**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

----

 

**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 MARCH 31, 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 markwhether the registrant: (1) has filed all reports required to be filed bySection 13 or 15 (d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ý  Yes   o  No

 

Indicate bycheck mark whether registrant is an accelerated filer (as defined in Rule 12b-2of the Securities Exchange Act of 1934).   ýYes    o  No

 

At May 12, 2003, the Companyhad 23,091,774 shares of common stock outstanding.

 

 

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## **SEACOASTFINANCIAL SERVICES CORPORATION**

**INDEX**

 
| **PART I -  FINANCIAL INFORMATION** |
|-------------------------------------|
|                                |   |
| Item 1.                             | Financial Statements  (unaudited) |
|                                |   |
|                                | Consolidated Balance Sheets at  March 31, 2003 and December 31, 2002 |
|                                |   |
|                                | Consolidated Statements of  (Operations) Income for the three months ended March 31, 2003 and 2002 |
|                                |   |
|                                | Consolidated Statements of  Changes in Stockholders’ Equity for the three months ended March 31, 2003 and  2002 |
|                                |   |
|                                | Consolidated Statements of Cash  Flows for the three months ended March 31, 2003 and 2002 |
|                                |   |
|                                | Notes  to Unaudited 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**                      |
|                                |   |
| **CERTIFICATIONS**                  |

 

2

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## **SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANC****E SHEETS**

**(In thousands)**

 
|                                                                                                                      |   | **March 31,  2003** |      | **December 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                                                                      |   | **(Unaudited****)** |      |                   |   |
| **ASSETS:**                                                                                                               |   |                |      |                   |   |
| Cash and due from banks                                                                                                   |   | $                   | 105,188   |                   | $      | 109,223 |   |
| Federal funds sold                                                                                                        |   | 45,106              |      | 11,056                 |   |
| Total cash and cash equivalents                                                                                           |   | 150,294             |      | 120,279                |   |
| Investment securities                                                                                                     |   |                |      |                   |   |
| Available-for-sale, at fair value                                                                                         |   | 397,833             |      | 426,791                |   |
| Held to maturity, at amortized cost (fair  value $19,161 and $19,448)                                                     |   | 18,446              |      | 18,721                 |   |
| Restricted equity securities                                                                                              |   | 46,136              |      | 44,243                 |   |
| Loans held-for-sale                                                                                                       |   | 9,587               |      | 6,183                  |   |
| Loans                                                                                                                     |   | 3,058,271           |      | 2,991,171              |   |
| Allowance for loan losses                                                                                                 |   | (34,709             | )         | (34,354                | )      |
| Net loans                                                                                                                 |   | 3,023,562           |      | 2,956,817              |   |
| Accrued interest receivable                                                                                               |   | 16,509              |      | 16,055                 |   |
| Banking premises and equipment, net                                                                                       |   | 54,288              |      | 53,945                 |   |
| Other real estate owned and repossessed  autos                                                                            |   | 332                 |      | 1,350                  |   |
| Net deferred tax asset                                                                                                    |   | 10,377              |      | 9,645                  |   |
| Goodwill (Note 2)                                                                                                         |   | 33,903              |      | 33,903                 |   |
| Intangible assets (Note 2)                                                                                                |   | 1,400               |      | 1,564                  |   |
| Other assets                                                                                                              |   | 13,489              |      | 11,549                 |   |
| Total assets                                                                                                              |   | $                   | 3,776,156 |                   | $      | 3,701,045 |   |
|                                                                                                                      |   |                |      |                   |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                                                            |   |                |      |                   |   |
| Deposits                                                                                                                  |   | $                   | 2,418,512 |                   | $      | 2,403,875 |   |
| Short-term borrowings                                                                                                     |   | 31,843              |      | 36,128                 |   |
| Federal Home Loan Bank advances                                                                                           |   | 908,463             |      | 858,804                |   |
| Other borrowings                                                                                                          |   | 1,754               |      | 1,772                  |   |
| Mortgagors’ escrow payments                                                                                          |   | 5,761               |      | 4,489                  |   |
| Accrued expenses and other liabilities                                                                                    |   | 31,438              |      | 21,626                 |   |
| Total liabilities                                                                                                         |   | 3,397,771           |      | 3,326,694              |   |
|                                                                                                                      |   |                |      |                   |   |
| Guaranteed Preferred Beneficial Interests  in Seacoast Junior Subordinated Deferrable   Interest Debentures (Note 6) |   | 69,405              |      | 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;   26,758,136 shares issued                   |   | 268                 |      | 268                    |   |
| Additional paid-in capital                                                                                                |   | 154,473             |      | 154,361                |   |
| Retained earnings                                                                                                         |   | 210,908             |      | 216,632                |   |
| Treasury stock, at cost, 3,666,362 shares  in 2003 and 3,385,562 shares in 2002                                           |   | (54,368             | )         | (49,033                | )      |
| Accumulated other comprehensive income                                                                                    |   | 8,320               |      | 8,330                  |   |
| Unearned compensation - ESOP and restricted  stock                                                                        |   | (10,314             | )         | (10,766                | )      |
| Shares held in employee trust                                                                                             |   | (307                | )         | (304                   | )      |
| Total stockholders’ equity                                                                                           |   | 308,980             |      | 319,488                |   |
| Total liabilities and stockholders’ equity                                                                           |   | $                   | 3,776,156 |                   | $      | 3,701,045 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

3

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## **SEACOAST FINANCIALSERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMEN****TS OF (OPERATIONS) INCOME**

**FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002**

**(Unaudited)**

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

 
|                                                                                   |   | **2003**   |   | **2002**   |   |
|----------------------------------------------------------------------------------------|--------|------------|--------|------------|--------|
| INTEREST AND DIVIDEND INCOME:                                                          |   |       |   |       |   |
| Interest on loans                                                                      |   | $          | 48,247 |       | $      | 46,923 |   |
| Interest and dividends on investment securities                                        |   | 5,233      |   | 5,847      |   |
| Interest on federal funds sold and short-term investments                              |   | 54         |   | 430        |   |
| Total interest and dividend income                                                     |   | 53,534     |   | 53,200     |   |
|                                                                                   |   |       |   |       |   |
| INTEREST EXPENSE:                                                                      |   |       |   |       |   |
| Interest on deposits                                                                   |   | 10,961     |   | 13,724     |   |
| Interest on borrowed funds                                                             |   | 10,319     |   | 10,681     |   |
| Total interest expense                                                                 |   | 21,280     |   | 24,405     |   |
| Net interest income                                                                    |   | 32,254     |   | 28,795     |   |
|                                                                                   |   |       |   |       |   |
| PROVISION FOR LOAN LOSSES                                                              |   | 2,087      |   | 1,535      |   |
| Net interest income after provision for loan losses                                    |   | 30,167     |   | 27,260     |   |
|                                                                                   |   |       |   |       |   |
| NONINTEREST INCOME:                                                                    |   |       |   |       |   |
| Deposit and other banking fees                                                         |   | 2,498      |   | 2,268      |   |
| Loan servicing fees, net                                                               |   | 173        |   | 197        |   |
| Merchant card fee income, net                                                          |   | 50         |   | 71         |   |
| Other loan fees                                                                        |   | 350        |   | 234        |   |
| Gain on sale of investment securities, net                                             |   | 259        |   | 141        |   |
| Gain on sales of loans, net                                                            |   | 45         |   | 83         |   |
| Other income                                                                           |   | 209        |   | 211        |   |
| Total noninterest income                                                               |   | 3,584      |   | 3,205      |   |
|                                                                                   |   |       |   |       |   |
| NONINTEREST EXPENSE:                                                                   |   |       |   |       |   |
| Salaries and employee benefits                                                         |   | 9,973      |   | 9,413      |   |
| Occupancy and equipment expenses                                                       |   | 2,717      |   | 2,171      |   |
| Data processing expenses                                                               |   | 2,088      |   | 1,700      |   |
| Marketing expenses                                                                     |   | 723        |   | 473        |   |
| Professional services expenses                                                         |   | 551        |   | 608        |   |
| Amortization of intangibles (Note 2)                                                   |   | 164        |   | 208        |   |
| Other operating expenses                                                               |   | 4,144      |   | 2,316      |   |
| Total noninterest expense                                                              |   | 20,360     |   | 16,889     |   |
| Minority interest expense (Note 6)                                                     |   | 1,233      |   | —     |   |
| Income before provision for income taxes                                               |   | 12,158     |   | 13,576     |   |
| PROVISION FOR INCOME TAXES                                                             |   | 15,187     |   | 4,702      |   |
| Net (loss) income                                                                      |   | $          | (3,029 | )          | $      | 8,874 |   |
| (Loss) earnings per share (Note 5):                                                    |   |       |   |       |   |
| Basic                                                                                  |   | $          | (0.14  | )          | $      | 0.39 |   |
| Diluted                                                                                |   | $          | (0.14  | )          | $      | 0.38 |   |
| Weighted average common shares outstanding                                             |   | 23,334,436 |   | 24,297,039 |   |
| Weighted average unallocated ESOP shares and unvested restricted  stock                |   | (1,126,360 | )      | (1,292,197 | )      |
| Weighted average common shares outstanding – basic                                |   | 22,208,076 |   | 23,004,842 |   |
| Diluted effect of common stock equivalents                                             |   | 490,045    |   | 519,874    |   |
| Weighted average common and common stock equivalent shares  outstanding – diluted |   | 22,698,121 |   | 23,524,716 |   |

 

See accompanying notes tothe unaudited consolidated financial statements.

 

4

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS****OF CHANGES IN STOCKHOLDERS’ EQUITY**

## **FORTHE THREE MONTHS ENDED MARCH 31, 2003 AND 2002**

 

**(Unaudited)**

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

 
|                                                                                                      |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |    | **Accumulated  Other  Comprehensive  Income (Loss)** |   | **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                                                                                 |   | —            |   | 36                               |   | —                 |   | 20                  |    | —                                               |   | —                                             |   | —                              |   | 56        |   |
| Repurchase of common stock (Note 7)                                                                       |   | —            |   | —                           |   | —                 |   | (1,547              | )       | —                                               |   | —                                             |   | —                              |   | (1,547    | )      |
| Net income                                                                                                |   | —            |   | —                           |   | 8,874                  |   | —              |    | —                                               |   | —                                             |   | —                              |   | 8,874     |   |
| Other comprehensive loss — Change in unrealized gain on securities  available for sale, net of taxes |   | —            |   | —                           |   | —                 |   | —              |    | (2,002                                               | )      | —                                             |   | —                              |   | (2,002    | )      |
| Comprehensive income  (Note 3)                                                                            |   | —            |   | —                           |   | —                 |   | —              |    | —                                               |   | —                                             |   | —                              |   | 6,872     |   |
| Cash dividends - $.10 per share                                                                           |   | —            |   | —                           |   | (2,339                 | )      | —              |    | —                                               |   | —                                             |   | —                              |   | (2,339    | )      |
| Amortization of unearned compensation                                                                     |   | —            |   | 118                              |   | —                 |   | —              |    | —                                               |   | 452                                                |   |                                |   | 570       |   |
| Other                                                                                                     |   | —            |   | —                           |   | —                 |   | —              |    | —                                               |   | —                                             |   | (7                                  | )      | (7        | )      |
| Balance, March 31, 2002                                                                                   |   | $                 | 268    |                             | $      | 153,370                |   | $                   | 196,278 |                                                 | $      | (29,712                                            | )      | $                                   | 1,529  |      | $      | (12,123 | ) | $ | (281 | ) | $ | 309,329 |   |
|                                                                                                      |   |              |   |                             |   |                   |   |                |    |                                                 |   |                                               |   |                                |   |      |   |
| Balance, December 31, 2002                                                                                |   | $                 | 268    |                             | $      | 154,361                |   | $                   | 216,632 |                                                 | $      | (49,033                                            | )      | $                                   | 8,330  |      | $      | (10,766 | ) | $ | (304 | ) | $ | 319,488 |   |
| Exercise of Stock Options                                                                                 |   | —            |   | 3                                |   | —                 |   | 44                  |    | —                                               |   | —                                             |   | —                              |   | 47        |   |
| Repurchase of common stock (Note 7)                                                                       |   | —            |   | —                           |   | —                 |   | (5,379              | )       | —                                               |   | —                                             |   | —                              |   | (5,379    | )      |
| Net loss                                                                                                  |   | —            |   | —                           |   | (3,029                 | )      | —              |    | —                                               |   | —                                             |   | —                              |   | (3,029    | )      |
| Other comprehensive loss — Change in unrealized gain on securities  available for sale, net of taxes |   | —            |   | —                           |   | —                 |   | —              |    | (10                                                  | )      | —                                             |   | —                              |   | (10       | )      |
| Comprehensive loss  (Note 3)                                                                              |   |              |   |                             |   |                   |   |                |    |                                                 |   |                                               |   |                                |   | (3,039    | )      |
| Cash dividends - $.12 per share                                                                           |   | —            |   | —                           |   | (2,695                 | )      | —              |    | —                                               |   | —                                             |   | —                              |   | (2,695    | )      |
| Amortization of unearned compensation                                                                     |   | —            |   | 131                              |   | —                 |   | —              |    | —                                               |   | 452                                                |   | —                              |   | 583       |   |
| Amortization of underwriting costs                                                                        |   | —            |   | (22                              | )      | —                 |   | —              |    | —                                               |   | —                                             |   | —                              |   | (22       | )      |
| Other                                                                                                     |   | —            |   | —                           |   | —                 |   | —              |    | —                                               |   | —                                             |   | (3                                  | )      | (3        | )      |
| Balance, March 31, 2003                                                                                   |   | $                 | 268    |                             | $      | 154,473                |   | $                   | 210,908 |                                                 | $      | (54,368                                            | )      | $                                   | 8,320  |      | $      | (10,314 | ) | $ | (307 | ) | $ | 308,980 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

5

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## **SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT****S OF CASH FLOWS**

**FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002**

**(Unaudited)**

**(In Thousands)**

 
|                                                                                                |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |     |   |     |   |
| Net (loss) income                                                                                   |   | $        | (3,029 | )        | $      | 8,874 |   |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities C          |   |     |   |     |   |
| Depreciation                                                                                        |   | 1,232    |   | 1,081    |   |
| Amortization and accretion, net                                                                     |   | 359      |   | 650      |   |
| Purchase accounting amortization, net                                                               |   | 103      |   | 99       |   |
| Stock-based compensation                                                                            |   | 583      |   | 570      |   |
| Provision for loan losses                                                                           |   | 2,087    |   | 1,535    |   |
| Gain on sale of investment securities, net                                                          |   | (259     | )      | (141     | )      |
| (Gain) loss on sale of fixed assets                                                                 |   | (1       | )      | 1        |   |
| Net increase deferred tax asset                                                                     |   | (732     | )      | (433     | )      |
| Originations of loans held-for-sale                                                                 |   | (8,715   | )      | (7,311   | )      |
| Proceeds from sales of loans originated for resale                                                  |   | 5,356    |   | 8,613    |   |
| Gain on sales of loans, net                                                                         |   | (45      | )      | (83      | )      |
| Net increase in accrued interest receivable                                                         |   | (454     | )      | (1,652   | )      |
| Net decrease (increase) in other assets                                                             |   | (1,618   | )      | 493      |   |
| Net increase in accrued expenses and other liabilities                                              |   | 9,839    |   | 4,109    |   |
| Net cash provided by operating activities                                                           |   | 4,706    |   | 16,405   |   |
|                                                                                                |   |     |   |     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |     |   |     |   |
| Purchase of securities classified as available-for-sale                                             |   | (29,116  | )      | (113,385 | )      |
| Purchase of securities classified as held to maturity                                               |   | —   |   | (1,098   | )      |
| Purchase of restricted equity securities                                                            |   | (1,893   | )      | (830     | )      |
| Proceeds from sales, calls, paydowns and maturities of securities  classified as available-for-sale |   | 57,648   |   | 34,718   |   |
| Proceeds from calls, paydowns and maturities of securities classified  as held-to-maturity          |   | 216      |   | 2,134    |   |
| Purchase of loans                                                                                   |   | (3,295   | )      | —   |   |
| Net increase in loans                                                                               |   | (65,886  | )      | (66,965  | )      |
| Recoveries of loans previously charged off                                                          |   | 84       |   | 137      |   |
| Proceeds from sales of repossessed assets                                                           |   | 1,350    |   | 43       |   |
| Purchase of premises and equipment                                                                  |   | (1,583   | )      | (700     | )      |
| Net cash used in investing activities                                                               |   | (42,475  | )      | (145,946 | )      |
|                                                                                                     |        |          |        |          |        |  |  |

 

6

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## **SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASHFLOWS (Continued)**

**FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002**

**(Unaudited)**

**(In Thousands)**

 
|                                                                         |   | **2003** |    | **2002** |   |
|------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                        |   |     |    |     |   |
| Net increase in NOW, money market deposit and demand deposit accounts        |   | $        | 6,744   |     | $      | 44,330 |   |
| Net increase in passbook and other savings accounts                          |   | 13,191   |    | 14,226   |   |
| Net increase (decrease) in certificates of deposit                           |   | (5,272   | )       | 2,213    |   |
| Advances from Federal Home Loan Bank                                         |   | 83,000   |    | 62,000   |   |
| Repayments of Federal Home Loan Bank advances                                |   | (33,341  | )       | (39,864  | )      |
| Net proceeds issuance of junior subordinated deferrable interest  debentures |   | 14,520   |    | —   |   |
| Net increase (decrease) in short-term and other borrowings                   |   | (4,303   | )       | 11,909   |   |
| Net increase in mortgagors’ escrow payments                             |   | 1,272    |    | 414      |   |
| Repurchase of common stock                                                   |   | (5,379   | )       | (1,547   | )      |
| Cash dividends                                                               |   | (2,695   | )       | (2,339   | )      |
| Exercise of stock options                                                    |   | 44       |    | 19       |   |
| Tax benefits of stock option and award transactions, net                     |   | 3        |    | 37       |   |
| Net cash provided by financing activities                                    |   | 67,784   |    | 91,398   |   |
|                                                                         |   |     |    |     |   |
| Net (decrease) increase in cash and cash equivalents                         |   | 30,015   |    | (38,143  | )      |
| Cash and cash equivalents, beginning of year                                 |   | 120,279  |    | 190,733  |   |
| Cash and cash equivalents, end of period                                     |   | $        | 150,294 |     | $      | 152,590 |   |
|                                                                         |   |     |    |     |   |
| Supplemental disclosure of cash flow information:                            |   |     |    |     |   |
| Interest paid on deposits and borrowed funds                                 |   | $        | 21,233  |     | $      | 24,378 |   |
| Income taxes paid                                                            |   | 6,166    |    | 1,175    |   |
| Minority interest expense                                                    |   | 1,233    |    | —   |   |
| Supplemental disclosure of noncash transactions:                             |   |     |    |     |   |
| Transfers from loans to repossessed assets                                   |   | 332      |    | —   |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

7

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**NOTES TOUNAUDI****TED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH 31, 2003**

**(In thousands, except per share data, unaudited)**

 

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

 

##### **Basisof Presentation**

 

The unaudited consolidated financialstatements of Seacoast Financial Services Corporation and its wholly-ownedsubsidiaries, Compass Bank for Savings (“Compass”), Nantucket Bank, LighthouseSecurities Corporation, and Seacoast Capital Trust I and II (collectivelyreferred to herein as “the Company”) presented herein should be read inconjunction with the consolidated financial statements of the Company as of andfor the year ended December 31, 2002 included as part of its annual report onForm 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 ofSignificant Accounting Policies**

** **

The Company’ssignificant accounting policies are described in Note 1 of the Notes toConsolidated Financial Statements included in its Form 10-K for the year endedDecember 31, 2002 filed with the Securities and Exchange Commission.  For interim reporting purposes, the Companyfollows the same significant accounting policies.  Certain reclassifications have been made to prior year balancesto conform to the current year presentation.

 

**Stock-BasedCompensation**

 

The Companyapplies APB Opinion No. 25 in accounting for stocks options which measurescompensation cost for stock based compensation plans as the difference betweenthe exercise price of options granted and the fair market value of theCompany’s stock at the grant date.  Thisgenerally does not result in any compensation charges to earnings.  Below, the Company discloses pro forma netincome and earnings per share as if compensation was measured at the date ofgrant based on the fair value of the award and recognized over the serviceperiod.  This is required by SFAS No.123 for all companies that elect to continue using APB Opinion No. 25 for stockoption grants.  As further noted in“Recent Accounting Pronouncements”, the Company is considering adopting SFAS No.148, which is an amendment to SFAS No. 123 and allows for alternative methodsof adopting fair value based compensation on stock option grants.  There were no stock option grants during thequarters ended March 31, 2002 and 2003.

 

Had theCompany applied SFAS No. 123 in accounting for its stock option grants, net(loss) income and EPS (basic and diluted) would have been reduced to the proforma amounts indicated below:

 
|               |   | **Quarter Ended March 31,**               |       |
|--------------------|--------|-------------------------------------------|------------|
|               |   | **2003**                                  |       | **2002** |   |
|               |   | **(In thousands, except for per  share)** | ** ** |
| Net (loss) income: |   |                                      |       |   |   |
| As reported        |   | $                                         | (3,029     | ) | $ | 8,874 |   |
| Pro forma          |   | (3,137                                    | )          | 8,754 |   |
| Basic EPS:         |   |                                      |       |   |   |
| As reported        |   | (0.14                                     | )          | 0.39 |   |
| Pro forma          |   | (0.14                                     | )          | 0.38 |   |
| Diluted EPS:       |   |                                      |       |   |   |
| As reported        |   | (0.14                                     | )          | 0.38 |   |
| Pro forma          |   | (0.14                                     | )          | 0.37 |   |
|                    |        |                                           |            |  |  |  |  |

 

8

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**(2)**                                 **GOODWILL AND INTANGIBLE ASSETS**

 

The Companyadopted Statements of Financial Accounting Standards No. 142, “Goodwill andOther Intangible Assets” (“SFAS 142”) as of January 1, 2002.  SFAS 142 addresses the method of identifyingand measuring goodwill and other intangible assets having indefinite livesacquired in a business combination, eliminates further amortization ofgoodwill, and requires periodic impairment evaluations of goodwill using a fairvalue methodology prescribed in the statement. As a result of adopting SFAS 142, the Company no longer amortizes thegoodwill balance of $33.9 million.  Aninitial impairment test was performed during 2002 and another impairment testwas completed at year-end.  Theevaluations were made using discounted future cash flows, and in each analysis,it was determined that an impairment charge was not required.  Impairment testing is required at leastannually or more frequently as a result of an event or change in circumstances(e.g. recurring operating losses by the acquired entity) that would indicate animpairment adjustment may be necessary.

 

At March 31,2003, the Company has $1.4 million in unamortized identifiable intangibleassets consisting of core deposit intangibles and other intangibles.  Total amortization expense associated withthese intangibles assets for the three months ending March 31, 2003 and 2002was $164,000 and $208,000, respectively.

 

The changes inthe carrying of goodwill and other intangibles assets for the three monthsended March 31, 2003 and 2002, are as follows:

 
|                            |   | **Goodwill**       |   | **Core Deposit  Intangibles** |   | **Other  Intangibles** |   | **Total  Intangibles** |   |
|---------------------------------|--------|--------------------|--------|-------------------------------|--------|------------------------|--------|------------------------|--------|
|                            |   | **(In thousands)** |   |
| Balance, December 31, 2001      |   | $                  | 33,903 |                          | $      | 2,263                  |   | $                      | 107    |   | $ | 36,273 |   |
| Recorded during the period      |   | —             |   | —                        |   | —                 |   | —                 |   |
| Amortization expense            |   | —             |   | (186                          | )      | (22                    | )      | (208                   | )      |
| Impairment recognized           |   | —             |   | —                        |   | —                 |   | —                 |   |
| Balance, March 31, 2002         |   | $                  | 33,903 |                          | $      | 2,077                  |   | $                      | 85     |   | $ | 36,065 |   |
|                            |   |               |   |                          |   |                   |   |                   |   |
| Balance, December 31, 2002      |   | $                  | 33,903 |                          | $      | 1,539                  |   | $                      | 25     |   | $ | 35,467 |   |
| Recorded during the period      |   | —             |   | —                        |   | —                 |   | —                 |   |
| Amortization expense            |   | —             |   | (156                          | )      | (8                     | )      | (164                   | )      |
| Impairment recognized           |   | —             |   | —                        |   | —                 |   | —                 |   |
| Balance, March 31, 2003         |   | $                  | 33,903 |                          | $      | 1,383                  |   | $                      | 17     |   | $ | 35,303 |   |
|                            |   |               |   |                          |   |                   |   |                   |   |
| Estimated amortization expense: |   |               |   |                          |   |                   |   |                   |   |
| 2003                            |   | —             |   | 608                           |   | 18                     |   | 626                    |   |
| 2004                            |   | —             |   | 314                           |   | 7                      |   | 321                    |   |
| 2005                            |   | —             |   | 208                           |   | —                 |   | 208                    |   |
| 2006                            |   | —             |   | 166                           |   | —                 |   | 166                    |   |
| 2007                            |   | —             |   | 115                           |   | —                 |   | 115                    |   |

 

The componentsof other intangibles assets follows:

 
|                     |   | **March  31, 2003**        |       |
|--------------------------|--------|----------------------------|------------|
|                     |   | **Gross Carrying  Amount** |       | **Accumulated   Amortization** |   | **Net Carrying  Amount** |   |
|                     |   | **(In thousands)**         | ** ** |
| Core deposit intangibles |   | $                          | 4,424      |   | $ | 3,041 |   | $ | 1,383 |   |
| Other intangibles        |   | 220                        |       | 203 |   | 17 |   |
| Total                    |   | $                          | 4,644      |   | $ | 3,244 |   | $ | 1,400 |   |

 

9

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** **

**(3)**                                 **COMPREHENSIVE (LOSS) INCOME**

** **

The componentsof comprehensive (loss) income for Seacoast are net (loss) income andunrealized gains (losses) on securities available for sale, net of tax.  The following is a reconciliation ofcomprehensive (loss) income for the three months ended March 31, 2003 and 2002.

 
|                                                                                                                   |   | **Three Months Ended  March 31,** |       |
|------------------------------------------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                                                   |   | **2003**                          |       | **2002** |   |
|                                                                                                                   |   | **(In thousands)**                | ** ** |
| Net (loss) income                                                                                                      |   | $                                 | (3,029     | ) | $ | 8,874 |   |
| Other comprehensive (loss) income, net of  tax:                                                                        |   |                              |       |   |   |
| Unrealized gains (losses) on available for  sale securities:                                                           |   |                              |       |   |   |
| Unrealized holding gains (losses) arising  during the period net of taxes of $87 and ($1,438), respectively            |   | 158                               |       | (1,910 | ) |
| Less: reclassification adjustment for gains  included in net (loss) income, net of taxes of $91 and $49, respectively, |   | (168                              | )          | (92 | ) |
| Other components of income, net                                                                                        |   | (10                               | )          | (2,002 | ) |
| Comprehensive (loss) income                                                                                            |   | $                                 | (3,039     | ) | $ | 6,872 |   |

 

**(4)**                                 **PENDING ACQUISITION**

 

On December 19, 2002, theCompany announced that it had entered into an agreement to acquire Bay StateBancorp, Inc. (“Bay State”),parent company of Bay State Federal Savings Bank.  Bay State had $584.5 million in assets and $61.0 million inshareholders’ equity at March 31, 2003. Under terms of the agreement, each outstanding share of common stock ofBay State will be converted into the right to receive $27.00 in cash, or 1.257shares of Seacoast common stock, plus cash in lieu of any fractional shareinterest, subject to election and allocation procedures which are intended toensure that 55% of the outstanding shares of Bay State common stock will beconverted into the right to receive Seacoast common stock and 45% of theoutstanding shares of Bay State common stock will be converted into cash.  The agreement has been approved by theSeacoast and Bay State boards of directors, as well as Bay StateStockholders.  Consummation of themerger is subject to the receipt of all required regulatory approvals and othercustomary closing conditions.  Theacquisition is expected to be completed by the end of the second quarter.

 

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

 

Basic EPS wascomputed based on the weighted average number of shares outstanding during theperiods.  Unallocated ESOP shares andunvested restricted stock awards are not considered outstanding for purposes ofthe computation of basic EPS.  DilutedEPS reflects the potential dilution that could occur if contracts to issuecommon stock were exercised and has been computed after giving consideration tothe dilutive effect of stock options, stock awards and shares held in anemployee trust.

 

**(6)**                                 **CAPITAL TRUST SECURITIES**

 

The following is a summary of the capital trust securities outstandingas of March 31, 2003:

 
| **Name**                  |   | **Issuance  Date** |   | **Amount** |   | **Stated  Rate** |   | **Maturity  Date** |     |
|---------------------------|--------|--------------------|--------|------------|--------|------------------|--------|--------------------|----------|
| Seacoast Capital Trust I  |   | 05/28/02           |   | $          | 54,885 |             | 8.50   | %                  | 06/30/32 |   |
| Seacoast Capital Trust II |   | 03/27/03           |   | 14,520     |   | 6.65             | %      | 04/07/33           |     |
|                      |   |               |   | $          | 69,405 |             |   |               |     |   |

 

10

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On March 27, 2003, Seacoast Capital Trust II, a subsidiary of Seacoastissued $15 million of trust preferred securities (“Securities”) and invested theproceeds from this offering in an equivalent amount of junior subordinateddebentures issued by Seacoast.  Theinitial interest rate on these securities is fixed at 6.65% until April 7,2008.  The securities are then callableat the option of Seacoast.  If Seacoastdoes not exercise its call option, the interest rate on the securities becomesvariable at LIBOR +3.25% adjusting quarterly. The securities remain callable at the Company’s option quarterlythereafter.  The proceeds from theoffering to Seacoast, which was net of $450,000 of issuance costs, will be usedfor general corporate purposes, including working capital, capitalexpenditures, investments in or advances to existing or future indebtedness,repayment of maturing obligations, replacement of outstanding indebtedness andrepurchase of outstanding stock.  TheSecurities pay interest quarterly and are mandatorily redeemable on April 7,2033.

 

**(7)**                                 **SHARE REPURCHASE PROGRAMS**

 

During the three months ended March 31, 2003, Seacoast repurchased285,000 shares of its outstanding common stock at an average price of$18.88.  At March 31, 2003, there were atotal of 390,184 shares remaining under existing repurchase authorizations.

 

**(8)**                                 **QUARTERLY CASH DIVIDEND**

** **

On April 24,2003, the Board of Directors voted for the payment of a quarterly cash dividendof $.12 per share.  The dividend ispayable on May 23, 2003 to stockholders of record on May 9, 2003.

 

** **

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

** **

On March 5,2003, a retroactive change to Massachusetts tax law was implemented whichspecifically denies the deduction for dividends received from a real estateinvestment trust subsidiary (REIT) in determining Massachusetts taxableincome.  The law applies retroactivelyto tax years ending on or after December 31, 1999.  Although Seacoast Financial questions the constitutionality ofthis retroactive legislation, accounting principles generally accepted in theUnited States dictate that the total estimated assessment, including interest,be provided for at the time the law is enacted.  Seacoast Financial has two REIT subsidiaries that were formed in1998 under its banking companies, Compass Bank for Savings and Nantucket Bank,that are impacted by this legislation. Accordingly, Seacoast Financial recorded an $11,192,000 charge to firstquarter earnings to recognize the liabilities for taxes ($9,571,000) andinterest ($1,621,000, recorded as non-interest expense) resulting from theretroactive application of this new law. This amount recorded is net of any federal and state income taxbenefits.  In addition to the charge toearnings resulting from the retroactive application of the new legislation,Seacoast Financial has also ceased recording the tax benefits associated withthe dividend received deduction in 2003.

 

**(10)**                          **RECENT ACCOUNTING PRONOUNCEMENTS**

** **

In January2003, the Financial Accounting Standards Board (“FASB”) issued InterpretationNo. 46, “Consolidation of Variable Interest Entities.”  Interpretation No. 46 addresses when acompany should include in its financial statements the assets, liabilities andactivities of another entity.  Theconsolidation requirements of Interpretation No. 46 apply immediately tovariable interest entities created after January 31, 2003.  The consolidating requirements apply toolder entities in the first fiscal year or interim period beginning after June15, 2003.  Certain disclosurerequirements apply in all financial statements issued after January 31,2003.  The Company does not believe theadoption of this statement will have a material impact on the Company’sfinancial position or results of operations.

 

In April 2003,the FASB issued SFAS No. 149, “Amendment of Statement 133 on DerivativeInstruments and Hedging Activities.” SFAS No. 149 amends and clarifiesaccounting for derivative instruments, including certain derivative instrumentsembedded in other contracts, and for hedging activities under SFAS #33.  SFAS #149 is generally effective forcontracts entered into or modified after June 30, 2003.  The Company does not believe the adoption ofthis statement will have a material impact on the Company’s financial positionor results of operations.

 

11

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**Item 2****.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

### **Forward-Looking Statements**

 

This Form 10-Qcontains certain “forward-looking statements” within the meaning of Section 27Aof the Securities Act of 1933 and Section 21E of the Securities Exchange Act of1934.  When used in this report, the wordsor phrases, “will likely result,” “are expected to,” “will continue,” “isanticipated,” “estimate,” “believe,” or similar expressions are intended toidentify such forward-looking statements. Actual events could differ materially from those anticipated in theforward-looking statements.  Importantfactors that might cause such a difference include, among other things, generaleconomic conditions, particularly the real estate market, in the Company’sprimary market area, potential increases in the Company’s nonperforming assets(as well as increases in the allowance for loan losses that might benecessary), concentrations of loans in a particular geographic area or withcertain large borrowers, changes in government regulation and supervision,including increased deposit insurance premiums or capital or reserverequirements, changes in interest rates, and increased competition and bankconsolidations in the Company’s market area. These and other factors that might cause differences between actual andanticipated results, performance and achievements are discussed in greaterdetail in this Item 2.

 

### **Comparison of Operating Results for theQuarters Ended March 31, 2003 and 2002**

 

General.  The Company incurred a net loss of$3,029,000, or $0.14 per diluted share, for the quarter ended March 31, 2003,compared to net income of $8,874,000, or $0.38 per diluted share for thequarter ended March 31, 2002.  Includedin the first quarter 2003 results is an $11,192,000 charge to earnings, $0.50per diluted share, due to a retroactive change in Massachusetts tax lawimplemented on March 5, 2003.  Refer toNote 9 to the unaudited Consolidated Financial Statements.

 

*Interest Income.*  Interest income for the quarter ended March31, 2003 was $53.6 million, compared to $53.2 million for the quarter endedMarch 31, 2002, an increase of $417,000, or 0.8%.  The increase in interest income resulted from growth in averageinterest-earning assets of $339.0 million, or 10.5%, partially offset by adecrease in the overall yield on interest-earning assets of 59 basis points inthe 2003 period.  The principal areas ofgrowth in average balances were related to real estate loans (up $254.4million, or 13.7%) and indirect auto loans (up $160.9 million, or 26.3%).  The growth in real estate loans resultedfrom increased originations during the period and retention in portfolio ofthose real estate loans. The increase in indirect auto loans resulted from thefavorable interest rate environment during the period and the continuedgeographic expansion of the network of participating dealers. The funding ofloan growth during the period resulted in a decrease in the average balance ininvestment securities of $74.0 million or 12.8%.

 

*Interest Expense.*  Interest expense for the quarter ended March31, 2003 was $21.3 million compared to $24.4 million for the quarter endedMarch 31, 2002, a decrease of $3.1 million or 12.8%.  This decrease resulted from a 68 basis points decrease in thecost of all funds from 3.40% in 2002 to 2.72% in 2003, partially offset by a higheraverage balance of interest-bearing liabilities (up $264.4 million, or9.2%).  Average interest-bearing depositbalances increased $173.5 million, or 8.6%, during the quarter ended March 31,2003 compared to the same period in 2002.

 

Interestexpense on borrowed funds decreased $362,000 in the quarter ended March 31,2003 primarily the result of a decrease of 65 basis points in the average ratepaid on borrowed funds to 4.42% in 2003 from 5.07% in 2002, partially offset byan increase in the average balance of such funds of $90.9 million or 10.8%during the period.

 

The decreasein the cost of funds and the lower yields earned on interest-earning assets arereflective of the interest rate reductions implemented by the Federal Reserveduring the period.

 

12

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The followingtable presents average balances, interest income and expense and yields earnedor rates paid on the major categories of assets and liabilities for thequarters indicated.

 

**Seacoast Financial Services Corporation and Subsidiaries**

**Analysis of Net Yield on Earning Assets**

**(Unaudited)**

**Quarters ended March 31,**

 
|                                                |   | **2003**             | ** ** | **2002**     | ** ** |
|-----------------------------------------------------|--------|----------------------|------------|--------------|------------|
|                                                |   | **Average  balance** |       | **Interest** |       | **Average  yield/  Cost (1)** |   | **Average  balance** |   | **Interest** |   | **Average  yield/  Cost (1)** |   |
| **Assets:**                                         |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| Interest-earning assets:                            |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| Mortgage loans (3)                                  |   | $                    | 2,104,991  |         | $          | 34,562 |   | 6.57 | % | $ | 1,850,623 |   | $ | 33,259 |   | 7.19 | % |
| Commercial loans (3)                                |   | 126,394              |       | 1,753        |       | 5.55 |   | 117,349 |   | 1,947 |   | 6.64 |   |
| Indirect auto loans (3)                             |   | 773,354              |       | 11,145       |       | 5.76 |   | 612,455 |   | 10,679 |   | 6.97 |   |
| Other consumer loans (3)                            |   | 43,568               |       | 839          |       | 7.70 |   | 54,849 |   | 1,093 |   | 7.97 |   |
| Total loans                                         |   | 3,048,307            |       | 48,247       |       | 6.34 |   | 2,635,276 |   | 46,923 |   | 7.12 |   |
| Federal funds sold and other short-term investments |   | 22,093               |       | 54           |       | 0.98 |   | 106,161 |   | 430 |   | 1.62 |   |
| Debt securities (2)                                 |   | 423,513              |       | 4,804        |       | 4.54 |   | 414,488 |   | 5,386 |   | 5.20 |   |
| Equity securities (2)                               |   | 59,629               |       | 460          |       | 3.09 |   | 58,576 |   | 492 |   | 3.36 |   |
| Total earning assets                                |   | 3,553,542            |       | 53,617       |       | 6.04 |   | 3,214,501 |   | 53,200 |   | 6.63 |   |
| Allowance for loan losses                           |   | (34,602              | )          |         |       |   |   | (30,028 | ) |   |   |   |   |
| Non-interest earning assets                         |   | 229,965              |       |         |       |   |   | 216,756 |   |   |   |   |   |
| Total assets                                        |   | $                    | 3,748,905  |         |       |   |   |   | $ | 3,401,229 |   |   |   |   |   |
| Liabilities and Equity:                             |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                       |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| Deposits:                                           |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| NOW accounts                                        |   | $                    | 287,808    |         | $          | 184 |   | 0.26 | % | $ | 260,238 |   | $ | 285 |   | 0.44 | % |
| Savings accounts                                    |   | 325,883              |       | 777          |       | 0.95 |   | 279,858 |   | 1,064 |   | 1.52 |   |
| Money market savings accounts                       |   | 579,187              |       | 2,023        |       | 1.40 |   | 496,691 |   | 2,741 |   | 2.21 |   |
| Certificates of deposit                             |   | 1,008,352            |       | 7,977        |       | 3.16 |   | 990,909 |   | 9,634 |   | 3.89 |   |
| Total interest-bearing deposits                     |   | 2,201,230            |       | 10,961       |       | 1.99 |   | 2,027,696 |   | 13,724 |   | 2.71 |   |
| Borrowed funds:                                     |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| Short-term borrowings (4)                           |   | 35,818               |       | 144          |       | 1.61 |   | 36,747 |   | 256 |   | 2.79 |   |
| FHLB advances                                       |   | 897,834              |       | 10,175       |       | 4.53 |   | 806,045 |   | 10,425 |   | 5.17 |   |
| Total borrowings                                    |   | 933,652              |       | 10,319       |       | 4.42 |   | 842,792 |   | 10,681 |   | 5.07 |   |
|                                                |   |                 |       |         |       |   |   |   |   |   |   |   |   |
| Total interest-bearing liabilities                  |   | 3,134,882            |       | 21,280       |       | 2.72 |   | 2,870,488 |   | 24,405 |   | 3.40 |   |
| Non-interest bearing demand deposit accounts        |   | 210,938              |       |         |       |   |   | 193,495 |   |   |   |   |   |
| Other liabilities                                   |   | 20,036               |       |         |       |   |   | 19,545 |   |   |   |   |   |
| Trust preferred securities                          |   | 55,032               |       |         |       |   |   | — |   |   |   |   |   |
| Total liabilities                                   |   | 3,420,888            |       |         |       |   |   | 3,083,528 |   |   |   |   |   |
| Stockholders’ equity                           |   | 328,017              |       |         |       |   |   | 317,701 |   |   |   |   |   |
| Total liabilities and stockholders’ equity     |   | $                    | 3,748,905  |         |       |   |   |   | $ | 3,401,229 |   |   |   |   |   |
| Net interest-earning assets                         |   | $                    | 418,660    |         |       |   |   |   | $ | 344,013 |   |   |   |   |   |
| Net interest income (fully-taxable equivalent)      |   |                 |       | 32,337       |       |   |   |   |   | 28,882 |   |   |   |
| Less: fully-taxable equivalent adjustments          |   |                 |       | (83          | )          |   |   |   |   | (87 | ) |   |   |
| Net interest income                                 |   |                 |       | $            | 32,254     |   |   |   |   |   | $ | 28,795 |   |   |   |
| Net interest rate spread (5)                        |   |                 |       |         |       | 3.32 | % |   |   |   |   | 3.23 | % |
| Net interest margin (6)                             |   |                 |       |         |       | 3.64 | % |   |   |   |   | 3.59 | % |

 

----

(1) Annualized

(2) Average balances include unrealized gains on securities availablefor sale.  Equity securities includemarketable equity securities and restricted equity securities.

(3) Loans on non-accrual status are included in the average balances.

(4) Short-term borrowings include immaterial balances of otherborrowings.

(5) Net interest rate spread represents the difference between the fullytaxable yield on interest-earning assets and the cost of interest-bearingliabilities.

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

 

13

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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.

 
|                                            |   | **Quarters  ended March 31,  2003 vs. 2002  Increase (decrease) due to** | ** ** |
|-------------------------------------------------|--------|--------------------------------------------------------------------------|------------|
|                                            |   | **Volume**                                                               |       | **Rate** | ** ** | **Net** | ** ** |
|                                            |   | **(In thousands)**                                                       | ** ** |
| Interest-earning assets:                        |   |                                                                     |       |   |   |   |   |
| Federal funds sold and short-term investments   |   | $                                                                        | (251       | ) | $ | (125 | ) | $ | (376 | ) |
| Debt securities                                 |   | 115                                                                      |       | (697 | ) | (582 | ) |
| Equity securities                               |   | 9                                                                        |       | (42 | ) | (33 | ) |
| Mortgage loans                                  |   | 4,329                                                                    |       | (3,026 | ) | 1,303 |   |
| Commercial loans                                |   | 142                                                                      |       | (336 | ) | (194 | ) |
| Indirect auto loans                             |   | 2,512                                                                    |       | (2,046 | ) | 466 |   |
| Other consumer loans                            |   | (218                                                                     | )          | (36 | ) | (254 | ) |
| Total interest-earning assets                   |   | 6,638                                                                    |       | (6,308 | ) | 330 |   |
|                                            |   |                                                                     |       |   |   |   |   |
| Interest-bearing liabilities:                   |   |                                                                     |       |   |   |   |   |
| Deposits:                                       |   |                                                                     |       |   |   |   |   |
| NOW accounts                                    |   | 28                                                                       |       | (129 | ) | (101 | ) |
| Savings accounts                                |   | 155                                                                      |       | (442 | ) | (287 | ) |
| Money market savings accounts                   |   | 403                                                                      |       | (1,121 | ) | (718 | ) |
| Certificates of deposit                         |   | 167                                                                      |       | (1,824 | ) | (1,657 | ) |
| Total deposits                                  |   | 753                                                                      |       | (3,516 | ) | (2,763 | ) |
|                                            |   |                                                                     |       |   |   |   |   |
| Borrowed funds:                                 |   |                                                                     |       |   |   |   |   |
| Short-term borrowings                           |   | (5                                                                       | )          | (107 | ) | (112 | ) |
| FHLB advances                                   |   | 1,117                                                                    |       | (1,367 | ) | (250 | ) |
| Total borrowings                                |   | 1,110                                                                    |       | (1,472 | ) | (362 | ) |
| Total interest-bearing liabilities              |   | 1,863                                                                    |       | (4,988 | ) | (3,125 | ) |
| Net interest income (fully-taxable  equivalent) |   | $                                                                        | 4,776      |   | $ | (1,321 | ) | $ | 3,455 |   |

** **

*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 the allowance for loan losses,management considers past and anticipated loss experience, evaluations ofunderlying collateral, prevailing economic conditions, the nature and volume ofthe loan portfolio, risk rating of loans, and the levels of nonperforming andother classified loans.  The amount ofthe allowance is estimated based on numerous judgments, and ultimate losses mayvary from such estimates.  Managementassesses the allowance for loan losses on a quarterly basis and provides forloan losses monthly in order to maintain the adequacy of the allowance.  For a full discussion on the Company’sallowance for loan losses policies see “Allowance for Loan Losses” in theCompany’s 2002 annual report on Form 10-K.

 

The Companyprovided $2.1 million for loan losses in the quarter ended March 31, 2003compared to $1.5 million in the quarter ended March 31, 2002.  The increase of $552,000 in 2003 wasprimarily attributable to risks associated with the growth in the loanportfolios as well as an increase in charge-offs and non-accrual loans.  The total allowance of $34.7 million atMarch 31, 2003 represented 1.13% of total loans compared to a ratio of 1.15% atDecember 31, 2002.  The allowance forloan losses as a percentage of non-performing loans was 174.9% compared to244.1% at December 31, 2002.

 

*Noninterest Income.*  Total noninterest income was $3.6 millionfor the quarter ended March 31, 2003 compared to $3.2 million in the sameperiod of 2002, an increase of $379,000, or 11.8%.  The increase was primarily the result of increases in deposit andother banking fees, other loan fees and gains on the sale of investmentsecurities. The increases were partially offset with decreases in loanservicing fees, merchant card fee income and sales of loans.

 

14

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*Noninterest Expense.*   Noninterest expense increased by $3.5million or 20.6%, from $16.9 million for the quarter ended March 31, 2002 to$20.4 million for the quarter ended March 31, 2003.  This increase reflected increases in salaries and employeebenefits ($560,000), occupancy and equipment ($546,000), data processing($388,000), marketing ($250,000) and other noninterest expense ($1.8million).  The increases in noninterestexpenses were partially offset by decreases in professional services ($57,000)and amortization of intangibles ($44,000).

 

Salaries andemployee benefits increased $560,000, or 5.9%, during the quarter ended March31, 2003.  This increase was the resultof salary increases averaging 4.5%, additions to staff in the CreditAdministration and Managed Assets departments and other increases in staffingrelated to Company growth and franchise expansion, supplemented by increases inemployee benefits.

 

Occupancy andequipment expenses increased by $546,000, or 25.1%, during the quarter endedMarch 31, 2002. This increase was primarily the result of increases in buildingand equipment depreciation and maintenance expenses related to branch expansionduring the period.

 

Dataprocessing expenses increased $388,000, or 22.8%, during the quarter endedMarch 31, 2003 due primarily to core processing activities that arevolume-related and increases in the number of retail deposit and loan accounts.Also, data communication line and software maintenance expenses increased dueto the anticipated conversion of the core processing functions to anotherservice bureau scheduled in the second quarter.

 

Marketingexpenses increased $250,000, or 52.9%, during the quarter ended March 31,2003.  This increase was primarilyattributable to an overall general increase in marketing and advertisingefforts related to brand building and product campaigns.

 

Professionalservices expenses decreased $57,000 or 9.4%, during the quarter ended March 31,2003.  This decrease was primarily theresult of reductions in expenses related to tax and audit fees and corporateconsulting.

 

Amortizationof intangibles decreased $44,000, or 21.2%, during the quarter ending March 31,2003.  This decrease is primarilyattributable to the elimination of certain intangibles related to depositacquisitions in previous years that have become fully amortized.

 

Othernoninterest expense increased $1.8 million, or 78.9%, during the quarter endedMarch 31, 2003.  This increase reflectsprimarily the recording of an interest deficiency charge of $1.6 million as aresult of the Massachusetts law change that retroactively disallowed the REITdividend deduction for the years ended December 31, 1999 through December 31,2002. (See Note 9 to the Unaudited Consolidated Financial Statements).  Excluding this deficiency charge, othernoninterest expense increased $228,000, or 9.8% during the period. Most of thatincrease was related to increases in postage and security related expenses.

 

*Minority Interest Expense. *Interestexpense of $1.2 million reflects the issuance of $55.0 million of the 8.50% trustpreferred securities in June 2002 and $15.0 million of pooled 6.65% trustpreferred stock in March 2003.

 

*Income Taxes.* During the quarter ended March 31, 2003, the Company recorded a stateincome tax provision of $9.6 million, net of the federal income tax benefit, asa result of the Massachusetts law change that retroactively disallowed the REITdividend deduction for the years ended December 31, 1999 through December 31,2002.  Due primarily to the impact of thisextra state tax provision, the effective tax rate was 124.9% for the quarterended March 31, 2003, as compared with 34.6% for the same period in 2002.  Exclusive of this provision and the interestdeficiency charge, the effective tax rate for the quarter ended March 31, 2003would have been 40.8% compared to 34.6% in the same period in 2002. Thisincrease from 2002 primarily reflects the impact of the elimination of the taxbenefit attributable to REIT dividends in 2003. (See Note 9).

 

15

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**Comparisonof Financial Condition at March 31, 2003 and December 31, 2002**

 

Total assetsincreased by $75.1 million from $3,701.1 million at December 31, 2002 to$3,776.2 million at March 31, 2003. During the quarter ended March 31, 2003, investment securities held asavailable-for-sale decreased $29.0 million from $426.8 million at December 31,2002 to $397.8 million at March 31, 2003. The decrease was primarily the result of securities being called due tothe low interest rate environment and scheduled maturities.  During the quarter ended March 31, 2003, theloan portfolio increased by $67.1 million, or 2.2%, which was fundedprincipally by Federal Home Loan Bank advances of $49.7 million and, to alesser extent deposit growth of $14.6 million. Short-term borrowings decreased $4.3 million from $36.1 million atDecember 31, 2002 to $31.8 million at March 31, 2003.  The decrease in short-term borrowings was primarily due to areduction in sweep accounts of $2.5 million and treasury tax and loanborrowings of $1.8 million.

 

**LOANS**

 

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

 
|                             |   | **March 31,  2003** |      | **December 31,  2002** |   |
|----------------------------------|--------|---------------------|-----------|------------------------|--------|
|                             |   | **(In  thousands)** |      |
| Real estate loans:               |   |                |      |                   |   |
| Residential (one-to-four family) |   | $                   | 1,576,224 |                   | $      | 1,513,388 |   |
| Commercial                       |   | 360,782             |      | 356,610                |   |
| Construction                     |   | 106,473             |      | 110,166                |   |
| Home equity lines of credit      |   | 75,057              |      | 67,794                 |   |
| Total real estate loans          |   | 2,118,536           |      | 2,047,958              |   |
| Commercial loans                 |   | 121,969             |      | 127,822                |   |
| Consumer loans:                  |   |                |      |                   |   |
| Indirect auto loans              |   | 775,911             |      | 770,574                |   |
| Less-unearned discount           |   | 102                 |      | 210                    |   |
| Indirect auto loans, net         |   | 775,809             |      | 770,364                |   |
| Other                            |   | 41,957              |      | 45,027                 |   |
| Total consumer loans, net        |   | 817,766             |      | 815,391                |   |
| Total loans                      |   | $                   | 3,058,271 |                   | $      | 2,991,171 |   |

 

Loans serviced for others ona non-recourse basis at March 31, 2003 and December 31, 2002 amounted to$216,161,000 and $248,983,000, respectively.

 

The increasein loans occurred primarily in the residential, home equity, and indirect autoloan portfolios.  From December 31, 2002to March 31, 2003, residential mortgage loans increased by $62.8 million, or4.2%, home equity lines of credit increased by $7.3 million, and indirect autoloans increased by $5.4 million. The growth during the quarter ended March 31,2003 was generally attributable to lower interest rates during this period aswell as a successful marketing campaign for new home equity lines ofcredit.  The Company has continued toretain in portfolio most residential mortgage loan originations and has continuedto emphasize the origination of indirect auto loans through its network ofautomobile dealers which has recently been expanded to include dealers incommunities contiguous to the metropolitan Boston area and southern NewHampshire.

 

16

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**RISKELEMENTS**

 

The followingtable sets forth information regarding non-performing assets:

 
|                                                                      |   | **03/31/03**                |   | **12/31/02** |   |
|---------------------------------------------------------------------------|--------|-----------------------------|--------|--------------|--------|
|                                                                      |   | **(Dollars  in thousands)** |   |
| Non-accrual loans (1):                                                    |   |                        |   |         |   |
| Real estate loans:                                                        |   |                        |   |         |   |
| Residential                                                               |   | $                           | 4,126  |         | $      | 3,654 |   |
| Commercial                                                                |   | 4,949                       |   | 3,978        |   |
| Construction                                                              |   | 1,967                       |   | —       |   |
| Home equity                                                               |   | 189                         |   | 77           |   |
| Commercial loans                                                          |   | 7,541                       |   | 5,028        |   |
| Indirect auto loans                                                       |   | 1,004                       |   | 1,194        |   |
| Other consumer loans                                                      |   | 70                          |   | 142          |   |
| Total non-accrual loans                                                   |   | 19,846                      |   | 14,073       |   |
| Restructured loans (2)                                                    |   | —                      |   | —       |   |
| Other real estate owned and repossessed autos                             |   | 333                         |   | 1,350        |   |
| Total non-performing assets                                               |   | $                           | 20,179 |         | $      | 15,423 |   |
|                                                                      |   |                        |   |         |   |
| Allowance for loan losses as a percent of total loans                     |   | 1.13                        | %      | 1.15         | %      |
| Allowance for loan losses as a percent of total non-performing loans  (3) |   | 174.9                       | %      | 244.1        | %      |
| Non-performing loans as a percent of total loans                          |   | 0.65                        | %      | 0.47         | %      |
| Non-performing assets as a percent of total assets                        |   | 0.53                        | %      | 0.42         | %      |

 

----

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

(2)             Restructured loans represent performing loansfor which concessions have been granted due to borrower’s financial condition.

(3)             Non-performing loans are comprised of non-accrualloans and restructured loans.

 

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 atMarch 31, 2003 and, December 31, 2002, were $15.3 million and $9.5 million,respectively.  The increase innon-accrual loans at March 31, 2003, was due mainly to several loans which hadreached the contractual maturity date more than 90 days prior.

 

17

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The following table sets forthactivity in the allowance for loan losses for the periods indicated:

 
|                                                 |   | **Three  Months Ended  March 31,** |       |
|------------------------------------------------------|--------|------------------------------------|------------|
|                                                 |   | **2003**                           |       | **2002** | ** ** |
|                                                 |   | **(In  thousands)**                | ** ** |
| Balance at beginning of period                       |   | $                                  | 34,354     |   | $ | 29,513 |   |
| Provision for loan losses                            |   | 2,087                              |       | 1,535 |   |
| Charge-offs:                                         |   |                               |       |   |   |
| Mortgage loans:                                      |   |                               |       |   |   |
| Residential                                          |   | —                             |       | — |   |
| Commercial                                           |   | (6                                 | )          | — |   |
| Home equity                                          |   | —                             |       | — |   |
| Construction                                         |   | —                             |       | — |   |
| Commercial loans                                     |   | (120                               | )          | (244 | ) |
| Indirect auto loans                                  |   | (1,688                             | )          | (605 | ) |
| Other consumer loans                                 |   | (2                                 | )          | (4 | ) |
| Total charge-offs                                    |   | (1,816                             | )          | (853 | ) |
|                                                 |   |                               |       |   |   |
| Recoveries:                                          |   |                               |       |   |   |
| Mortgage loans:                                      |   |                               |       |   |   |
| Residential                                          |   | —                             |       | — |   |
| Commercial                                           |   | —                             |       | 31 |   |
| Home equity                                          |   | —                             |       | — |   |
| Construction                                         |   | —                             |       | — |   |
| Commercial loans                                     |   | 2                                  |       | 23 |   |
| Indirect auto loans                                  |   | 79                                 |       | 83 |   |
| Other consumer loans                                 |   | 3                                  |       | — |   |
| Total recoveries                                     |   | 84                                 |       | 137 |   |
|                                                 |   |                               |       |   |   |
| Net charge-offs                                      |   | (1,732                             | )          | (716 | ) |
|                                                 |   |                               |       |   |   |
| Balance at end of period                             |   | $                                  | 34,709     |   | $ | 30,332 |   |
|                                                 |   |                               |       |   |   |
| Ratio of annualized net charge-offs to average loans |   | 0.23                               | %          | 0.11 | % |

 

The increasein indirect auto loan charge-offs during the first quarter of 2003 versus 2002is due in part to the significant growth in the portfolio during the past year(average balances increased $161 million or 26%), coupled with risingunemployment and lower values realized from repossessed auto sales.

 

18

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**DEPOSITS**

 

A summary of deposit balances is as follows:

 
|                                   |   | **March 31,  2003** |      | **December 31,  2002** |   |
|----------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                   |   | **(In  thousands)** |      |
| Demand deposit accounts                |   | $                   | 197,831   |                   | $      | 196,869 |   |
| NOW and money market deposit accounts  |   | 878,801             |      | 873,019                |   |
| Passbook and other savings accounts    |   | 333,719             |      | 320,528                |   |
| Total non-certificate accounts         |   | 1,410,351           |      | 1,390,416              |   |
|                                   |   |                |      |                   |   |
| Certificates of deposit -              |   |                |      |                   |   |
| Term certificates of $100,000 and over |   | 286,720             |      | 285,664                |   |
| Term certificates less than $100,000   |   | 721,441             |      | 727,795                |   |
| Total certificates of deposit          |   | 1,008,161           |      | 1,013,459              |   |
|                                   |   | $                   | 2,418,512 |                   | $      | 2,403,875 |   |

 

Total depositsat March 31, 2003 were $2,418.5 million, an increase of $14.6 million, comparedto $2,403.9 million at December 31, 2002. Core deposit account balances (non-certificate) increased by $19.9million during the quarter.  Theincrease in core deposits during the quarter was generally attributable tonormal seasonal fluctuations, continued uncertainty in the stock market asconsumers seek safety and liquidity, as well as the result of less attractiverates being offered on term deposit products. The slight decrease in certificates of deposits was primarily the resultof declining interest rates for this type of product and consumers wanting tomaintain a liquid position.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

The decreasein stockholders’ equity of $10.5 million to $309.0 million at March 31, 2003resulted from the net loss of $3.0 million for the quarter ended March 31, 2003and by cash dividends and stock repurchases totaling $8.1 million.  There remain 390,184 shares available forrepurchase under the Company’s fourth repurchase program announced in September2002.  Management expects to fullyrepurchase the remaining shares under this program during 2003, subject tomarket conditions.

 

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 specifically   pledged to the FHLB.  At March 31, 2003, Compass and Nantucket Bankhad approximately $350.4 million and $28.9 million, respectively, in unusedborrowing capacity that is contingent upon the purchase of additional FHLBstock.  Use of this borrowing capacitymay also be impacted by regulatory capital requirements.

 

Liquidity management is botha 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 March 31, 2003, the Company maintainedcash and due from banks, federal funds sold, short-term investments and debtsecurities maturing within one year of $212.4 million, or 5.62% of totalassets.  The Company invests excessfunds, if any, in federal funds sold which provides liquidity to meet lendingrequirements.

 

At March 31,2003, the Company had commitments to originate loans, unused outstanding linesof credit, standby letters of credit and undisbursed proceeds of loans totaling$324.6 million.  The Company also had a$2.3 million commitment to purchase and renovate office space for Bankuse.  The Company anticipates that itwill have sufficient funds available to meet its current commitments.  Certificates of deposit maturing within oneyear from March 31, 2003 amounted to $690.2 million.  The Company expects that a significant portion of maturingcertificate accounts will be retained at maturity.

 

19

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The Company’sand the Banks’ capital ratios at March 31, 2003 were as follows:

 
|                                    |   | **Seacoast Financial** |   | **Compass  Bank** |   | **Nantucket** |   |
|-----------------------------------------|--------|------------------------|--------|-------------------|--------|---------------|--------|
| Total Capital (to risk weighted assets) |   | 14.13                  | %      | 12.16             | %      | 12.94         | %      |
| Tier 1 Capital (to risk weighed assets) |   | 12.84                  |   | 10.90             |   | 11.68         |   |
| Tier 1 Capital (to average assets)      |   | 8.91                   |   | 7.59              |   | 8.21          |   |

 

These ratios placed theCompany in excess of regulatory standards and the Banks in the “wellcapitalized” category as set forth by the FDIC.

 

**Item 3****.  Quantitativeand Qualitative Disclosures about Market Risk**

 

The chiefmarket risk factor affecting the financial condition and operating results ofthe Company is interest rate risk.  Thisrisk is managed by periodic evaluation of the interest risk inherent in certainbalance sheet accounts, determination of the level of risk considered appropriategiven capital and liquidity requirements, business strategy, performanceobjectives and operating environment and maintenance of such risks withinguidelines approved by the Board of Directors. Through such management, the Company seeks to reduce the vulnerabilityof its net earnings to changes in interest rates.  Each Bank’s Asset/Liability Committee, comprised of seniormanagement, is responsible for managing interest rate risk and reviewing withits Board of Directors on a quarterly basis its activities and strategies, theeffect of those strategies on operating results, the Bank’s interest rate riskposition and the effect changes in interest rates would have on net interestincome. The extent of movement of interest rates is an uncertainty that couldhave a negative impact on 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 a significantportion of its investment portfolio as available for sale so as to providesufficient 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 various ratescenarios.  Internal guidelines on interestrate risk specify that for every 100 basis points immediate shift in interestrates, the estimated net interest income over the next 12 months should declineby less than 5%.

 

In utilizing a 300 basispoint increase in rates in its simulation model, the full impact of annual ratecaps of 200 basis points 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 are based onpublished median dealer forecasts for each interest rate scenario.

 

As of March31, 2003, the Company’s estimated exposure as a percentage of estimated netinterest income for the next twelve and twenty-four month periods is asfollows:

 
|                                       |   | **Percentage Change in Estimated  Net Interest Income Over:** |   |
|--------------------------------------------|--------|---------------------------------------------------------------|--------|
|                                       |   | **12 months**                                                 |   | **24 months** | ** ** |
| 300 basis point increase in rates          |   | (11.84                                                        | )%     | (9.75 | )% |
| 100 basis point decrease in rates (Note 1) |   | 2.07                                                          | %      | 0.47 | % |

 

----

(1)          Due to the low interest rate environment in effect at March 31, 2003(the average Federal Fund overnight rates were trading below 1.25%) thesimulation model could only be rate shocked down 100 basis points.

 

For each onepercentage point change in net interest income, the effect on net income wouldbe $776,000, assuming a 41% tax rate.

 

20

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**Item 4****.  Controls andProcedures**

** **

*Disclosure controls and procedures.* Within 90 days before filing this report, we evaluated the effectiveness of thedesign and operation of our disclosure controls and procedures.  Ourdisclosure controls and procedures are the controls and other procedures thatwe designed to ensure that we record, process, summarize and report in a timelymanner the information we must disclose in reports that we file with or submitto the SEC.  Kevin G. Champagne, our President and Chief ExecutiveOfficer, and Francis S. Mascianica, Jr., our Treasurer and Chief FinancialOfficer, supervised and participated in this evaluation.  Based on thisevaluation, Mr. Champagne and Mr. Mascianica concluded that, as of the date oftheir evaluation, our disclosure controls and procedures were effective.

 

*Internal controls.*  Since the date of the evaluation describedabove, there have not been any significant changes in our internal accountingcontrols or in other factors that could significantly affect those controls.

 

21

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**PART II****- OTHER INFORMATION**

 

### **Item 1**.  Legal Proceedings

 

The Company isnot involved in any pending legal proceedings other than those involved in theordinary course of business.  Managementbelieves that the resolution of these matters will not materially affect theirbusiness or the consolidated financial condition of the Company.

 

**Item 2.   Ch****anges in Securities and Useof Proceeds**

 

Notapplicable.

 

**Item3.   D****efaults Upon SeniorSecurities**

 

Notapplicable.

 

#### **Item 4.   S**ubmission of Matters to A Vote of SecurityHolders

#### ** **

Notapplicable.

 

###### **Item 5.   O**therInformation

 

Notapplicable.

 

**Item6.   E****xhibits and Reports on Form8-****K**

 
| a.     |   | Exhibits:                                                                                                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                         |
| 2.1    |   | Agreement and Plan of  Merger, dated as of December 19, 2002 by and between Seacoast Financial  Services Corporation, Seacoast Merger Sub. Inc. and Bay State Bancorp, Inc.  +++                             |
|   |   |                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                         |
| 2.2    |   | Form of Voting Agreement  (attached as Annex A to Exhibit 2.1)+++                                                                                                                                            |
|   |   |                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                         |
| 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.                                                                                                                     |
|   |   |                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                         |
| 99     |   | Certification  required by section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                    |
|   |   |                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                         |
| b.     |   | We filed a Current Report  on Form 8-K on March 6, 2003 under Items 5 and 7 of Form 8-K to report the  state income tax provision relating to the retroactive disallowance of the  REIT dividend deductions. |

 

----

| +      |   | 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 December 23, 2002.                                                                                                           |

 

22

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**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
|                | Seacoast  Financial Services Corporation |                                  |
|---------------------|------------------------------------------|---------------------------------------|
|                | (Registrant)                             |                                  |
|                |                                     |                                  |
|                |                                     |                                  |
| Date: May  14, 2003 | By                                       | /s/ Kevin G.  Champagne               |
|                |                                     | Kevin G. Champagne                    |
|                |                                     | President and Chief Executive Officer |
|                |                                     |                                  |
|                |                                     |                                  |
| Date: May 14, 2003  | By                                       | /s/ Francis S. Mascianica,  Jr.       |
|                |                                     | Francis S. Mascianica, Jr.            |
|                |                                     | Treasurer, as Principal               |
|                |                                     | Financial and Accounting Officer      |
|                     |                                          |                                       |  |

 

23

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**CERTIFICATIONS**

 

I, Kevin G. Champagne, certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of Seacoast Financial Services Corporation;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state amaterial fact necessary to make the statements made, in light of the circumstancesunder which such statements were made, not misleading with respect to theperiod covered by this quarterly report;

 

3.               Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others within thoseentities, particularly during the period in which this quarterly report isbeing prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarize and report financial dataand have identified for the registrant’s auditors any material weaknesses ininternal controls; and

 

b)             anyfraud, whether or not material,that involves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:                                  | May 14, 2003 |   |
|----------------------------------------|--------------|--------|
|                                   |
|                                   |
| /s/ KEVIN G. CHAMPAGNE                 |         |
| Kevin G. Champagne                     |
| President and Chief  Executive Officer |

 

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**CERTIFICATIONS**

 

I, Francis S. Mascianica, Jr., certify that:

 

1.               I have reviewed this quarterly report on Form10-Q of Seacoast Financial Services Corporation;

 

2.               Based on my knowledge, this quarterly reportdoes not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made,in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.               Based on my knowledge, the financial statements,and other financial information included in this quarterly report, fairlypresent in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4.               The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)              designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this quarterly reportis being prepared;

 

b)             evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this quarterly report (the “Evaluation Date”); and

 

c)              presented in this quarterly report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.               The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)              allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)             anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.               The registrant’sother certifying officers and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:                                  | May 14, 2003 |   |
|----------------------------------------|--------------|--------|
|                                   |
|                                   |
| /s/ FRANCIS S. MASCIANICA,  Jr.        |         |
| Francis S. Mascianica, Jr.             |
| Treasurer and Chief  Financial Officer |

 

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