |
| Goodwill                  |   | 81,616  |    |
| Other Intangible          |   | 6,915   |    |
| Other assets              |   | 50,711  |    |
| Total assets assumed      |   | $       | 683,097 |   |
|                      |   |    |    |
| **Liabilities:**          |   |    |    |
| Deposits                  |   | 389,202 |    |
| Borrowings                |   | 138,413 |    |
| Other liabilities         |   | 20,988  |    |
| Total liabilities assumed |   | 548,603 |    |
| Net assets acquired       |   | $       | 134,494 |   |

 

The Company expects that some adjustments ofthe estimated fair values assigned to the assets acquired and liabilitiesassumed at the acquisition date will be recorded after September 30, 2003,although such adjustments are not expected to be significant.

 

The Company accrued $1.0 million ofmerger-related costs with an offsetting charge to goodwill.  Prior to the acquisition date, Bay Staterecorded cash and non-cash merger related charges.  Contractual obligations payable to certain executives of BayState upon a change in control totaling $12.9 million were accrued by Bay Statein May 2003.

 

7

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**(3)****              GOODWILL AND OTHERINTANGIBLE ASSETS**

 

The changes in the carrying value of goodwilland other intangible assets for the nine months ended September 30, 2003 are asfollows:

 
|                            |   | **Identifiable Intangibles** |       |
|---------------------------------|--------|------------------------------|------------|
|                            |   | **Goodwill**                 |       | **Core Deposit  Intangibles** |   | **Other****IdentifiableIntangibles** |   | **Total****IdentifiableIntangibles** |   |
|                            |   |                         | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Balance, December 31, 2002      |   | $                            | 33,903     |   | $ | 1,539 |   | $ | 25 |   | $ | 1,564 |   |
| Recorded during the period      |   | 80,077                       |       | 4,075 |   | 2,840 |   | 6,915 |   |
| Amortization expense            |   | —                       |       | (615 | ) | (331 | ) | (946 | ) |
| Impairment recognized           |   | —                       |       | — |   | — |   | — |   |
| Balance, September 30, 2003     |   | $                            | 113,980    |   | $ | 4,999 |   | $ | 2,534 |   | $ | 7,533 |   |
|                            |   |                         |       |   |   |   |   |   |   |
| Estimated amortization expense: |   |                         |       |   |   |   |   |   |   |
| Remaining                       | 2003   |                         | —     |   | 258 |   | 239 |   | 497 |   |
|                            | 2004   |                         | —     |   | 960 |   | 954 |   | 1,914 |   |
|                            | 2005   |                         | —     |   | 816 |   | 947 |   | 1,763 |   |
|                            | 2006   |                         | —     |   | 734 |   | 394 |   | 1,128 |   |
|                            | 2007   |                         | —     |   | 653 |   | — |   | 653 |   |

 

The components of other intangible assets follows:

 
|                     |   | **September 30, 2003**       |       |
|--------------------------|--------|------------------------------|------------|
|                     |   | **Gross Carrying****Amount** |       | **Accumulated****Amortization** |   | **Net Carrying****Amount** |   |
|                     |   |                         | ** ** |   | ** ** |   | ** ** |
| Core deposit intangibles |   | $                            | 8,499      |   | $ | 3,500 |   | $ | 4,999 |   |
| Other intangibles        |   | 3,060                        |       | 526 |   | 2,534 |   |
| Total                    |   | $                            | 11,559     |   | $ | 4,026 |   | $ | 7,533 |   |

 

**(4)****              COMPREHENSIVE INCOME**

 

The components of comprehensive income forthe Company are net income and unrealized gains (losses) on securitiesavailable for sale, net of tax.  Thefollowing is a reconciliation of comprehensive income for the nine months endedSeptember 30, 2003 and 2002.

 
|                                                                                                                         |   | **Nine Months Ended****September 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|
|                                                                                                                         |   | **2003**                               |   | **2002** |   |
| Net income                                                                                                                   |   | 19,987                                 |   | 27,416 |   |
| Other comprehensive income, net of tax:                                                                                      |   |                                   |   |   |   |
| Unrealized gains on available for sale  securities:                                                                          |   |                                   |   |   |   |
| Unrealized holding gains arising during the  period net of taxes of $750 and $1,826, respectively                            |   | 1,046                                  |   | 3,357 |   |
| Less: reclassification adjustment for gains  (losses) included in net income, net of taxes of $122 and ($57),  respectively, |   | (227                                   | )      | 106 |   |
| Other comprehensive income, net                                                                                              |   | 819                                    |   | 3,463 |   |
| Comprehensive income                                                                                                         |   | $                                      | 20,806 |   | $ | 30,879 |   |
|                                                                                                                              |        |                                        |        |  |  |  |  |

 

 

8

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** **

**(5)****              EARNINGS PER SHARE(EPS)**

 

Basic EPS was computed based on the weightedaverage number of shares outstanding during the periods.  Unallocated ESOP shares and unvestedrestricted stock awards are not considered outstanding for purposes of the computationof basic EPS.  Diluted EPS reflects thepotential dilution that could occur if contracts to issue common stock wereexercised and has been computed after giving consideration to the dilutiveeffect of stock options, stock awards and shares held in an employee trust.

 

**(6)****              CAPITAL TRUSTSECURITIES**

 

Thefollowing is a summary of the capital trust securities outstanding as ofSeptember 30, 2003:

 
| **Name**                   |   | **Issuance  Date** |   | **Amount** |   | **Stated  Rate** |   | **Maturity  Date** |     | **Call  Date** |     |
|----------------------------|--------|--------------------|--------|------------|--------|------------------|--------|--------------------|----------|----------------|----------|
| Seacoast  Capital Trust I  |   | 05/28/02           |   | $          | 54,930 |             | 8.50   | %                  | 06/30/32 |           | 06/30/07 |   |
| Seacoast  Capital Trust II |   | 03/27/03           |   | 14,529     |   | 6.65             | %      | 04/07/33           |     | 04/07/08       |     |
|                       |   |               |   | $          | 69,459 |             |   |               |     |           |     |   |

 

**(7)****              SHAREREPURCHASE PROGRAMS**

 

During thethree months ended September 30, 2003, Seacoast repurchased 755,000 shares ofits outstanding common stock at an average price of $21.00.  At September 30, 2003, there were a total of2,171,459 shares remaining under existing repurchase authorizations.

 

**(8)****              QUARTERLY CASHDIVIDEND**

 

On October 23, 2003, the Board of Directorsvoted for the payment of a quarterly cash dividend of $.13 per share.  The dividend is payable on November 21, 2003to stockholders of record on November 7, 2003.

 

**(9)****              STATE TAX ASSESSMENT**

 

On March 5, 2003, a retroactive change toMassachusetts tax law was implemented which specifically denies the deductionfor dividends received from a real estate investment trust subsidiary (REIT) indetermining Massachusetts taxable income. The law applies retroactively to tax years ending on or after December31, 1999.  On June 24, 2003, Seacoastannounced that it had entered into a settlement with the MassachusettsDepartment of Revenue (“DOR”) to pay $8.5 million ($5.5 million on an after-taxbasis) representing approximately 50% of the disputed tax liability for whichthe Company previously accrued during the first quarter of 2003 approximately$11.2 million, net of taxes.  Includedin the second quarter of 2003, is a credit of $5.3 million resulting from thesettlement.

 

**(10)****       RECENT ACCOUNTINGPRONOUNCEMENTS**

 

In January 2003, the FASB issued FASBInterpretation No. 46, “Consolidation of Variable Interest Entities, aninterpretation of ARB No. 51” (“FIN 46”). FIN 46 provides a new framework for identifying variable interestentities (“VIEs”) and determining when a company should include the assets,liabilities, noncontrolling interests and results of activities of a VIE in itsconsolidated financial statements.  FIN46 is effective immediately for VIEs created after January 31, 2003.  On October 8, 2003, the FASB deferred to thefourth quarter of 2003, the implementation date for FIN 46 as it applies tovariable interest entities that existed prior to February 1, 2003.  The Company is currently evaluating theapplicability of FIN 46.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Financial Instruments with Characteristics of BothLiabilities and Equity.”  The statementrequires that certain financial instruments with characteristics of bothliabilities and equity be classified as a liability.  This statement is effective for financial instruments enteredinto or modified after May 31, 2003, and July 1, 2003 for all other financialinstruments.

 

9

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On November 6, 2003, the FASB indefinitelysuspended the guidance in SFAS No. 150 as it relates to mandatorily redeemablefinancial instruments issued by limited life entities.  The Company issued a press release onOctober 23, 2003, which reported the Company’s results for the third quarter of2003 based on the then existing classification requirements contained withinSFAS No. 150 and effective as of July 1, 2003. Based on this suspension of the guidance in SFAS No. 150, the Companyhas classified its manditorily redeemable capital securities consistent withprevious quarters.

 

**(11)****       SUBSEQUENT EVENT**

 

On October 21, 2003, the Company announcedthe execution of a definitive agreement to acquire Abington Bancorp, Inc.(Abington).  Under terms of theagreement, each share of Abington common stock will be exchanged for either$34.00 in cash or 1.4468 shares of the Company’s common stock, subject toelection and allocation procedures intended to ensure that, in the aggregate,75% of the Abington shares will be exchanged for shares of the Company’s commonstock.  It is anticipated that the transactionwill be completed in late first quarter or early second quarter of 2004,pending regulatory approvals and the approval of the stockholders ofAbington.  The acquisition, which wasvalued at approximately $139.5 million on the announcement date, will beaccounted for as a purchase in accordance with Statement of FinancialAccounting Standards, No. 142.

 

10

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**Item 2.****Management's Discussion and Analysis of FinancialCondition and Results of Operations**

 

**Forward-Looking Statements**

 

This Form 10-Q contains certain “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.  Whenused in this report, the words or phrases, “will likely result,” “are expectedto,” “will continue,” “is anticipated,” “estimate,” “believe,” or similarexpressions are intended to identify such forward-looking statements.  Actual events could differ materially fromthose anticipated in the forward-looking statements.  Important factors that might cause such a difference include,among other things, general economic conditions, particularly the real estatemarket, in the Company’s primary market area, potential increases in theCompany’s nonperforming assets (as well as increases in the allowance for loanlosses that might be necessary), concentrations of loans in a particulargeographic area or with certain large borrowers, changes in governmentregulation and supervision, including increased deposit insurance premiums orcapital or reserve requirements, changes in interest rates, and increasedcompetition and bank consolidations in the Company’s market area.  These and other factors that might causedifferences between actual and anticipated results, and performance andachievements are discussed in greater detail in this Item 2.

 

**Comparisonof Operating Results for the Quarters Ended September 30, 2003 and 2002**

 

Net income totaled $9.7 million, or $.38 per diluted share, for the quarter ended September 30, 2003, a4.8% increase in earnings when compared to net income of $9.3 million, or $.40per diluted share, for the quarter ended September 30, 2002.  The Company’s financial statements for 2003reflect the acquisition of Bay State from the date of acquisition on May 31,2003.

 

*Interest Income.* Interest income for the quarter ended September 30, 2003 was $59.4million, compared to $55.1 million for the quarter ended September 30, 2002, anincrease of $4.4 million, or 7.9%.  Theincrease in interest income resulted from growth in average interest-earningassets of $672.9 million, or 19.3%, partially offset by a decrease in theoverall yield on interest-earning assets of 61 basis points in the 2003 period,from 6.34% in 2002 to 5.73% in 2003. The principal areas of growth in average balances were related to realestate loans (up $710.7 million, or 37.2%), indirect auto loans (up $82.5million, or 11.4%), and commercial loans (up $26.8 million, or 21.7%).  The growth in real estate loans resultedprimarily from the acquisition of Bay State on May 31, 2003 and to a lesserextent, originations during the period. Late in the quarter ending September 30, 2003, the Company sold $90.4million of residential real estate loans. The increase in indirect auto loans resulted from the favorable interestrate environment during the period and the continued geographic expansion ofthe network of participating dealers. The funding of loan growth and the purchase of Bay State during theperiod resulted in a decrease in the average balance in investment securitiesof $139.2 million, or 20.7%.

 

*Interest Expense. *Interestexpense for the quarter ended September 30, 2003 was $22.2 million compared to$24.0 million for the quarter ended September 30, 2002, a decrease of $1.9million, or 7.8%.  This decreaseresulted from a 77 basis point decrease in the cost of funds from 3.16% in 2002to 2.39% in 2003, partially offset by a higher average balance ofinterest-bearing liabilities (up $667.1 million, or 21.9%), primarily due tothe acquisition of Bay State on May 31, 2003. Average interest-bearing depositbalances increased $510.2 million, or 23.6%, during the quarter ended September30, 2003 compared to the same period in 2002. Average interest-bearing deposit balances increased due to theacquisition of Bay State on May 31, 2003. The cost of funds on interest-bearing deposits decreased 70 basis pointsfrom 2.44% in 2002 to 1.74% in 2003.

 

Interestexpense on borrowed funds decreased $318,000 in the quarter ended September 30,2003, primarily the result of a decrease of 87 basis points in the average ratepaid on borrowed funds to 4.08% in 2003 from 4.95% in 2002.  The decrease was partially offset by anincrease in the average balance of such funds during the period (up $156.9million, or 17.9%).

 

The decrease in the cost of funds and the lower yields earned oninterest-earning assets are reflective of the interest rate reductionsimplemented by the Federal Reserve during the period.

 

11

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The following table presents averagebalances, interest income and expense and yields earned or rates paid on themajor categories of assets and liabilities for the periods                 indicated.(unaudited)

 
|                                            |   | **Three Months Ended September 30,** |      |
|-------------------------------------------------|--------|--------------------------------------|-----------|
|                                            |   | **2003**                             |      | **2002** |   |
|                                            |   | **Average****Balance**               |      | **Interest** |   | **Average****Yield/Cost (1)** |   | **Average****Balance** |   | **Interest** |   | **Average****Yield/Cost (1)** |   |
|                                            |   | **(In thousands)**                   |      |
| **Assets:**                                     |   |                                 |      |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                        |   |                                 |      |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans (2)                              |   | $                                    | 2,620,284 |   | $ | 40,738 |   | 6.22 | % | $ | 1,909,601 |   | $ | 33,303 |   | 6.98 | % |
| Commercial loans (2)                            |   | 150,387                              |      | 2,032 |   | 5.40 |   | 123,617 |   | 1,917 |   | 6.20 |   |
| Indirect auto loans (2)                         |   | 807,099                              |      | 11,239 |   | 5.57 |   | 724,575 |   | 12,147 |   | 6.71 |   |
| Other consumer loans (2)                        |   | 43,190                               |      | 810 |   | 7.50 |   | 51,130 |   | 1,027 |   | 8.03 |   |
| Total loans                                     |   | 3,620,960                            |      | 54,819 |   | 6.06 |   | 2,808,923 |   | 48,394 |   | 6.89 |   |
| Short-term investments                          |   | 108,664                              |      | 214 |   | 0.79 |   | 171,555 |   | 686 |   | 1.60 |   |
| Debt securities (3)                             |   | 350,124                              |      | 3,932 |   | 4.49 |   | 442,793 |   | 5,535 |   | 5.00 |   |
| Equity securities (3)                           |   | 74,269                               |      | 541 |   | 2.91 |   | 57,868 |   | 541 |   | 3.74 |   |
| Total earning assets                            |   | 4,154,017                            |      | 59,506 |   | 5.73 | % | 3,481,139 |   | 55,156 |   | 6.34 | % |
| Allowance for loan losses                       |   | (42,246                              | )         |   |   |   |   | (32,181 | ) |   |   |   |   |
| Non-interest earning assets                     |   | 372,772                              |      |   |   |   |   | 228,774 |   |   |   |   |   |
| Total assets                                    |   | $                                    | 4,484,543 |   |   |   |   |   | $ | 3,677,732 |   |   |   |   |   |
| **Liabilities and Equity:**                     |   |                                 |      |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits:                      |   |                                 |      |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                    |   | $                                    | 352,466   |   | $ | 283 |   | 0.32 | % | $ | 289,231 |   | $ | 234 |   | 0.32 | % |
| Savings accounts                                |   | 401,000                              |      | 819 |   | 0.82 |   | 311,924 |   | 1,047 |   | 1.34 |   |
| Money market savings accounts                   |   | 803,211                              |      | 2,628 |   | 1.31 |   | 545,811 |   | 2,738 |   | 2.01 |   |
| Certificates of deposit                         |   | 1,117,737                            |      | 7,893 |   | 2.82 |   | 1,017,227 |   | 9,165 |   | 3.60 |   |
| Total interest-bearing deposits                 |   | 2,674,414                            |      | 11,623 |   | 1.74 |   | 2,164,193 |   | 13,184 |   | 2.44 |   |
| Borrowed funds:                                 |   |                                 |      |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings (4)                       |   | 44,112                               |      | 94 |   | 0.85 |   | 39,748 |   | 176 |   | 1.77 |   |
| FHLB advances                                   |   | 987,586                              |      | 10,400 |   | 4.21 |   | 834,990 |   | 10,634 |   | 5.09 |   |
| Other borrowings                                |   | 1,727                                |      | 42 |   | 9.73 |   | 1,800 |   | 44 |   | 9.78 |   |
| Total borrowings                                |   | 1,033,425                            |      | 10,536 |   | 4.08 |   | 876,538 |   | 10,854 |   | 4.95 |   |
| Total interest-bearing liabilities              |   | 3,707,839                            |      | 22,159 |   | 2.39 | % | 3,040,731 |   | 24,038 |   | 3.16 | % |
| Demand deposit accounts                         |   | 282,068                              |      |   |   |   |   | 249,969 |   |   |   |   |   |
| Other liabilities and capital securities        |   | 100,794                              |      |   |   |   |   | 75,642 |   |   |   |   |   |
| Total liabilities                               |   | 4,090,701                            |      |   |   |   |   | 3,366,342 |   |   |   |   |   |
| Stockholders’ equity                       |   | 393,842                              |      |   |   |   |   | 311,390 |   |   |   |   |   |
| Total liabilities and Stockholders’ equity |   | $                                    | 4,484,543 |   |   |   |   |   | $ | 3,677,732 |   |   |   |   |   |
| Net interest income (fully-taxable equivalent)  |   |                                 |      | 37,347 |   |   |   |   |   | 31,118 |   |   |   |
| Less: full-taxable equivalent adjustments       |   |                                 |      | (79 | ) |   |   |   |   | (86 | ) |   |   |
| Net interest margin                             |   |                                 |      | $ | 37,268 |   |   |   |   |   | $ | 31,032 |   |   |   |
| Net interest spread (5)                         |   |                                 |      |   |   | 3.34 |   |   |   |   |   | 3.18 |   |
| Net interest margin (6)                         |   |                                 |      |   |   | 3.60 | % |   |   |   |   | 3.58 | % |

 
|                                            |   | **Nine Months Ended September 30** |      |
|-------------------------------------------------|--------|------------------------------------|-----------|
|                                            |   | **2003**                           |      | **2002** |   |
|                                            |   | **Average****Balance**             |      | **Interest** |   | **Average****Yield/Cost (1)** |   | **Average****Balance** |   | **Interest** |   | **Average****Yield/Cost (1)** |   |
|                                            |   | **(In thousands)**                 |      |
| **Assets:**                                     |   |                               |      |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                        |   |                               |      |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans (2)                              |   | $                                  | 2,347,828 |   | $ | 112,201 |   | 6.57 | % | $ | 1,876,995 |   | $ | 99,432 |   | 7.06 | % |
| Commercial loans (2)                            |   | 135,908                            |      | 5,642 |   | 5.65 |   | 123,187 |   | 5,922 |   | 6.41 |   |
| Indirect auto loans (2)                         |   | 786,551                            |      | 33,387 |   | 5.66 |   | 663,913 |   | 34,046 |   | 6.84 |   |
| Other consumer loans (2)                        |   | 43,104                             |      | 2,476 |   | 7.82 |   | 53,270 |   | 3,206 |   | 8.02 |   |
| Total loans                                     |   | 3,313,391                          |      | 153,706 |   | 6.33 |   | 2,717,365 |   | 142,606 |   | 7.00 |   |
| Short-term investments                          |   | 66,963                             |      | 427 |   | 0.85 |   | 117,318 |   | 1,421 |   | 1.61 |   |
| Debt securities (3)                             |   | 382,677                            |      | 12,925 |   | 4.50 |   | 441,918 |   | 16,999 |   | 5.13 |   |
| Equity securities (3)                           |   | 66,319                             |      | 1,490 |   | 3.00 |   | 58,217 |   | 1,537 |   | 3.52 |   |
| Total earning assets                            |   | 3,829,350                          |      | 168,548 |   | 5.99 | % | 3,334,818 |   | 162,563 |   | 6.50 | % |
| Allowance for loan losses                       |   | (38,035                            | )         |   |   |   |   | (31,058 | ) |   |   |   |   |
| Non-interest earning assets                     |   | 288,911                            |      |   |   |   |   | 221,731 |   |   |   |   |   |
| Total assets                                    |   | $                                  | 4,080,226 |   |   |   |   |   | $ | 3,525,491 |   |   |   |   |   |
| **Liabilities and Equity:**                     |   |                               |      |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits:                      |   |                               |      |   |   |   |   |   |   |   |   |   |   |
| NOW accounts                                    |   | $                                  | 315,758   |   | $ | 682 |   | 0.30 | % | $ | 273,136 |   | $ | 818 |   | 0.40 | % |
| Savings accounts                                |   | 362,936                            |      | 2,473 |   | 0.93 |   | 296,569 |   | 3,102 |   | 1.39 |   |
| Money market savings accounts                   |   | 682,094                            |      | 7,055 |   | 1.45 |   | 519,086 |   | 8,075 |   | 2.07 |   |
| Certificates of deposit                         |   | 1,056,240                          |      | 23,727 |   | 3.04 |   | 1,001,285 |   | 27,969 |   | 3.72 |   |
| Total interest-bearing deposits                 |   | 2,417,028                          |      | 33,937 |   | 1.91 |   | 2,090,076 |   | 39,964 |   | 2.55 |   |
| Borrowed funds:                                 |   |                               |      |   |   |   |   |   |   |   |   |   |   |
| Short-term borrowings (4)                       |   | 38,218                             |      | 297 |   | 1.04 |   | 37,486 |   | 597 |   | 2.12 |   |
| FHLB advances                                   |   | 946,243                            |      | 30,906 |   | 4.35 |   | 821,910 |   | 31,547 |   | 5.12 |   |
| Other borrowings                                |   | 1,746                              |      | 128 |   | 9.77 |   | 1,817 |   | 129 |   | 9.47 |   |
| Total borrowings                                |   | 986,207                            |      | 31,331 |   | 4.24 |   | 861,213 |   | 32,273 |   | 5.00 |   |
| Total interest-bearing liabilities              |   | 3,403,235                          |      | 65,268 |   | 2.58 | % | 2,951,289 |   | 72,237 |   | 3.26 | % |
| Demand deposit accounts                         |   | 238,111                            |      |   |   |   |   | 214,172 |   |   |   |   |   |
| Other liabilities and capital securities        |   | 90,227                             |      |   |   |   |   | 45,262 |   |   |   |   |   |
| Total liabilities                               |   | 3,731,573                          |      |   |   |   |   | 3,210,723 |   |   |   |   |   |
| Stockholders’ equity                       |   | 348,653                            |      |   |   |   |   | 314,768 |   |   |   |   |   |
| Total liabilities and Stockholders’ equity |   | $                                  | 4,080,226 |   |   |   |   |   | $ | 3,525,491 |   |   |   |   |   |
| Net interest income (fully-taxable equivalent)  |   |                               |      | 103,280 |   |   |   |   |   | 90,326 |   |   |   |
| Less: full-taxable equivalent adjustments       |   |                               |      | (242 | ) |   |   |   |   | (258 | ) |   |   |
| Net interest margin                             |   |                               |      | $ | 103,038 |   |   |   |   |   | $ | 90,068 |   |   |   |
| Net interest spread (5)                         |   |                               |      |   |   | 3.41 |   |   |   |   |   | 3.24 |   |
| Net interest margin (6)                         |   |                               |      |   |   | 3.60 | % |   |   |   |   | 3.61 | % |

 

----

(1)          Annualized

(2)          Loans on non-accrual status are included inthe average balances.

(3)          Average balances include unrealized gains onsecurities available for sale.  Equitysecurities include marketable equity securities and restricted equitysecurities.

(4)        Short-term borrowing includes immaterialbalances of other borrowings.

(5)          Net interest rate spread represents thedifference between the fully taxable yield on interest-earning assets and thecost of interest-bearing liabilities. 

(6)          Net interest margin represents net interestincome divided by average interest-earning assets (fully taxable equivalent).

 

12

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*Rate/Volume Analysis.*  The following table presents the extent towhich changes in interest rates and changes in volume of interest-earningassets and interest-bearing liabilities have affected the Company’s interestincome and interest expense during the periods indicated.  Information is provided in each categorywith respect to: (i) changes attributable to changes in volume (changes involume multiplied by prior rate); (ii) changes attributable to changes in rate(changes in rate multiplied by prior volume); and (iii) the net change (changein rate times change in volume).  Thenet change has been allocated proportionately to the changes due to volume andthe changes due to rate.

 
|                                            |   | **Three months  ended September 30,  2003 vs. 2002  Increase (decrease) due to** |   | **Nine months  ended September 30,  2003 vs. 2002  Increase (decrease) due to** |   |
|-------------------------------------------------|--------|----------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|--------|
|                                            |   | **Volume**                                                                       |   | **Rate**                                                                        |   | **Net** |   | **Volume** |   | **Rate** |   | **Net** |   |
| Interest-earning  assets:                       |   |                                                                             |   |                                                                            |   |   |   |   |   |   |   |   |   |
| Federal  funds sold and short-term investments  |   | $                                                                                | (198   | )                                                                               | $      | (274 | ) | $ | (472 | ) | $ | (473 | ) | $ | (521 | ) | $ | (994 | ) |
| Debt  securities                                |   | (1,079                                                                           | )      | (524                                                                            | )      | (1,603 | ) | (2,133 | ) | (1,941 | ) | (4,074 | ) |
| Equity  securities                              |   | 134                                                                              |   | (134                                                                            | )      | — |   | 199 |   | (246 | ) | (47 | ) |
| Mortgage  loans                                 |   | 11,353                                                                           |   | (3,911                                                                          | )      | 7,442 |   | 20,900 |   | (8,115 | ) | 12,785 |   |
| Commercial  loans                               |   | 382                                                                              |   | (267                                                                            | )      | 115 |   | 522 |   | (802 | ) | (280 | ) |
| Indirect  auto loans                            |   | 1,289                                                                            |   | (2,197                                                                          | )      | (908 | ) | 5,728 |   | (6,387 | ) | (659 | ) |
| Other  consumer loans                           |   | (152                                                                             | )      | (65                                                                             | )      | (217 | ) | (643 | ) | (87 | ) | (730 | ) |
| Total  interest-earning assets                  |   | 11,729                                                                           |   | (7,372                                                                          | )      | 4,357 |   | 24,100 |   | (18,099 | ) | 6,001 |   |
|                                            |   |                                                                             |   |                                                                            |   |   |   |   |   |   |   |   |   |
| Interest-bearing  liabilities:                  |   |                                                                             |   |                                                                            |   |   |   |   |   |   |   |   |   |
| Deposits:                                       |   |                                                                             |   |                                                                            |   |   |   |   |   |   |   |   |   |
| NOW accounts                                    |   | 50                                                                               |   | (2                                                                              | )      | 48 |   | 102 |   | (238 | ) | (136 | ) |
| Savings  accounts                               |   | 250                                                                              |   | (478                                                                            | )      | (228 | ) | 583 |   | (1,212 | ) | (629 | ) |
| Money market  savings accounts                  |   | 1,033                                                                            |   | (1,143                                                                          | )      | (110 | ) | 1,964 |   | (2,984 | ) | (1,020 | ) |
| Certificates  of deposit                        |   | 844                                                                              |   | (2,116                                                                          | )      | (1,272 | ) | 1,394 |   | (5,636 | ) | (4,242 | ) |
| Total  deposits                                 |   | 2,177                                                                            |   | (3,739                                                                          | )      | (1,562 | ) | 4,043 |   | (10,070 | ) | (6,027 | ) |
|                                            |   |                                                                             |   |                                                                            |   |   |   |   |   |   |   |   |   |
| Borrowed  funds:                                |   |                                                                             |   |                                                                            |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings                          |   | 15                                                                               |   | (100                                                                            | )      | (85 | ) | 6 |   | (307 | ) | (301 | ) |
| FHLB  advances                                  |   | 1,771                                                                            |   | (2,003                                                                          | )      | (232 | ) | 4,414 |   | (5,055 | ) | (641 | ) |
| Total  borrowings                               |   | 1,786                                                                            |   | (2,103                                                                          | )      | (317 | ) | 4,420 |   | (5,362 | ) | (942 | ) |
| Total  interest-bearing liabilities             |   | 3,963                                                                            |   | (5,842                                                                          | )      | (1,879 | ) | 8,463 |   | (15,432 | ) | (6,969 | ) |
| Net interest  income (fully-taxable equivalent) |   | $                                                                                | 7,766  |                                                                            | $      | (1,530 | ) | $ | 6,236 |   | $ | 15,637 |   | $ | (2,667 | ) | $ | 12,970 |   |

 

*Provision for Loan Losses.*  The Company provides for loan losses inorder to maintain the allowance for loan losses at a level that managementestimates is appropriate to absorb losses inherent within the loan portfolio.  In determining the appropriate level of theallowance for loan losses, management considers past and anticipated lossexperience, evaluations of underlying collateral, prevailing economicconditions, the nature and volume of the loan portfolio, risk rating of loans,and the levels of non performing and other classified loans.  The amount of the allowance is estimatedbased on numerous judgments, and ultimate losses may vary from such estimates.  Management assesses the allowance for loanlosses on a quarterly basis and provides for loan losses monthly in order tomaintain the adequacy of the allowance. For a full discussion on the Company’s allowance for loan lossespolicies see “Allowance for Loan Losses” in the Company’s 2002 annual report onForm 10-K.

 

The Companyprovided $2.2 million for loan losses in the quarter ended September 30, 2003compared to $1.9 million in the quarter ended September 30, 2002.  The increase of $347,000 in 2003 wasprimarily attributable to risks associated in the growth in the loanportfolio.  The total allowance of $43.1million at September 30, 2003 represented 1.22% of total loans compared to1.15% at December 31, 2002.  Theallowance for loan losses as a percentage of non-performing loans was 258.1%compared to 244.1% at December 31, 2002. During the year the allowance for loan losses was increased by $6.1million as a result of the Bay State acquisition on May 31, 2003.

 

13

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*Noninterest Income.*  Total noninterest income was$4.7 million for the quarter ended September 30, 2003 compared to $3.6 millionin the same period of 2002, an increase of $1.1 million, or 32.3%.  Of this increase, $362,000 resulted from theacquisition of Bay State.  Otherincome increased $505,000 in 2003 compared to 2002 primarily as a result of acurtailment loss of $446,000 recorded in 2002 related to the curtailment of thedefined benefit pension plan at Nantucket Bank.

 

*Noninterest Expense.* Noninterest expense increased by $4.4 million, or 25.7%, from $17.2million for the quarter ended September 30, 2002 to $21.6 million for thequarter ended September 30, 2003.  Thisincrease reflected increases in salaries and employee benefits ($1.3 million),occupancy and equipment ($723,000), data processing ($358,000), marketingexpenses ($125,000), professional services ($1.1 million), amortization ofintangibles ($302,000), and other noninterest expense ($571,000).

 

Salaries and employeebenefits increased $1.3 million, or 13.7%, during the quarter ended September 30, 2003.  This increase was the result ofsalary increases averaging 4.5%, increases in staffing and overtime related toCompany growth and franchise expansion as well as the Bay State acquisition andthe core data processing conversion, supplemented by increases in employeebenefits.

 

Occupancy andequipment expenses increased $723,000, or 30.8%, during the quarter endedSeptember 30, 2003.  This increase wasprimarily the result of increases in building, equipment and softwaredepreciation, rent and maintenance expenses related to branch expansion and BayState acquisition during the period.

 

Dataprocessing expenses increased $358,000, or 16.9%, during the quarter endedSeptember 30, 2003 due primarily to core processing activities that arevolume-related, increases in the number of retail deposit and loan accounts,ATM transactions and electronic banking. Also, core processing expenses, data communication line and softwaremaintenance expenses increased due to the conversion of the core processingfunctions to another service bureau which was completed in the secondquarter.  In addition, overall dataprocessing expenses increased due to the acquisition of Bay State on May 31,2003.

 

Marketing expensesincreased  $125,000, or 16.6%, during thequarter ended September 30, 2003.  Thisincrease was primarily attributable to overall general increases in marketingand advertising efforts and public relations.

 

Professional servicesexpenses increased $1.1 million, or 205.1%, during the quarter ended September30, 2003. This increase was primarily the result of increases incorporate consulting services, legal and recruitment expenses.  In addition, professional services increasedas a result of the conversion of the data core processing functions and thepending data processing conversion of Bay State scheduled later this year.

 

Amortizationof intangibles increased $302,000, or 148.0%, during the quarter endingSeptember 30, 2003.  This increase isprimarily attributable to an increase in core deposit and non-competeintangibles as a result of the Bay State acquisition.

 

Othernoninterest expense increased $571,000, or 29.1%, during the quarter ended September 30, 2003. The increase wasrelated to increases in postage, telephone, office supplies, repossessions, andsecurity related expenses, and also the Bay State acquisition.

 

*Minority Interest Expense*.  Interest expense of $1.5 million and $1.2million for the quarters ending September 30, 2003 and 2002 respectively,reflects the issuance of $57.5 million of the 8.50% trust preferred securitiesin May 2002 and $15.0 million of pooled 6.65% trust preferred stock in March2003.

 

*Income Taxes.* The effective tax rate for the quarter ended September 30, 2003 was41.6% compared to 35.2% in the same period in 2002.  The increase from 2002 primarily reflects a change inMassachusetts tax law which eliminated the tax benefit attributable to REITdividends.

 

14

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**Comparisonof Operating Results for the Nine Months Ended September 30, 2003 and 2002**

 

Net income amounted to $20.0million, $.84 per diluted share, for the nine months ended September 30, 2003,as compared to net income of $27.4 million, $1.17 per diluted share, in thecorresponding period of 2002.  Thefinancial performance in the first nine months of 2003 was negatively impactedby the recording of a state income tax provision of $4.9 million, net offederal income tax benefit, as well as a charge of $1.0 million representing aninterest tax deficiency on a settlement with the DOR.  (See Note 9)

 

*Interest Income.* Interest income for the nine months ended September 30, 2003 was $168.3million, compared to $162.3 million for the nine months ended September 30,2002, an increase of $6.0 million, or 3.7%. The increase in interest income resulted from growth in averageinterest-earning assets of $494.5 million, or 14.8%, offset by a decrease inthe overall yield on interest-earning assets of 51 basis points from 6.50% in2002 to 5.99% in 2003.  The principalareas of growth in average balances were real estate loans (up $470.8 million,or 25.1%) and indirect auto loans (up $122.6 million, or 18.5%), offset by adecrease in investment securities ($101.5 million, or 16.4%).  Most of the real estate loan growth resultedfrom increased originations and loans acquired through the purchase of BayState on May 31, 2003.  During the ninemonths ending September 30, 2003, the Company sold $102.2 million ofresidential real estate loans.  Theincrease in indirect auto loans resulted from the prevailing favorable interestrate environment and the continued geographic expansion of the network ofparticipating dealers and regions. The decrease in investment securities wasprimarily the result of funding loan growth during the period and cash requiredto purchase Bay State.

 

*Interest Expense.* Interest expense for the nine months ended September 30, 2003 was $65.3million compared to $72.2 million for the nine months ended September 30, 2002,a decrease of $7.0 million, or 9.6%. This decrease resulted from a 68 basis point decrease in the cost offunds from 3.26% in 2002 to 2.58% in 2003, partially offset by a higher averagebalance of interest-bearing liabilities (up $451.9 million, or 15.3%).  The increase in interest-bearing liabilitieswas primarily the result of the acquisition of Bay State on May 31, 2003.

 

Interest expense on borrowedfunds decreased $942,000 in the nine months ended September 30, 2003 to $31.3from $32.2 million due primarily to a decrease of 76 basis points in theaverage rate paid on borrowed funds from 5.0% in 2002 to 4.24% for the ninemonths ended September 2003.  During the2003 period, the average balance of borrowed funds increased $125.0 million, or14.5%, as a result of the purchase of Bay State and to fund loan growth.

 

The current economicenvironment reflects what we believe is a consumer bias to preserve principal,remain liquid and deposit funds into non-time deposit accounts. We believe thatthe current low interest rate environment and stock market volatility, combinedwith the slow growth and employment in the economy, have induced consumers toseek insured deposit accounts that provide a safe haven for their savings.  Material increases in the average balancesof non-time deposits reflect this positioning.   From September 30, 2002 to September 30, 2003 the averagebalance of non-time deposits increased from $1.1 billion to $1.4 billion whilethe cost associated with these accounts decreased 43 basis points from 1.47% in2002 to 1.04% in 2003.  The averagebalance of term deposit accounts increased from $1 billion to $1.1 billionduring the period.  Also, it should benoted that the average balance increase in non-time and term deposits has beeninfluenced, to a lesser extent, by the purchase of Bay State on May 31,2003.  In addition, with the expectationthat the Federal Reserve’s Open Market Committee will not be inclined toimmediately initiate a series of interest rate increases, we believe thatconsumers will continue to invest in non-time deposit accounts.

 

*Provision for Loan Losses.*  TheCompany provided $6.4 million for loan losses in the nine months endedSeptember 30, 2003 compared to $5.4 million in the comparable prior yearperiod.  The increase of $986,000 in2003 was primarily attributable to the growth in the loan portfolio.

 

*Noninterest Income.* Total noninterest income was $12.8 millionfor the nine months ended September 30, 2003 compared to $10.4 million in thesame period of 2002, an increase of $2.4 million, or 22.9%.  This increase was principally caused byincreases in retail and checking account related income ($912,000), ATM/Debitcard usage ($300,000), other loan fees ($313,000), gains on investmentsecurities ($512,000), gains on the sale of loans ($117,000), and other income($426,000), offset by decreases from loan servicing fees ($114,000), merchantcard fee income ($89,000).

 

15

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*Noninterest Expense.* Noninterest expense increased by $11.1million, or 21.7%, from $51.2 million for the nine months ended September 30,2002 to $62.3 million for the nine months ended September 30, 2003.  This increase reflected increases insalaries and employee benefits ($3.5 million), occupancy and equipment expenses($1.8 million), data processing ($1.1 million), marketing expenses ($374,000),professional services ($1.6 million), amortization of intangibles ($328,000),and other noninterest expense ($2.4 million).

 

Salariesand employee benefits increased $3.5 million, or 12.6%, during the nine monthsended September 30, 2003.  This increasewas partially the result of salary increases averaging 4.5%, coupled withadditions to staff resulting from the Bay State acquisition, an increase incommissions paid on loan refinancing activities, an increase in overtimepayroll due to the core data processing conversion, and other additions tostaff related to company growth supplemented by increases in employee benefits.

 

Occupancy and equipmentexpenses increased $1.8 million, or 26.4% during the nine months endedSeptember 30, 2003. The increase was primarily the result of the Bay Stateacquisition as well as branch expansion and the related expenses to operatethem during the period.  In addition,there were increases in depreciation expense for computer equipment related tothe conversion of the core data processing function.

 

Dataprocessing expenses increased $1.1 million, or 19.5%, during the nine monthsended September 30, 2003 due primarily to core processing activities which arevolume-related such as item processing, loan and deposit account activity, ATMand electronic bill payment processing, data line communication expenses andthe acquisition of Bay State which is currently on a different core processingsystem.

 

Marketingexpenses increased $374,000, or 18.8%, during the nine months ended September30, 2003.  This increase wasattributable to an increase in outside agency fees, newspaper and radioadvertising and premium promotions, partially offset by decreases in productioncosts, direct marketing and marketing research.

 

Professionalservices expenses increased $1.6 million, or 91.6%, during the nine monthsended September 30, 2003. This increase primarily reflects increases in legal,corporate and outside professional services associated with the conversion ofthe core data processing function and professional services related to theoperations of Bay State which will continue until the core data processingconversion scheduled for November, 2003. These increases were partially offset by decreases in audit and taxpreparation and consulting services for private banking.

 

Amortization of intangiblesincreased $328,000, or 53.1%, during the nine months ended September 30,2003.  This increase is attributed to anincrease in identifiable core deposit and other intangibles as a result of theacquisition of Bay State.

 

Othernoninterest expense increased $2.4 million, or 37.1%, during the nine monthsended September 30, 2003.  This increasereflects primarily the net interest tax deficiency charge relatedto the REIT settlement with the Massachusetts DOR ($1.0 million), and increasein postage, building security, repossessions and litigation expenses.

 

*Minority Interest Expense.*Interestexpense totaled $4.2 million for the nine months ended September 30, 2003,versus $1.6 million for the sameperiod of 2002.  The increase in expensein 2003 reflects the issuance of a $15.0 million trust preferred security inMarch 2003, as well as having a full period of interest expense in 2003 from the$57.5 million trust preferred security which was issued in May 2002.

 

*Income Taxes. *During the nine months ended September30, 2003, the company recorded a state income tax provision of $4.9 million,net of the federal income tax benefit, as a result of the settlement with theMassachusetts DOR that retroactively disallowed the REIT dividend deduction forthe years ended December 31, 1999 through December 31, 2002.  Due primarily to the impact of this extratax provision, the effective tax rate was 53.4% for the nine months endedSeptember 30, 2003 compared to 35.1% for the same period in 2002. Exclusive ofthis provision and the related $1.0 million interest deficiency charge, theeffective tax rate for the nine months ended September 30, 2003 would have been41.1% compared to 35.1% in the same period in 2002.  This increase from 2002 primarily reflects the impact of thechange in Massachusetts law that eliminated the tax benefit attributable toREIT dividends in 2003.

 

16

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**Comparison of Financial Condition atSeptember 30, 2003 and December 31, 2002**

 

Total assetsincreased by $778.6 million from $3.7 billion at December 31, 2002 to $4.5billion at September 30, 2003.  Thisincrease was largely due to the acquisition of Bay State during the secondquarter of 2003 which added $683 million to total assets.

 

**INVESTMENT SECURITIES**

 

Investmentsecurities decreased from $489.8 million as of December 31, 2002, to $401.2million at September 30, 2003.  Thisdecrease was due to sales, calls, paydowns and maturities exceedingreinvestment.  Cash flows frominvestments were used in part, to finance the acquisition of Bay State.  The securities portfolio consists primarilyof United States Treasury and Agency securities all rated AAA by ratingagencies.

 

Federal fundssold totaled $187.8 million as of September 30, 2003, versus $11.1 million asof December 31, 2002.  These amountsrepresent overnight investments of excess funds placed with other financialinstitutions that are deemed to be "well capitalized" by regulatorybodies.  The increase in amounts atSeptember 30, 2003, was due in part from proceeds of a loan sale at the quarterend of approximately $90 million.  TheCompany expects to reinvest a portion of these funds in loans and investmentpurchases during the fourth quarter.

 

**LOANS**

 

The following table showsthe composition of the Company’s loan portfolio at:

 
|                             |   | **September 30,  2003** |      | **December 31,  2002** |   |
|----------------------------------|--------|-------------------------|-----------|------------------------|--------|
|                             |   | **(In thousands)**      |      |
| Real estate  loans:              |   |                    |      |                   |   |
| Residential (one-to-four family) |   | $                       | 1,669,571 |                   | $      | 1,513,388 |   |
| Commercial                       |   | 634,045                 |      | 356,610                |   |
| Construction                     |   | 123,761                 |      | 110,166                |   |
| Home equity lines of credit      |   | 108,617                 |      | 67,794                 |   |
| Total real estate loans          |   | 2,535,994               |      | 2,047,958              |   |
| Commercial loans                 |   | 136,460                 |      | 127,822                |   |
| Consumer loans:                  |   |                    |      |                   |   |
| Indirect auto loans              |   | 822,778                 |      | 770,574                |   |
| Less-unearned discount           |   | 18                      |      | 210                    |   |
| Indirect auto loans, net         |   | 822,760                 |      | 770,364                |   |
| Other                            |   | 39,225                  |      | 45,027                 |   |
| Total consumer loans, net        |   | 861,985                 |      | 815,391                |   |
| Total loans                      |   | $                       | 3,534,439 |                   | $      | 2,991,171 |   |

 

Loans serviced for others ona non-recourse basis at September 30, 2003 and December 31, 2002 amounted to$262.2 million and $249.0 million, respectively.

 

Total loansincreased by $543.3 million during the first nine months of 2003.  This increase was primarily attributable toapproximately $517 million of loans obtained as a result of the Bay Stateacquisition.

 

Residentialreal estate loans increased $156.2 million from December 31, 2002 to September30, 2003.  This increase was due to theBay State acquisition.   The Companysold $90.4 million of fixed rate loans during the third quarter of 2003.

 

Commercialreal estate loans increased $277.4 million from December 31, 2002.  This increase was primarily attributable tothe Bay State acquisition.

 

Constructionloans increased $13.6 million from December 31, 2002, due primarily to the BayState acquisition.

 

17

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Home equitylines of credit increased by $40.8 million from December 31, 2002.  Excluding Bay State, the increase was $14.8million. This growth was achieved through a special marketing program thatprovided a lower fixed rate for the first six months.

 

Indirect autoloans increased by $52.4 million from December 31, 2002 to September 30,2003.  Bay State did not have anyindirect auto loans in its portfolio. The annualized year to date growth, in this business line ofapproximately 9%, is lower than our historical growth rate.  This slowdown is a result of a number offactors including consumers opting for cash out refinances, and manufacturerdirect loans as financing sources, as well as increased competition.  Primarily for these reasons, managementbelieves that the rate of growth will be lower than historical levels.

 

**RISK MANAGEMENT**

 

The primarygoal of our risk management program is to identify key areas of risk within theCompany, and to effectively measure, control and monitor these risks.  The Board of Directors has established theRisk Management Committee which is comprised of three outside directors, withmembers of senior management participating in carrying out the committee’sduties.

 

**CREDIT RISK MANAGEMENT**

 

The RiskManagement Committee of the Board monitors our credit risk management.  We utilize an internal loan rating systemthat provides a mechanism to regularly monitor the credit quality of our loanportfolio.  Additionally, as asupplement to our own internal credit review function, the Company has asemi-annual review performed by an outside firm specializing in loan analysis.

 

**RISKELEMENTS**

The followingtable sets forth information regarding non-performing assets:

 
|                                                                    |   | **September 30,  2003**     |   | **December 31,  2002** |   |
|-------------------------------------------------------------------------|--------|-----------------------------|--------|------------------------|--------|
|                                                                    |   | **(Dollars  in thousands)** |   |
| Non-accrual loans (1):                                                  |   |                        |   |                   |   |
| Real estate loans:                                                      |   |                        |   |                   |   |
| Residential                                                             |   | $                           | 3,526  |                   | $      | 3,654 |   |
| Commercial                                                              |   | 3,832                       |   | 3,978                  |   |
| Construction                                                            |   | 1,454                       |   | —                 |   |
| Home equity                                                             |   | 13                          |   | 77                     |   |
| Commercial loans                                                        |   | 5,499                       |   | 5,028                  |   |
| Indirect auto loans                                                     |   | 2,175                       |   | 1,194                  |   |
| Other consumer loans                                                    |   | 189                         |   | 142                    |   |
| Total non-accrual loans                                                 |   | 16,688                      |   | 14,073                 |   |
| Other real estate owned and repossessed autos, net  of related reserves |   | 235                         |   | 1,350                  |   |
| Total non-performing assets                                             |   | $                           | 16,923 |                   | $      | 15,423 |   |
|                                                                    |   |                        |   |                   |   |
| Allowance for loan losses as a percent of total  loans                  |   | 1.22                        | %      | 1.15                   | %      |
| Allowance for loan losses as a percent of total  non-accrual loans      |   | 258.1                       | %      | 244.1                  | %      |
| Non-performing loans as a percent of total loans                        |   | 0.47                        | %      | 0.47                   | %      |
| Non-performing assets as a percent of total assets                      |   | 0.38                        | %      | 0.42                   | %      |

 

----

(1)                                  Non-accrual loans include loans 90 days ormore past due and other loans which have been identified asresentinguncertainty with respect to the collectibility of interest orprincipal.

 

Loans areconsidered impaired when it is probable that the Company will not be able tocollect principal, interest and fees according to the contractual terms of theloan agreement.  Total impaired loans atSeptember 30, 2003 and December 31, 2002, were $11.9 million and $9.5 million,respectively.

 

 

18

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The followingtable sets forth activity in the allowance for loan losses for the periodsindicated:

 
|                                                |   | **Three Months Ended  September 30,** |   | **Nine Months Ended  September 30,** |   |
|-----------------------------------------------------|--------|---------------------------------------|--------|--------------------------------------|--------|
|                                                |   | **2003**                              |   | **2002**                             |   | **2003** |   | **2002** |   |
|                                                |   | **(In thousands)**                    |   |
| Balance at beginning of period                      |   | $                                     | 41,797 |                                 | $      | 31,631 |   | $ | 34,354 |   | $ | 29,513 |   |
| Provision for loan losses                           |   | 2,197                                 |   | 1,850                                |   | 6,371 |   | 5,385 |   |
| Acquired allowance from Bay State                   |   | —                                |   | —                               |   | 6,147 |   | — |   |
| Charge-offs:                                        |   |                                  |   |                                 |   |   |   |   |   |
| Mortgage loans:                                     |   |                                  |   |                                 |   |   |   |   |   |
| Residential                                         |   | —                                |   | —                               |   | — |   | (44 | ) |
| Commercial                                          |   | —                                |   | —                               |   | (6 | ) | — |   |
| Home equity                                         |   | —                                |   | —                               |   | — |   | — |   |
| Construction                                        |   | —                                |   | —                               |   | — |   | — |   |
| Commercial loans                                    |   | (359                                  | )      | (445                                 | )      | (766 | ) | (855 | ) |
| Indirect auto loans                                 |   | (833                                  | )      | (441                                 | )      | (4,070 | ) | (1,663 | ) |
| Other consumer loans                                |   | (10                                   | )      | —                               |   | (21 | ) | (13 | ) |
| Total charge-offs                                   |   | (1,202                                | )      | (886                                 | )      | (4,863 | ) | (2,575 | ) |
| Recoveries:                                         |   |                                  |   |                                 |   |   |   |   |   |
| Mortgage loans:                                     |   |                                  |   |                                 |   |   |   |   |   |
| Residential                                         |   | 42                                    |   | 1                                    |   | 86 |   | 58 |   |
| Commercial                                          |   | 171                                   |   | —                               |   | 179 |   | 31 |   |
| Home equity                                         |   | —                                |   | —                               |   | — |   | — |   |
| Construction                                        |   | —                                |   | —                               |   | — |   | — |   |
| Commercial loans                                    |   | 4                                     |   | 437                                  |   | 9 |   | 488 |   |
| Indirect auto loans                                 |   | 88                                    |   | 104                                  |   | 783 |   | 237 |   |
| Other consumer loans                                |   | (25                                   | )      | 4                                    |   | 6 |   | 4 |   |
| Total recoveries                                    |   | 280                                   |   | 546                                  |   | 1,063 |   | 818 |   |
|                                                |   |                                  |   |                                 |   |   |   |   |   |
| Net charge-offs                                     |   | (922                                  | )      | (340                                 | )      | (3,800 | ) | (1,757 | ) |
|                                                |   |                                  |   |                                 |   |   |   |   |   |
| Balance at end of period                            |   | $                                     | 43,072 |                                 | $      | 33,141 |   | $ | 43,072 |   | $ | 33,141 |   |
|                                                |   |                                  |   |                                 |   |   |   |   |   |
| Ratio of annualized net charge-offs toaverage loans |   | 0.10                                  | %      | 0.05                                 | %      | 0.15 | % | 0.09 | % |

 

The increasein indirect auto loan charge-offs during the three and nine months endingSeptember 30, 2003 versus 2002 is due in part to the significant growth in theportfolio during the past year, (year-to-date average balances increased $123million or 18%), coupled with rising unemployment and lower values realizedfrom repossessed auto sales.

 

**DEPOSITS**

** **

A summaryof deposit balances is as follows:

** **
|                                   |   | **September 30,  2003** |      | **December 31,****2002** |   |
|----------------------------------------|--------|-------------------------|-----------|--------------------------|--------|
|                                   |   | **(In thousands)**      |      |
| Demand deposit accounts                |   | $                       | 279,170   |                     | $      | 196,869 |   |
| NOW and money market deposit accounts  |   | 1,201,040               |      | 873,019                  |   |
| Passbook and other savings accounts    |   | 395,854                 |      | 320,528                  |   |
| Total non-certificate accounts         |   | 1,876,064               |      | 1,390,416                |   |
| Certificates of deposit -              |   |                    |      |                     |   |
| Term certificates of $100,000 and over |   | 296,520                 |      | 285,664                  |   |
| Term certificates less than $100,000   |   | 815,895                 |      | 727,795                  |   |
| Total certificates of deposit          |   | 1,112,415               |      | 1,013,459                |   |
| Total deposits                         |   | $                       | 2,988,479 |                     | $      | 2,403,875 |   |

 

19

----

 

Total depositsat September 30, 2003 were $3.0 billion, an increase of $584.6 million,compared to $2.4 billion at December 31, 2002. This increase was largely due to the Bay State acquisition which added$389.2 million to total deposits. Core deposit account balances(non-certificate) increased by $485.6 million during the first nine months of2003.  The increase in core depositsduring 2003 was generally attributable to Bay State, normal seasonalfluctuations, continued uncertainty in the stock market as consumers seeksafety and liquidity, as well as the result of less attractive rates beingoffered on term deposit products. A slight decrease in certificates of deposits(excluding the effects of the Bay State acquisition) was primarily the resultof declining interest rates for this type of product and consumers wanting tomaintain a liquid position.

 

**OTHER FUNDING SOURCES**

 

Totalborrowings increased $108.8 million from December 31, 2002 to September 30,2003.  The majority of this increase infunding represents term debt from the Federal Home Loan Bank of Bostonresulting from the acquisition of Bay State.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The increasein stockholders’ equity of $63.4 million to $382.9 million at September 30,2003 resulted mainly from common stock issued in conjunction with theacquisition of Bay State of $71.9 million, net comprehensive income of $20.8million, offset by cash dividends and stock repurchases totaling $31.2 million.There remain 2,171,459 shares available for repurchase under the Company’sfifth repurchase program announced in August 2003.

 

Liquidity, represented bycash and cash equivalents and debt securities is a productof the Company’s operating, investing, andfinancing activities.  The Company’sprimary sources of funds are deposits, borrowings, principal and interestpayments on outstanding loans and mortgage-backed securities, maturities ofinvestment securities and funds provided from operations.  While scheduled payments from theamortization of loans and mortgage related securities and maturing investmentsecurities are relatively predictable sources of funds, deposit flows and loanprepayments are greatly influenced by general interest rates and, in the caseof deposits, other instruments available to the public such as mutual funds andannuities.

 

As voluntary members of theFederal Home Loan Bank of Boston (FHLB), Compass and Nantucket Bank areentitled to borrow an amount up to the value of its qualified collateral thathas not been pledged to others. Qualified collateral generally consists of residential first mortgageloans, U.S. Government and agency securities and funds on deposit specificallypledged to the FHLB.  At September 2003,Compass and Nantucket Bank had approximately $431.2 million and $26.7 million,respectively, in unused borrowing capacity that is contingent upon the purchaseof additional FHLB stock.  Use of thisborrowing capacity may also be impacted by regulatory capital requirements.

 

Liquiditymanagement is both a daily and long-term function of business management.  The measure of a Bank’s liquidity is itsability to meet its cash commitments at all times with available cash or byconversion of other assets to cash at a reasonable price.  At September 30, 2003, the Companymaintained cash and due from banks, federal funds sold and short-terminvestments of $346.7 million, or 7.7% of total assets.  The Company invests excess funds, if any, infederal funds sold which provides liquidity to meet lending requirements.

 

At September30, 2003, the Company had commitments to originate loans, unused outstandinglines of credit, standby letters of credit and undisbursed proceeds of loanstotaling $446.4 million. The Company anticipates that it will have sufficientfunds available to meet its current commitments.  Certificates of deposit maturing within one year from June 30,2003 amounted to $617.5 million.  TheCompany expects that a significant portion of maturing certificate accountswill be retained at maturity.

 

The Company’sand the Banks’ capital ratios at September 30, 2003 were as follows:

 
|                                     |   | **Seacoast Financial** |   | **Compass Bank** |   | **Nantucket** |   |
|------------------------------------------|--------|------------------------|--------|------------------|--------|---------------|--------|
| Total Capital (to risk weighted assets)  |   | 12.82                  | %      | 11.34            | %      | 13.88         | %      |
| Tier 1 Capital (to risk weighted assets) |   | 11.50                  |   | 10.06            |   | 12.62         |   |
| Tier 1 Capital (to average assets)       |   | 7.66                   |   | 6.67             |   | 8.88          |   |

 

These ratiosplaced the Company in excess of regulatory standards and the Banks in the “wellcapitalized” category as set forth by the FDIC.

 

20

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**Item3.  Quantitative and QualitativeDisclosures about Market Risk**

 

The chiefmarket risk factor affecting the financial condition and operating results ofthe Company is interest rate risk. This risk is managed by periodic evaluationof the interest risk inherent in certain balance sheet accounts, determinationof the level of risk considered appropriate given capital and liquidityrequirements, business strategy, performance objectives and operatingenvironment and maintenance of such risks within guidelines approved by theBoard of Directors.  Through suchmanagement, the Company seeks to reduce the vulnerability of its net earningsto changes in interest rates.  Each Bank¢sAsset/Liability Committee, comprised of senior management, is responsible formanaging interest rate risk and reviewing with its Board of Directors on aquarterly basis its activities and strategies, the effect of those strategieson operating results, the Bank’s interest rate risk position and the effectchanges in interest rates would have on net interest income. The extent ofmovement of interest rates is an uncertainty that could have a negative impacton earnings.

 

The principalstrategies that the Company generally uses to manage interest rate risk include(i) emphasizing the origination and retention of adjustable-rate loans,origination of indirect auto loans (Compass only) which have relatively shortmaturities and origination of loans with maturities at least partly matchedwith those of the deposits and borrowings funding the loans, (ii) investing indebt securities with relatively short maturities and (iii) classifying asignificant portion of its investment portfolio as available for sale so as toprovide sufficient flexibility in liquidity management.

 

The Company and the Banksquantify their interest rate risk exposure using a sophisticated simulationmodel.  Simulation analysis is used tomeasure the exposure of net interest income to changes in interest rates over aspecified time horizon.  Simulationanalysis involves projecting future interest income and expense under variousrate scenarios.  Internal guidelines oninterest rate risk specify that for every 100 basis point immediate shift ininterest rates, the estimated net interest income over the next 12 monthsshould decline by less than 5%.

 

In utilizing a 300 basispoint increase in rates in its simulation model, the full impact of annual ratecaps of 200 basis point common to most adjustable rate mortgage loan productsis considered.  The rate shocks usedassume an instantaneous and parallel change in interest rates and that nostrategies are implemented in response to the change in interest rates.  Prepayment speeds for loans andmortgage-backed securities are based on published median dealer forecasts foreach interest rate scenario.

 

As ofSeptember 30, 2003, the Company’s estimated exposure as a percentage ofestimated net interest income for the next twelve and twenty-four month periodsis as follows:

 
|                                      |   | **Percentage Increase (Decrease) in Estimated  Net Interest Income Over:** |   |
|-------------------------------------------|--------|----------------------------------------------------------------------------|--------|
|                                      |   | **12 months**                                                              |   | **24 months** |   |
| 300 basis point increase in rates         |   | (13.2                                                                      | )%     | (12.7 | )% |
| 50 basis point decrease in rates (Note 1) |   | 0.8                                                                        | %      | 0.5 | % |

 

----

(1)          Dueto the low interest rate environment in effect at September 30, 2003 (theaverage Federal Fund overnight rates were trading below 1.00%) the simulationmodel was rate shocked down 50 basis point.

 

For eachone-percentage point change in net interest income, the effect on net incomewould be $770,000, assuming a 41% tax rate.

 

21

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**Item4.  Controls and Procedures**

 

(a) Evaluationof Disclosure Controls and Procedures. Our Chief Executive Officer, our Chief Financial Officer (the principalaccounting officer), and other members of our senior management team haveevaluated the effectiveness of our disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)).  Based on such evaluation, our ChiefExecutive Officer and Chief Financial Officer have concluded that ourdisclosure controls and procedures, as of the end of the period covered by thisreport, were adequate and effective to provide reasonable assurance thatinformation required to be disclosed by the Company, including our consolidatedsubsidiaries, in reports that it files or submits under the Exchange Act, isrecorded, processed, summarized and reported, within the time periods specifiedin the Commission’s rules and forms.

 

Theeffectiveness of a system of disclosure controls and procedures is subject tovarious inherent limitations, including cost limitations, judgments used indecision making, assumptions about the likelihood of future events, thesoundness of internal controls, and fraud. Due to such inherent limitations, there can be no assurance that anysystem of disclosure controls and procedures will be successful in preventingall errors or fraud, or in making all material information known in a timelymanner to the appropriate levels of management.

 

(b) Changes in Internal Controls.  There were no changes in our internal control over financialreporting identified in connection with the evaluation required by Exchange ActRules 13a-15(d) and 15d-15(d) that occurred during the fiscal quarter coveredby this report that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

 

Late in oursecond fiscal quarter, Compass Bank for Savings converted to a new electronicdata processing (EDP) system and made a significant acquisition, both of whichare relevant to our internal control over financial reporting.  Following an extensive review of core processingproviders, in September 2002 we enteredinto an agreement with Fiserv, Inc. to provide a custom outsourcing product forcomprehensive bank EDP services.  Inaddition to providing core banking processes, including loan servicing, theFiserv system is designed to provide relationship management and retaildelivery capabilities, as well as branch automation and e-commerce products forretail and commercial customers.  Wechanged our entire EDP system to the Fiserv platform on May 23, 2003.  Following a successful data processingconversion, we have encountered some processing issues, which we do notconsider unexpected for an EDP conversion of this magnitude.  For example, in order to realize the fulladvantage of the new system, we established approximately one hundred newgeneral ledger accounts.  To date, someof these accounts, primarily suspense and in-process accounts in ourresidential mortgage servicing area, have not been satisfactorily reconciledunder the new EDP system.  We havecorrected any and all differences that have been detected.  Based upon our current evaluation, webelieve that any further adjustments will affect our balance sheet rather than ourincome statement.  It is possible,however, that further evaluation of these issues could result in adjustments toour income statement as well.  In orderto assess the consistency of accounting across the old and new EDP systems, wehave compared accounts for April and early May to those accounts under the newsystem and found no deviations that raise questions about materiality.  Notwithstanding these measures, we considerthe occurrence of unreconciled accounts in the EDP system to beunacceptable.  To address these issues,we have enlisted additional third party resources, and we are also workingclosely with Fiserv to resolve these matters as soon as practicable.

 

On May 31,2003, we completed the acquisition of Bay State Bancorp, Inc.  In the course of our due diligence for thattransaction we evaluated Bay State’s system of internal control over financialreporting and concluded that it provided reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America, as provided in Exchange Act Rule13a-15(f).  The integration of Bay Stateinto the Fiserv EDP platform was completed in November 2003.

 

22

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**PART II - OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

The Company is involved inroutine legal proceedings occurring in the ordinary course of business which inthe aggregate are believed by management to be immaterial to our financialcondition and results of operations.

 

**Item2.  Changes in Securities and Use ofProceeds**

 

Not applicable.

 

**Item 3. Defaults Upon Senior Securities**

 

Not applicable.

 

**Item4.  Submission of Matters to A Vote ofSecurity Holders**

 

Not applicable.

 

**Item 5. Other Information**

 

Not applicable.

 

**Item 6. Exhibits and Reports on Form 8-****K**

 
| a.     |   | Exhibits:                                                                                                                                                                                                                                                      |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                           |
| 2.1    |   | Agreement and Plan of Merger, dated as of October 20, 2003 by and  between Seacoast Financial Services Corporation, Coast Merger Sub Corporation  and Abington Bancorp, Inc. +++                                                                               |
|   |   |                                                                                                                                                                                                                                                           |
| 3.1    |   | Articles  of Organization of Seacoast Financial Services Corporation++                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                           |
| 3.2    |   | By-Laws  of Seacoast Financial Services Corporation++                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                           |
| 4      |   | Specimen  certificate for the common stock of Seacoast Financial Services Corporation+                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                           |
| 11     |   | A statement regarding earnings per share is included in Item 1, Note  5, of this report.                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                           |
| 31     |   | Rule  13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                           |
| 32     |   | Section  1350 Certifications                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                           |
| b.     |   | We filed a Current Report on Form 8-K on July 25,  2003 under Items 7 and 9 of Form 8-K.                                                                                                                                                                       |
|   |
|        |
| +      |   | Incorporated by reference to Amendment No. 1 to the Company’s  Registration Statement on Form S-1 (333-52889), filed with the Securities and  Exchange Commission under the Company’s prior name, “The 1855 Bancorp”, on  August 14, 1998. |
|   |   |                                                                                                                                                                                                                                                           |
| ++     |   | Incorporated by reference to the Company’s Registration Statement on  Form 8-A filed with the Securities and Exchange Commission on November 18,  1998.                                                                                                   |
|   |   |                                                                                                                                                                                                                                                           |
| +++    |   | Incorporated by reference to the Company’s Current Report on Form 8-K  filed with the Securities and Exchange Commission on October 27, 2003.                                                                                                             |

 

 

23

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                     |   | Seacoast  Financial Services Corporation |   |
|--------------------------|--------|------------------------------------------|--------|
|                     |   | (Registrant)                             |   |
|                     |
|                     |
| Date:  November 13, 2003 | By     | /s/  Kevin G. Champagne                  |   |
|                     |   | Kevin  G. Champagne                      |
|                     |   | President  and Chief Executive  Officer  |
|                     |
|                     |
| Date:  November 13, 2003 | By     | /s/  Francis S. Mascianica, Jr.          |   |
|                     |   | Francis  S. Mascianica, Jr.              |
|                     |   | Treasurer,  as Principal Financial and   |
|                     |   | Accounting  Officer                      |
|                          |        |                                          |        |  |  |

 

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