**SECURITIES AND EXCHANGECOMMISSION**

**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 JUNE 30, 2003** |
|                                  |   |   |
| **or**                                |
|                                  |   |   |
| **o**                                 |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |
|                                  |   |   |
| **COMMISSION FILE NUMBER: 000-25077** |

 

**SEACOAST FINANCIAL SERVICES CORPORATION**

(ExactName 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.              ýYes  o No

 

Indicate by check mark whether registrant is an accelerated filer (asdefined in Rule 12b-2 of the SecuritiesExchange Act of 1934).          ýYes  o No

 

At August 14, 2003, the Company had26,241,630 shares of common stock outstanding.

** **

** **

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** **

**SEACOAST FINANCIAL SERVICES CORPORATION**

**INDEX**

 

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

 

 

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(In thousands) (Unaudited)**

 
|                                                                                                                                 |   | **June 30,  2003** |      | **December  31,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------|-----------|-------------------------|--------|
| **ASSETS:**                                                                                                                          |   |               |      |                    |   |
| Cash and due from banks                                                                                                              |   | $                  | 137,930   |                    | $      | 109,223 |   |
| Federal funds sold                                                                                                                   |   | 73,166             |      | 11,056                  |   |
| Total cash and cash equivalents                                                                                                      |   | 211,096            |      | 120,279                 |   |
| Investment securities —                                                                                                         |   |               |      |                    |   |
| Available-for-sale, at fair value                                                                                                    |   | 364,240            |      | 426,791                 |   |
| Held to maturity, at amortized cost (fair  value $18,646 and $19,448)                                                                |   | 17,827             |      | 18,721                  |   |
| Restricted equity securities                                                                                                         |   | 55,623             |      | 44,243                  |   |
| Loans held-for-sale                                                                                                                  |   | 8,528              |      | 6,183                   |   |
| Loans                                                                                                                                |   | 3,626,988          |      | 2,991,171               |   |
| Allowance for loan losses                                                                                                            |   | (41,797            | )         | (34,354                 | )      |
| Net loans                                                                                                                            |   | 3,585,191          |      | 2,956,817               |   |
| Accrued interest receivable                                                                                                          |   | 20,010             |      | 16,055                  |   |
| Banking premises and equipment, net                                                                                                  |   | 59,442             |      | 53,945                  |   |
| Other real estate owned and repossessed  autos                                                                                       |   | 366                |      | 1,350                   |   |
| Net deferred tax asset                                                                                                               |   | 10,062             |      | 9,645                   |   |
| Goodwill (Note 3)                                                                                                                    |   | 115,519            |      | 33,903                  |   |
| Intangible assets (Note 3)                                                                                                           |   | 8,040              |      | 1,564                   |   |
| Other assets                                                                                                                         |   | 20,871             |      | 11,549                  |   |
| Total assets                                                                                                                         |   | $                  | 4,476,815 |                    | $      | 3,701,045 |   |
|                                                                                                                                 |   |               |      |                    |   |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY:**                                                                                       |   |               |      |                    |   |
| Deposits                                                                                                                             |   | $                  | 2,896,842 |                    | $      | 2,403,875 |   |
| Short-term borrowings                                                                                                                |   | 38,713             |      | 36,128                  |   |
| Federal Home Loan Bank advances                                                                                                      |   | 1,041,593          |      | 858,804                 |   |
| Other borrowings                                                                                                                     |   | 1,735              |      | 1,772                   |   |
| Mortgagors’ escrow payments                                                                                                     |   | 7,215              |      | 4,489                   |   |
| Accrued expenses and other liabilities                                                                                               |   | 28,948             |      | 21,626                  |   |
| Total liabilities                                                                                                                    |   | 4,015,046          |      | 3,326,694               |   |
|                                                                                                                                 |   |               |      |                    |   |
| Guaranteed Preferred Beneficial Interests  in Seacoast Junior Subordinated Deferrable Interest Debentures (Note 6)                   |   | 69,359             |      | 54,863                  |   |
|                                                                                                                                 |   |               |      |                    |   |
| Stockholders’ equity (Notes 7, and 8):                                                                                          |   |               |      |                    |   |
| Preferred stock, par value $.01 per share;  authorized 10,000,000 shares; none issued                                                |   | —             |      | —                  |   |
| Common stock, par value $.01 per share;  authorized 100,000,000 shares; 30,227,555 shares issued in 2003; 26,758,136  issued in 2002 |   | 302                |      | 268                     |   |
| Additional paid-in capital                                                                                                           |   | 226,437            |      | 154,361                 |   |
| Retained earnings                                                                                                                    |   | 221,567            |      | 216,632                 |   |
| Treasury stock, at cost, 3,745,925 shares  in 2003 and 3,387,562 shares in 2002                                                      |   | (55,677            | )         | (49,033                 | )      |
| Accumulated other comprehensive income                                                                                               |   | 9,953              |      | 8,330                   |   |
| Unearned compensation - ESOP and restricted  stock                                                                                   |   | (9,862             | )         | (10,766                 | )      |
| Shares held in employee trust                                                                                                        |   | (310               | )         | (304                    | )      |
| Total stockholders’ equity                                                                                                      |   | 392,410            |      | 319,488                 |   |
| Total liabilities and stockholders’ equity                                                                                      |   | $                  | 4,476,815 |                    | $      | 3,701,045 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

 

2

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME**

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

 
|                                                                                 |   | **Three Months  Ended June 30,** |   | **Six Months  Ended June 30,** |   |
|--------------------------------------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|--------|
|                                                                                 |   | **2003**                         |   | **2002**                       |   | **2003** |   | **2002** |   |
| INTEREST AND DIVIDEND INCOME                                                         |   |                             |   |                           |   |   |   |   |   |
| Interest on loans                                                                    |   | $                                | 50,535 |                           | $      | 47,180 |   | $ | 98,783 |   | $ | 94,103 |   |
| Interest and dividends on investment securities                                      |   | 4,651                            |   | 6,551                          |   | 9,883 |   | 12,398 |   |
| Interest on federal funds sold and short-term investments                            |   | 158                              |   | 305                            |   | 212 |   | 735 |   |
| Total interest and dividend income                                                   |   | 55,344                           |   | 54,036                         |   | 108,878 |   | 107,236 |   |
| INTEREST EXPENSE                                                                     |   |                             |   |                           |   |   |   |   |   |
| Interest on deposits                                                                 |   | 11,352                           |   | 13,057                         |   | 22,313 |   | 26,781 |   |
| Interest on borrowed funds                                                           |   | 10,476                           |   | 10,738                         |   | 20,795 |   | 21,419 |   |
| Total interest expense                                                               |   | 21,828                           |   | 23,795                         |   | 43,108 |   | 48,200 |   |
| Net interest income                                                                  |   | 33,516                           |   | 30,241                         |   | 65,770 |   | 59,036 |   |
| PROVISION FOR LOAN LOSSES                                                            |   | 2,087                            |   | 2,000                          |   | 4,174 |   | 3,535 |   |
| Net interest income after provision for loan losses                                  |   | 31,429                           |   | 28,241                         |   | 61,596 |   | 55,501 |   |
| NONINTEREST INCOME                                                                   |   |                             |   |                           |   |   |   |   |   |
| Deposit and other banking fees                                                       |   | 3,053                            |   | 2,534                          |   | 5,551 |   | 4,802 |   |
| Loan servicing fees, net                                                             |   | 169                              |   | 235                            |   | 342 |   | 432 |   |
| Merchant card fee income, net                                                        |   | 211                              |   | 261                            |   | 261 |   | 332 |   |
| Other loan fees                                                                      |   | 532                              |   | 334                            |   | 882 |   | 568 |   |
| Gain (loss) on investment securities, net                                            |   | 61                               |   | (233                           | )      | 321 |   | (92 | ) |
| Gain on sales of loans, net                                                          |   | 127                              |   | 99                             |   | 172 |   | 182 |   |
| Other income                                                                         |   | 313                              |   | 391                            |   | 522 |   | 602 |   |
| Total noninterest income                                                             |   | 4,466                            |   | 3,621                          |   | 8,051 |   | 6,826 |   |
| NONINTEREST EXPENSE                                                                  |   |                             |   |                           |   |   |   |   |   |
| Salaries and employee benefits                                                       |   | 10,960                           |   | 9,283                          |   | 20,934 |   | 18,696 |   |
| Occupancy and equipment expenses                                                     |   | 2,803                            |   | 2,276                          |   | 5,519 |   | 4,447 |   |
| Data processing expenses                                                             |   | 2,107                            |   | 1,800                          |   | 4,196 |   | 3,500 |   |
| Marketing expenses                                                                   |   | 769                              |   | 770                            |   | 1,491 |   | 1,243 |   |
| Professional services expenses                                                       |   | 1,209                            |   | 623                            |   | 1,761 |   | 1,231 |   |
| Amortization of intangibles (Note 3)                                                 |   | 275                              |   | 206                            |   | 439 |   | 414 |   |
| Other operating expenses                                                             |   | 2,147                            |   | 2,130                          |   | 6,291 |   | 4,446 |   |
| Total noninterest expense                                                            |   | 20,270                           |   | 17,088                         |   | 40,631 |   | 33,977 |   |
| Minority interest expense (Notes 6, and 10)                                          |   | 1,471                            |   | 407                            |   | 2,704 |   | 407 |   |
| Income before provision for income taxes                                             |   | 14,154                           |   | 14,367                         |   | 26,312 |   | 27,943 |   |
| PROVISION FOR INCOME TAXES                                                           |   | 838                              |   | 5,083                          |   | 16,025 |   | 9,785 |   |
| Net income                                                                           |   | $                                | 13,316 |                           | $      | 9,284 |   | $ | 10,287 |   | $ | 18,158 |   |
| EARNINGS PER SHARE  (Note 5)                                                    |   |                             |   |                           |   |   |   |   |   |
| Basic                                                                                |   | $                                | 0.57   |                           | $      | 0.40 |   | $ | 0.46 |   | $ | 0.79 |   |
| Diluted                                                                              |   | $                                | 0.56   |                           | $      | 0.39 |   | $ | 0.45 |   | $ | 0.77 |   |
| Weighted average common shares outstanding                                           |   | 24,257,066                       |   | 24,176,594                     |   | 23,583,687 |   | 24,278,149 |   |
| Weighted average unallocated ESOP shares and unvested restricted  stock              |   | (1,094,158                       | )      | (1,262,600                     | )      | (1,115,709 | ) | (1,281,330 | ) |
| Weighted average common shares outstanding – basic                              |   | 23,162,908                       |   | 22,913,994                     |   | 22,467,978 |   | 22,996,819 |   |
| Diluted effect of common stock equivalents                                           |   | 497,384                          |   | 631,431                        |   | 496,316 |   | 580,320 |   |
| Weighted average common and common stock equivalentshares outstanding – diluted |   | 23,660,292                       |   | 23,545,425                     |   | 22,964,294 |   | 23,577,139 |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

3

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

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

# **FOR THE SIX MONTHS ENDEDJUNE 30, 2003 AND 2002**

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

** **
|                                                                                                        |   | **Common********Stock** |   | **Additional********Paid-In********Capital** |   | **Retained********Earnings** |   | **Treasury********Stock** |    | **Accumulated  Other  Comprehensive  Income** |   | **Unearned********Compensation********ESOP********/Restricted********Stock** |   | **Shares-Held********In Employee********Trust** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------------|--------|----------------------------------------------|--------|------------------------------|--------|---------------------------|---------|-----------------------------------------------|--------|------------------------------------------------------------------------------|--------|-------------------------------------------------|--------|-----------|--------|
| Balance, December 31, 2001                                                                                  |   | $                       | 268    |                                         | $      | 153,216                      |   | $                         | 189,743 |                                          | $      | (28,185                                                                      | )      | $                                               | 3,531  |      | $      | (12,575 | ) | $ | (274 | ) | $ | 305,724 |   |
| Exercise of stock options                                                                                   |   | —                  |   | 139                                          |   | —                       |   | 242                       |    | —                                        |   | —                                                                       |   | —                                          |   | 381       |   |
| Repurchase of common stock (Note 7)                                                                         |   | —                  |   | —                                       |   | —                       |   | (7,550                    | )       | —                                        |   | —                                                                       |   | —                                          |   | (7,550    | )      |
| Net income                                                                                                  |   |                    |   | —                                       |   | 18,158                       |   | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | 18,158    |   |
| Other comprehensive income — Change in unrealized gain on securities  available for sale, net of taxes |   | —                  |   | —                                       |   | —                       |   | —                    |    | 1,855                                         |   | —                                                                       |   | —                                          |   | 1,855     |   |
| Comprehensive income (Note 4)                                                                               |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | 20,013    |   |
| Cash dividends - $.20 per share                                                                             |   | —                  |   | —                                       |   | (4,668                       | )      | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | (4,668    | )      |
| Amortization of unearned compensation                                                                       |   | —                  |   | 285                                          |   | —                       |   | —                    |    | —                                        |   | 904                                                                          |   | —                                          |   | 1,189     |   |
| Other                                                                                                       |   | —                  |   | (7                                           | )      | —                       |   | —                    |    | —                                        |   | —                                                                       |   | (16                                             | )      | (23       | )      |
| Balance, June 30, 2002                                                                                      |   | $                       | 268    |                                         | $      | 153,633                      |   | $                         | 203,233 |                                          | $      | (35,493                                                                      | )      | $                                               | 5,386  |      | $      | (11,671 | ) | $ | (290 | ) | $ | 315,066 |   |
|                                                                                                        |   |                    |   |                                         |   |                         |   |                      |    |                                          |   |                                                                         |   |                                            |   |      |   |
| Balance, December 31, 2002                                                                                  |   | $                       | 268    |                                         | $      | 154,361                      |   | $                         | 216,632 |                                          | $      | (49,033                                                                      | )      | $                                               | 8,330  |      | $      | (10,766 | ) | $ | (304 | ) | $ | 319,488 |   |
|                                                                                                        |   |                    |   |                                         |   |                         |   |                      |    |                                          |   |                                                                         |   |                                            |   |      |   |
| Common stock issued: 3,469,419 shares at $20.72                                                             |   | 34                      |   | 71,852                                       |   | —                       |   | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | 71,886    |   |
| Exercise of stock options                                                                                   |   | —                  |   | 3                                            |   | —                       |   | 44                        |    | —                                        |   | —                                                                       |   | —                                          |   | 47        |   |
| Repurchase of common stock (Note 7)                                                                         |   | —                  |   | —                                       |   | —                       |   | (6,688                    | )       | —                                        |   | —                                                                       |   | —                                          |   | (6,688    | )      |
| Net income                                                                                                  |   | —                  |   | —                                       |   | 10,287                       |   | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | 10,287    |   |
| Other comprehensive income — Change in unrealized gain on securities  available for sale, net of taxes |   | —                  |   | —                                       |   | —                       |   | —                    |    | 1,623                                         |   | —                                                                       |   | —                                          |   | 1,623     |   |
| Comprehensive income (Note 4)                                                                               |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | 11,910    |   |
| Cash dividends - $.24 per share                                                                             |   | —                  |   | —                                       |   | (5,352                       | )      | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | (5,352    | )      |
| Amortization of unearned compensation                                                                       |   | —                  |   | 265                                          |   | —                       |   | —                    |    | —                                        |   | 904                                                                          |   | —                                          |   | 1,169     |   |
| Amortization of underwriting costs                                                                          |   | —                  |   | (44                                          | )      | —                       |   | —                    |    | —                                        |   | —                                                                       |   | —                                          |   | (44       | )      |
| Other                                                                                                       |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                        |   | —                                                                       |   | (6                                              | )      | (6        | )      |
| Balance, June 30, 2003                                                                                      |   | $                       | 302    |                                         | $      | 226,437                      |   | $                         | 221,567 |                                          | $      | (55,677                                                                      | )      | $                                               | 9,953  |      | $      | (9,862 | ) | $ | (310 | ) | $ | 392,410 |   |

** **

Seeaccompanying notes to the unaudited consolidated financial statements.

 

 

4

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002**

**(In thousands) (Unaudited)**

 
|                                                                                                |   | **2003** |   | **2002** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |     |   |     |   |
| Net income                                                                                          |   | $        | 10,287 |     | $      | 18,158 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities —            |   |     |   |     |   |
| Depreciation                                                                                        |   | 2,521    |   | 2,169    |   |
| Amortization and accretion, net                                                                     |   | 725      |   | 1,040    |   |
| Purchase accounting amortization, net                                                               |   | 478      |   | 485      |   |
| Stock-based compensation                                                                            |   | 1,169    |   | 1,189    |   |
| Provision for loan losses                                                                           |   | 4,174    |   | 3,535    |   |
| (Gain) loss on investment securities, net                                                           |   | (321     | )      | 92       |   |
| Gain on sale of fixed assets                                                                        |   | (1       | )      | (97      | )      |
| Net increase deferred tax asset                                                                     |   | (417     | )      | (1,105   | )      |
| Originations of loans held-for-sale                                                                 |   | (9,411   | )      | (4,616   | )      |
| Proceeds from sales of loans originated for sale                                                    |   | 7,313    |   | 19,513   |   |
| Gain on sales of loans, net                                                                         |   | (172     | )      | (182     | )      |
| Net increase in accrued interest receivable                                                         |   | (1,096   | )      | (2,605   | )      |
| Net decrease in other assets                                                                        |   | 10,999   |   | 824      |   |
| Net increase (decrease) in accrued expenses and other liabilities                                   |   | (10,724  | )      | 4,660    |   |
| Net cash provided by operating activities                                                           |   | 15,524   |   | 43,060   |   |
|                                                                                                |   |     |   |     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |     |   |     |   |
| Purchase of securities classified as available-for-sale                                             |   | (30,403  | )      | (129,993 | )      |
| Purchase of securities classified as held-to-maturity                                               |   | —   |   | (1,098   | )      |
| Purchase of restricted equity securities                                                            |   | (2,925   | )      | (1,885   | )      |
| Proceeds from sales, calls, paydowns and maturities of securities  classified as available-for-sale |   | 97,559   |   | 85,303   |   |
| Proceeds from calls, paydowns and maturities of securities classified  as held -to-maturity         |   | 775      |   | 2,200    |   |
| Cash paid for acquisition of Bay State Bancorp, Inc., net of cash  acquired                         |   | (35,547  | )      | —   |   |
| Purchase of loans                                                                                   |   | (9,327   | )      | —   |   |
| Net increase in loans                                                                               |   | (113,964 | )      | (172,847 | )      |
| Recoveries of loans previously charged off                                                          |   | 783      |   | 278      |   |
| Proceeds from sales of repossessed assets                                                           |   | 2,313    |   | 18       |   |
| Proceeds from sales of fixed assets                                                                 |   | —   |   | 338      |   |
| Purchase of premises and equipment                                                                  |   | (3,211   | )      | (3,601   | )      |
| Net cash used in investing activities                                                               |   | (93,947  | )      | (221,287 | )      |
|                                                                                                     |        |          |        |          |        |  |  |

 

**Statement  continued on next page.**

 

5

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|                                                                                                                                                                      |   | **2003** |    | **2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                                                                                                     |   |     |    |     |   |
| Increase in NOW, money market deposit and demand deposit accounts                                                                                                         |   | $        | 80,662  |     | $      | 93,567 |   |
| Increase in passbook and other savings accounts                                                                                                                           |   | 34,438   |    | 30,353   |   |
| Increase (decrease) in certificates of deposit                                                                                                                            |   | (11,224  | )  | 13,145   |   |
| Advances from Federal Home Loan Bank                                                                                                                                      |   | 186,140  |    | 139,500  |   |
| Repayments of Federal Home Loan Bank advances                                                                                                                             |   | (128,488 | )       | (98,802  | )      |
| Increase in short-term and other borrowings                                                                                                                               |   | 2,527    |    | 10,186   |   |
| (Increase) decrease in mortgagors’ escrow payments                                                                                                                   |   | 2,726    |    | (1,427   | )      |
| Net proceeds issuance of junior subordinated deferrable interest  debentures                                                                                              |   | 14,452   |    | 55,047   |   |
| Exercise of stock options                                                                                                                                                 |   | 44       |    | 381      |   |
| Tax benefit of stock awards                                                                                                                                               |   | 3        |    | —   |   |
| Repurchase of common stock                                                                                                                                                |   | (6,688   | )       | (7,550   | )      |
| Cash dividends                                                                                                                                                            |   | (5,352   | )       | (4,668   | )      |
| Net cash provided by financing activities                                                                                                                                 |   | 169,240  |    | 229,732  |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Net increase in cash and cash equivalents                                                                                                                                 |   | 90,817   |    | 51,505   |   |
| Cash and cash equivalents, beginning of year                                                                                                                              |   | 120,079  |    | 190,733  |   |
| Cash and cash equivalents, end of period                                                                                                                                  |   | $        | 210,896 |     | $      | 242,238 |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Supplemental disclosure of cash flow information:                                                                                                                         |   |     |    |     |   |
| Interest paid on deposits and borrowed funds                                                                                                                              |   | $        | 42,830  |     | $      | 48,340 |   |
| Income taxes paid                                                                                                                                                         |   | 12,206   |    | 6,284    |   |
|                                                                                                                                                                      |   |     |    |     |   |
| Supplemental disclosure of noncash transactions:                                                                                                                          |   |     |    |     |   |
| Transfers from loans to other repossessed assets                                                                                                                          |   | 1,329    |    | 82       |   |
| Financed sales of other real estate owned                                                                                                                                 |   | —   |    | 76       |   |
|                                                                                                                                                                      |   |     |    |     |   |
| In conjunction with the purchase acquisition detailed in Note 2 to  the Consolidated Financial Statements. Assets were acquired and liabilities  were assumed as follows: |   |     |    |     |   |
| Fair value of assets acquired                                                                                                                                             |   | $        | 683,097 |     | $      | — |   |
| Less liabilities assumed                                                                                                                                                  |   | 548,603  |    | —   |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

6

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2003**

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

 

**(1)   BASISOF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

**Basis of Presentation**

 

The unauditedconsolidated financial statements of Seacoast Financial Services Corporationand its wholly-owned subsidiaries, Compass Bank for Savings (“Compass”),Nantucket Bank, Lighthouse Securities Corporation, and Seacoast Capital Trust Iand II (collectively referred to herein as “the Company”) presented hereinshould be read in conjunction with the consolidated financial statements of theCompany as of and for the year ended December 31, 2002 included as part of itsannual report on Form 10-K.

 

In the opinionof management, the accompanying unaudited financial statements reflect alladjustments (consisting of normal recurring adjustments) and disclosuresnecessary for a fair presentation. Management is required to make estimates and assumptions that affectamounts reported in the financial statements. Actual results could differ significantly from those estimates.

 

**Summary of Significant Accounting Policies**

 

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

 

**Stock-Based Compensation**

 

The Companyapplies APB Opinion No. 25 in accounting for stock 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 thethree and six months ended June 30, 2002 and 2003.

 

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

 
|         |   | **Three Months Ended June 30,** |   | **Six Months Ended June 30,** |   |
|--------------|--------|---------------------------------|--------|-------------------------------|--------|
|         |   | **2003**                        |   | **2002**                      |   | **2003** |   | **2002** |   |
| Net income:  |   |                            |   |                          |   |   |   |   |   |
| As reported  |   | $                               | 13,316 |                          | $      | 9,284 |   | $ | 10,287 |   | $ | 18,158 |   |
| Pro forma    |   | 13,208                          |   | 9,167                         |   | 10,068 |   | 17,923 |   |
| Basic EPS:   |   |                            |   |                          |   |   |   |   |   |
| As reported  |   | 0.57                            |   | 0.40                          |   | 0.46 |   | 0.79 |   |
| Pro forma    |   | 0.57                            |   | 0.40                          |   | 0.45 |   | 0.78 |   |
| Diluted EPS: |   |                            |   |                          |   |   |   |   |   |
| As reported  |   | 0.56                            |   | 0.39                          |   | 0.45 |   | 0.77 |   |
| Pro forma    |   | 0.56                            |   | 0.39                          |   | 0.44 |   | 0.76 |   |
|              |        |                                 |        |                               |        |  |  |  |  |  |  |  |  |

 

7

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**JUNE 30, 2003**

** **

**(2)   ACQUISITION**

 

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

 

**(Dollarsand shares in millions)**

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

 

The followingtable summarizes the estimated fair value of the assets acquired andliabilities assumed for Bay State at the date of acquisition.

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

 

The Companyexpects that some adjustments of the estimated fair values assigned to theassets acquired and liabilities assumed at the acquisition date will berecorded after June 30, 2003, although such adjustments are not expected to besignificant.

 

The Companyaccrued $1.0 million of merger-related costs with an offsetting charge togoodwill.  Prior to the acquisition date,Bay State recorded cash and non-cash merger related charges.  Contractual obligations payable to certainexecutives of Bay State upon a change in control totaling $12.9 million wereaccrued by Bay State in May 2003.

 

8

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**(3)   GOODWILLAND OTHER INTANGIBLE ASSETS**

 

The changes inthe carrying value of goodwill and other intangible assets for the six monthsended June 30, 2003 are as follows:

 
|                            |   | **Goodwill** |       | **Core Deposit  Intangibles** |       | **Other****IdentifiableIntangibles** |       | **Total  Identifiable****Intangibles** |       |
|---------------------------------|--------|--------------|------------|-------------------------------|------------|--------------------------------------|------------|----------------------------------------|------------|
|                            |   |         | ** ** |                          | ** ** |                                 | ** ** |                                   | ** ** |
| Balance, December 31, 2002      |   | $            | 33,903     |                          | $          | 1,539                                |       | $                                      | 25         |   | $ | 35,467 |   |
| Recorded during the period      |   | 81,616       |       | 4,075                         |       | 2,840                                |       | 88,531                                 |       |
| Amortization expense            |   | —       |       | (349                          | )          | (90                                  | )          | (439                                   | )          |
| Impairment recognized           |   | —       |       | —                        |       | —                               |       | —                                 |       |
| Balance, June 30, 2003          |   | $            | 115,519    |                          | $          | 5,265                                |       | $                                      | 2,775      |   | $ | 123,559 |   |
|                            |   |         |       |                          |       |                                 |       |                                   |       |
| Estimated amortization expense: |   |         |       |                          |       |                                 |       |                                   |       |
| 2003                            |   | —       |       | 983                           |       | 570                                  |       | 1,553                                  |       |
| 2004                            |   | —       |       | 960                           |       | 954                                  |       | 1,914                                  |       |
| 2005                            |   | —       |       | 816                           |       | 947                                  |       | 1,763                                  |       |
| 2006                            |   | —       |       | 734                           |       | 394                                  |       | 1,128                                  |       |
| 2007                            |   | —       |       | 653                           |       | —                               |       | 653                                    |       |

 

The componentsof other intangible assets follows:

 
|                     |   | **Gross Carrying****Amount** |       | **Accumulated****Amortization** |       | **Net Carrying****Amount** |       |
|--------------------------|--------|------------------------------|------------|---------------------------------|------------|----------------------------|------------|
|                     |   |                         | ** ** |                            | ** ** |                       | ** ** |
| Core deposit intangibles |   | $                            | 8,499      |                            | $          | 3,234                      |       | $ | 5,265 |   |
| Other intangibles        |   | 3,060                        |       | 285                             |       | 2,775                      |       |
| Total                    |   | $                            | 11,559     |                            | $          | 3,519                      |       | $ | 8,040 |   |

 

9

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**(4)   COMPREHENSIVEINCOME**

 

The componentsof comprehensive income for the Company are net income and unrealized gains(losses) on securities available for sale, net of tax.  The following is a reconciliation ofcomprehensive income for the six months ended June 30, 2003 and 2002.

 
|                                                                                                                         |   | **Six Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                                         |   | **2003**                       |   | **2002** |   |
| Net income                                                                                                                   |   | $                              | 10,287 |   | $ | 18,158 |   |
| Other comprehensive income, net of tax:                                                                                      |   |                           |   |   |   |
| Unrealized gains on available for sale  securities:                                                                          |   |                           |   |   |   |
| Unrealized holding gains arising during the  period net of taxes of $1,150 and $976, respectively                            |   | 1,832                          |   | 1,795 |   |
| Less: reclassification adjustment for gains  (losses) included in net income, net of taxes of $112 and ($32),  respectively, |   | (209                           | )      | 60 |   |
| Other comprehensive income, net                                                                                              |   | 1,623                          |   | 1,855 |   |
| Comprehensive income                                                                                                         |   | $                              | 11,910 |   | $ | 20,013 |   |

 

**(5)   EARNINGSPER 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 issue commonstock were exercised and has been computed after giving consideration to thedilutive effect of stock options, stock awards and shares held in an employeetrust.

 

**(6)   CAPITALTRUST SECURITIES**

 

The following is a summary of the capital trust securities outstandingas of June 30, 2003:

 
| **Name**                  |   | **Issuance  Date** |   | **Amount** |   | **Stated  Rate** |   | **Maturity  Date** |     |
|---------------------------|--------|--------------------|--------|------------|--------|------------------|--------|--------------------|----------|
| Seacoast Capital Trust I  |   | 05/28/02           |   | $          | 54,907 |             | 8.50   | %                  | 06/30/32 |   |
| Seacoast Capital Trust II |   | 03/27/03           |   | 14,452     |   | 6.65             | %      | 04/07/33           |     |
|                      |   |               |   | $          | 69,359 |             |   |               |     |   |

 

**(7)   SHAREREPURCHASE PROGRAMS**

 

During the three months ended June 30, 2003, Seacoast repurchased63,725 shares of its outstanding common stock at an average price of$20.54.  At June 30, 2003, there were atotal of 326,459 shares remaining under existing repurchase authorizations.

 

**(8)   QUARTERLYCASH DIVIDEND**

 

On July 24,2003, the Board of Directors voted for the payment of a quarterly cash dividendof $.13 per share.  The dividend ispayable on August 22, 2003 to stockholders of record on August 8, 2003.

 

10

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**(9)   STATETAX 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.  On June 24, 2003, Seacoast announced that it had entered into asettlement with the Massachusetts Department of Revenue (“DOR”) to pay $8.5million ($5.5 million on an after-tax basis) representing approximately 50% ofthe disputed tax liability for which the Company previously accrued during thefirst quarter of 2003 approximately $11.2 million, net of taxes.  Included in the second quarter of 2003, is acredit of $5.3 million resulting from the settlement.

 

**(10) RECENTACCOUNTING PRONOUNCEMENTS**

 

In May 2003,the FASB issued SFAS No. 150, “Accounting for Certain Financial Instrumentswith Characteristics of Both Liabilities and Equity.”  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150 iseffective July 1, 2003, and will require the Company to prospectivelyreclassify “Guaranteed Preferred Beneficial Interests in Seacoast JuniorSubordinated Deferrable Interest Debentures” as a liability on its balancesheet and the associated interest cost (currently reported as “MinorityInterest Expense”, and amounting to $1.5 million for the quarter) will beclassified as interest on borrowed funds. Restatement of prior periods is not permitted.

 

11

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**Item 2****.****         ****Management’s Discussion and Analysis of Financial Conditionand 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, thewords or 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.

 

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

 

Net incometotaled $13.3 million, $.56 per diluted share, for the quarter ended June 30,2003, a 43.4% increase in earnings when compared to net income of $9.3 million,$.39 per diluted share for the quarter ended June 30, 2002.  Included in the second quarter 2003 resultsis a credit of $5.3 million resulting from the Company’s settlement with theMassachusetts Department of Revenue (DOR). (See Note 9).   The Company’sfinancial statements for 2003 reflect the acquisition of Bay State from thedate of acquisition on May 31, 2003.

 

*Interest Income.*  Interest income for the quarter ended June30, 2003 was $55.3 million, compared to $54.0 million for the quarter endedJune 30, 2002, an increase of $1.3 million, or 2.4%.  The increase in interest income resulted from growth in averageinterest-earning assets of $468.0 million, or 14.2% partially offset by adecrease in the overall yield on interest-earning assets of 44 basis points inthe 2003 period.  The principal areas ofgrowth in average balances were related to real estate loans (up $450.1million, or 24.1%) and indirect auto loans (up $125.4 million, or 19.2%).  The growth in real estate loans resultedfrom increased originations during the period and retention in portfolio ofthose real estate loans and to a lesser extent the purchase of Bay State on May31, 2003. The increase in indirect auto loans resulted from the favorableinterest rate environment during the period and the continued geographicexpansion of the network of participating dealers. The funding of loan growthand to a lesser extent the purchase of Bay State during the period resulted ina decrease in the average balance in investment securities of $90.6 million or15.1%.

 

*Interest Expense.*  Interest expense for the quarter ended June30, 2003 was $21.8 million compared to $23.8 million  for the quarter ended June 30, 2002, a decrease of $2.0 millionor 8.6%.  This decrease resulted from a58 basis points decrease in the cost of all funds from 3.24% in 2002 to 2.66%in 2003, partially offset by a higher average balance of interest-bearingliabilities (up $419.9 million, or 14.3%). Average interest-bearing deposit balances increased $293.4 million, or14.1%, during the quarter ended June 30, 2003 compared to the same period in2002. Average-earning deposit balances were increased to a lesser extent due tothe acquisition of Bay State on May 31, 2003. The cost of funds on interest-bearing deposits decreased 51 basis pointsfrom 2.51% in 2002 to 2.00% in 2003.

 

Interestexpense on borrowed funds decreased $262,000 in the quarter ended June 30, 2003primarily the result of a decrease of 74 basis points in the average rate paidon borrowed funds to 4.23% in 2003 from 4.97% in 2002, partially offset by anincrease in the average balance of such funds of $126.5 million or 14.6% duringthe period which was primarily the result of the Bay State acquisition and loangrowth in the portfolio.

 

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. (unaudited)

 
|                                             |   | **(In thousands)**               |      |
|--------------------------------------------------|--------|----------------------------------|-----------|
|                                             |   | **Three  Months Ended June 30,** |      | **Six Months  Ended June 30** |   |
|                                             |   | **2003**                         |      | **2002** |   | **2003** |   | **2002** |   |
|                                             |   | **Average  Balance**             |      | **Interest** |   | **Average  Yield/  Cost (1)** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost (1)** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost (1)** |   | **Average  Balance** |   | **Interest** |   | **Average  Yield/  Cost (1)** |   |
| **Assets:**                                      |   |                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-earning assets:                         |   |                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Mortgage loans (3)                               |   | $                                | 2,320,167 |   | $ | 36,902 |   | 6.72 | % | $ | 1,870,116 |   | $ | 32,871 |   | 7.03 | % | $ | 2,213,173 |   | $ | 71,464 |   | 7.09 | % | $ | 1,860,423 |   | $ | 66,132 |   | 7.11 | % |
| Commercial loans (3)                             |   | 125,541                          |      | 1,856 |   | 6.14 |   | 128,526 |   | 2,058 |   | 6.40 |   | 125,965 |   | 3,610 |   | 6.10 |   | 122,969 |   | 4,003 |   | 6.51 |   |
| Indirect auto loans (3)                          |   | 778,829                          |      | 11,003 |   | 5.65 |   | 653,476 |   | 11,205 |   | 6.86 |   | 776,107 |   | 22,146 |   | 5.71 |   | 633,079 |   | 21,910 |   | 6.92 |   |
| Other consumer loans (3)                         |   | 40,077                           |      | 826 |   | 8.58 |   | 53,870 |   | 1,101 |   | 8.18 |   | 41,813 |   | 1,667 |   | 8.51 |   | 54,357 |   | 2,168 |   | 7.98 |   |
| Total  loans                                     |   | 3,264,614                        |      | 50,587 |   | 6.47 |   | 2,705,988 |   | 47,235 |   | 6.98 |   | 3,157,058 |   | 98,887 |   | 6.73 |   | 2,670,828 |   | 94,213 |   | 7.05 |   |
| Short-term investments                           |   | 69,183                           |      | 158 |   | 0.91 |   | 73,519 |   | 305 |   | 1.66 |   | 45,768 |   | 212 |   | 0.93 |   | 89,750 |   | 735 |   | 1.64 |   |
| Debt securities (2)                              |   | 375,198                          |      | 4,200 |   | 4.48 |   | 468,161 |   | 6,087 |   | 5.20 |   | 399,223 |   | 8,993 |   | 4.51 |   | 441,473 |   | 11,464 |   | 5.19 |   |
| Equity securities (2)                            |   | 64,899                           |      | 480 |   | 2.96 |   | 58,214 |   | 495 |   | 3.40 |   | 62,277 |   | 951 |   | 3.05 |   | 58,395 |   | 996 |   | 3.41 |   |
| Total  earning assets                            |   | 3,773,894                        |      | 55,425 |   | 6.11 | % | 3,305,882 |   | 54,122 |   | 6.55 | % | 3,664,326 |   | 109,043 |   | 6.35 | % | 3,260,446 |   | 107,408 |   | 6.59 | % |
| Allowance for loan losses                        |   | (37,173                          | )         |   |   |   |   | (30,943 | ) |   |   |   |   | (35,895 | ) |   |   |   |   | (30,487 | ) |   |   |   |   |
| Non-interest earning assets                      |   | 262,427                          |      |   |   |   |   | 216,263 |   |   |   |   |   | 246,286 |   |   |   |   |   | 216,508 |   |   |   |   |   |
| Total  assets                                    |   | $                                | 3,999,148 |   |   |   |   |   | $ | 3,491,202 |   |   |   |   |   | $ | 3,874,717 |   |   |   |   |   | $ | 3,446,467 |   |   |   |   |   |
| **Liabilities and Equity:**                      |   |                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest-bearing deposits:                       |   |                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| NOW  accounts                                    |   | $                                | 306,290   |   | $ | 216 |   | 0.31 | % | $ | 269,621 |   | $ | 298 |   | 0.44 | % | $ | 297,100 |   | $ | 400 |   | 0.32 | % | $ | 264,955 |   | $ | 583 |   | 0.44 | % |
| Savings  accounts                                |   | 361,102                          |      | 877 |   | 1.01 |   | 297,573 |   | 991 |   | 1.33 |   | 343,589 |   | 1,654 |   | 1.02 |   | 288,765 |   | 2,054 |   | 1.42 |   |
| Money  market savings accounts                   |   | 661,423                          |      | 2,404 |   | 1.62 |   | 514,218 |   | 2,596 |   | 2.02 |   | 620,532 |   | 4,427 |   | 1.72 |   | 505,503 |   | 5,338 |   | 2.11 |   |
| Certificates  of deposit                         |   | 1,041,428                        |      | 7,855 |   | 3.09 |   | 995,430 |   | 9,172 |   | 3.69 |   | 1,024,982 |   | 15,833 |   | 3.22 |   | 993,182 |   | 18,805 |   | 3.79 |   |
| Total  interest-bearing deposits                 |   | 2,370,243                        |      | 11,352 |   | 2.00 |   | 2,076,842 |   | 13,057 |   | 2.51 |   | 2,286,203 |   | 22,314 |   | 2.10 |   | 2,052,405 |   | 26,780 |   | 2.61 |   |
| Borrowed funds:                                  |   |                             |      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Short-term  borrowings (4)                       |   | 36,378                           |      | 102 |   | 1.12 |   | 45,992 |   | 249 |   | 2.17 |   | 35,223 |   | 203 |   | 1.15 |   | 44,586 |   | 501 |   | 2.25 |   |
| FHLB  advances                                   |   | 952,323                          |      | 10,331 |   | 4.34 |   | 816,128 |   | 10,449 |   | 5.12 |   | 925,229 |   | 20,505 |   | 4.43 |   | 807,012 |   | 20,834 |   | 5.16 |   |
| Other  borrowings                                |   | 1,746                            |      | 43 |   | 9.85 |   | 1,817 |   | 40 |   | 8.81 |   | 1,755 |   | 86 |   | 9.80 |   | 1,825 |   | 85 |   | 9.32 |   |
| Total  borrowings                                |   | 990,447                          |      | 10,476 |   | 4.23 |   | 863,937 |   | 10,738 |   | 4.97 |   | 962,207 |   | 20,794 |   | 4.32 |   | 853,423 |   | 21,420 |   | 5.02 |   |
| Total  interest-bearing liabilities              |   | 3,360,690                        |      | 21,828 |   | 2.66 | % | 2,940,779 |   | 23,795 |   | 3.24 | % | 3,248,410 |   | 43,108 |   | 2.76 | % | 2,905,828 |   | 48,200 |   | 3.32 | % |
| Demand deposit accounts                          |   | 220,545                          |      |   |   |   |   | 198,431 |   |   |   |   |   | 215,768 |   |   |   |   |   | 195,977 |   |   |   |   |   |
| Other liabilities and  capital securities        |   | 94,540                           |      |   |   |   |   | 36,851 |   |   |   |   |   | 84,857 |   |   |   |   |   | 28,245 |   |   |   |   |   |
| Total  liabilities                               |   | 3,675,775                        |      |   |   |   |   | 3,176,061 |   |   |   |   |   | 3,549,035 |   |   |   |   |   | 3,130,050 |   |   |   |   |   |
| Stockholders’  equity                       |   | 323,373                          |      |   |   |   |   | 315,141 |   |   |   |   |   | 325,682 |   |   |   |   |   | 316,417 |   |   |   |   |   |
| Total  liabilities and stockholders’ equity |   | $                                | 3,999,148 |   |   |   |   |   | $ | 3,491,202 |   |   |   |   |   | $ | 3,874,717 |   |   |   |   |   | $ | 3,446,467 |   |   |   |   |   |
| Net interest income  (fully-taxable equivalent)  |   |                             |      | 33,597 |   |   |   |   |   | 30,327 |   |   |   |   |   | 65,935 |   |   |   |   |   | 59,208 |   |   |   |
| Less: full-taxable  equivalent adjustments       |   |                             |      | (81 | ) |   |   |   |   | (86 | ) |   |   |   |   | (165 | ) |   |   |   |   | (172 | ) |   |   |
| Net interest margin                              |   |                             |      | $ | 33,516 |   |   |   |   |   | $ | 30,241 |   |   |   |   |   | $ | 65,770 |   |   |   |   |   | $ | 59,036 |   |   |   |
| Net interest spread (5)                          |   |                             |      |   |   | 3.45 |   |   |   |   |   | 3.31 |   |   |   |   |   | 3.59 |   |   |   |   |   | 3.27 |   |
| Net interest margin (6)                          |   |                             |      |   |   | 3.56 | % |   |   |   |   | 3.67 | % |   |   |   |   | 3.60 | % |   |   |   |   | 3.63 | % |

 

----

(1)          Annualized

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

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

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

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

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

 

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.

 
|                                            |   | **Three months  ended June 30,  2003 vs. 2002  Increase (decrease) due to** |   | **Six months  ended June 30,  2003 vs. 2002  Increase (decrease) due to** |   |
|-------------------------------------------------|--------|-----------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
|                                            |   | **Volume**                                                                  |   | **Rate**                                                                  |   | **Net** |   | **Volume** |   | **Rate** |   | **Net** |   |
| Interest-earning assets:                        |   |                                                                        |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Federal funds sold and short-term  investments  |   | $                                                                           | (17    | )                                                                         | $      | (130 | ) | $ | (147 | ) | $ | (277 | ) | $ | (246 | ) | $ | (523 | ) |
| Debt securities                                 |   | (1,110                                                                      | )      | (777                                                                      | )      | (1,887 | ) | (1,036 | ) | (1,435 | ) | (2,471 | ) |
| Equity securities                               |   | 53                                                                          |   | (68                                                                       | )      | (15 | ) | 64 |   | (109 | ) | (45 | ) |
| Mortgage loans                                  |   | 5,854                                                                       |   | (1,823                                                                    | )      | 4,031 |   | 5,667 |   | (335 | ) | 5,332 |   |
| Commercial loans                                |   | (72                                                                         | )      | (130                                                                      | )      | (202 | ) | 30 |   | (423 | ) | (393 | ) |
| Indirect auto loans                             |   | 1,952                                                                       |   | (2,154                                                                    | )      | (202 | ) | 4,461 |   | (4,225 | ) | 236 |   |
| Other consumer loans                            |   | (322                                                                        | )      | 47                                                                        |   | (275 | ) | (613 | ) | 112 |   | (501 | ) |
| Total interest-earning assets                   |   | $                                                                           | 6,338  |                                                                      | $      | (5,035 | ) | $ | 1,303 |   | $ | 8,296 |   | $ | (6,661 | ) | $ | 1,635 |   |
|                                            |   |                                                                        |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Interest-bearing liabilities:                   |   |                                                                        |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Deposits:                                       |   |                                                                        |   |                                                                      |   |   |   |   |   |   |   |   |   |
| NOW accounts                                    |   | $                                                                           | 30     |                                                                      | $      | (112 | ) | $ | (82 | ) | $ | 44 |   | $ | (227 | ) | $ | (183 | ) |
| Savings accounts                                |   | 173                                                                         |   | (287                                                                      | )      | (114 | ) | 303 |   | (703 | ) | (400 | ) |
| Money market savings accounts                   |   | 497                                                                         |   | (689                                                                      | )      | (192 | ) | 598 |   | (1,509 | ) | (911 | ) |
| Certificates of deposit                         |   | 363                                                                         |   | (1,680                                                                    | )      | (1,317 | ) | 467 |   | (3,439 | ) | (2,972 | ) |
| Total deposits                                  |   | 1,063                                                                       |   | (2,768                                                                    | )      | (1,705 | ) | 1,412 |   | (5,878 | ) | (4,466 | ) |
|                                            |   |                                                                        |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Borrowed funds:                                 |   |                                                                        |   |                                                                      |   |   |   |   |   |   |   |   |   |
| Short-term borrowings                           |   | (46                                                                         | )      | (98                                                                       | )      | (144 | ) | (93 | ) | (204 | ) | (297 | ) |
| FHLB advances                                   |   | 1,604                                                                       |   | (1,722                                                                    | )      | (118 | ) | 2,830 |   | (3,157 | ) | (327 | ) |
| Total borrowings                                |   | 1,558                                                                       |   | (1,820                                                                    | )      | (262 | ) | 2,737 |   | (3,361 | ) | (624 | ) |
| Total interest-bearing liabilities              |   | 2,621                                                                       |   | (4,588                                                                    | )      | (1,967 | ) | 4,149 |   | (9,239 | ) | (5,090 | ) |
| Net interest income (fully-taxable  equivalent) |   | $                                                                           | 3,717  |                                                                      | $      | (447 | ) | $ | 3,270 |   | $ | 4,147 |   | $ | 2,578 |   | $ | 6,725 |   |

 

*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 loanportfolio.  In determining theappropriate level of the allowance for loan losses, management considers pastand anticipated loss experience, evaluations of underlying collateral,prevailing economic conditions, the nature and volume of the loan portfolio,risk rating of loans, and the levels of nonperforming and other classifiedloans.  The amount of the allowance isestimated based on numerous judgments, and ultimate losses may vary from suchestimates.  Management assesses theallowance for loan losses on a quarterly basis and provides for loan lossesmonthly 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 Company provided $2.1million for loan losses in the quarter ended June 30, 2003 compared to $2.0million in the quarter ended June 30, 2002. The increase of $87,000 in 2003 was primarily attributable to risksassociated with the growth in the loan portfolios. The total allowance of $41.8million at June 30, 2003 represented 1.15% of total loans compared to a ratioof 1.15% at December 31, 2002.  Theallowance for loan losses as a percentage of non-performing loans was 303.0%compared to 244.1% at December 31, 2002. During the second quarter the allowance for loan losses increased $6.1million as a result of the acquisition of Bay State.

 

*Noninterest Income.*  Total noninterest income was $4.5 millionfor the quarter ended June 30, 2003 compared to $3.6 million in the same periodof 2002, an increase of $845,000 or 23.3%. The increase was primarily the result of increases in deposit and otherbanking fees, other loan fees and gains on the sale of investment securitiesand loans.  The increases were partiallyoffset with decreases in loan servicing fees, merchant card fee income andother income.  In addition, noninterestincome increased $92,000 as a result of the Bay State acquisition in the secondquarter of 2003.

 

14

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*Noninterest Expense.*   Noninterest expense increased by $3.2million, or 18.6%, from $17.1 million for the quarter ended June 30, 2002 to$20.3 million for the quarter ended June 30, 2003.  This increase reflected increases in salaries and employeebenefits ($1.7 million), occupancy and equipment ($527,000), data processing($307,000), professional services ($586,000), amortization of goodwill andintangibles ($69,000), and other noninterest expense ($17,000).  The increases in noninterest expenses werepartially offset by decreases in marketing ($1,000).

 

Salaries and employeebenefits increased $1.7 million, or 18.1%, during the quarter ended June 30,2003.  This increase was the result ofsalary increases averaging 4.5%, additions to staff in Retail Banking, the CallCenter and the Managed Assets departments and other increases in staffing andovertime related to Company growth, franchise expansion, the Bay State acquisitionand data processing conversion, supplemented by increases in employee benefits.

 

Occupancy and equipmentexpenses increased by $527,000, or 23.2%, during the quarter ended June 30,2003.   This increase was primarily theresult of increases in building, equipment and software depreciation, rent andmaintenance expenses related to branch expansion and Bay State acquisitionduring the period.

 

Data processing expensesincreased $307,000, or 17.1%, during the quarter ended June 30, 2003 dueprimarily to core processing activities that are volume-related and increasesin the number of retail deposit and loan accounts, ATM transactions andelectronic banking.  Also, coreprocessing expenses, data communication line and software maintenance expensesincreased due to the conversion of the core processing functions to anotherservice bureau which was completed in the second quarter.  In addition, overall data processingexpenses increased due to the acquisition of Bay State during the secondquarter of 2003.  Currently, Bay Stateis supported by another data processing company and is scheduled to beconverted later this year.

 

Marketing expensesdecreased $1,000, during the quarter ended June 30, 2003.  This decrease was primarily attributable tooverall general increases in marketing and advertising efforts offset bydecreases in similar activities.

 

Professional servicesexpenses increased $586,000, or 94.1%, during the quarter ended June 30,2003.  This increase was primarily theresult of outside expenses related to the conversion of data processingfunctions which was completed in the second quarter.  In addition, there were increases in corporate consultingservices and recruitment expense.

 

Amortization of intangiblesincreased $69,000, or 33.5%, during the quarter ending June 30, 2003.  This increase is primarily attributable toan increase in core deposit and noncompete intangibles as a result of the BayState acquisition.

 

Other noninterest expenseincreased $17,000, or 1.0%, during the quarter ended June 30, 2003.  This increase reflects primarily therecording of an interest expense credit of $623,000 as a result of thesettlement with the Massachusetts DOR that retroactively disallowed the REITdividend deduction for the years ended December 31, 1999 through December 31,2002. (See Note 9 to the Consolidated Financial Statements).  Excluding this deficiency credit, othernoninterest expense increased $640,000, or 30.0% during the period. Most ofthat increase was related to increases in postage, printing, repossessions,litigations, and security related expenses.

 

*Minority Interest Expense. *Interestexpense of $1.5 million reflects the issuance of $55.0 million of the 8.50%trust preferred securities in June 2002 and $15.0 million of pooled 6.65% trustpreferred stock in March 2003.

 

*Income Taxes.* During the quarter ended June 30, 2003, the Company recorded a stateincome tax recovery of $4.7 million, net of the federal income tax benefit, asa result of the settlement with the Massachusetts DOR that retroactivelydisallowed the REIT dividend deduction for the years ended December 31, 1999through December 31, 2002.  Dueprimarily to the impact of this state tax recovery, the effective tax rate was5.9% for the quarter ended June 30, 2003, as compared with 35.4% for the sameperiod in 2002.  Exclusive of thisrecovery of taxes and interest deficiency, the effective tax rate for thequarter ended June 30, 2003 would have been 40.8% compared to 35.4% in the sameperiod in 2002. This increase from 2002 primarily reflects the impact of theelimination of the tax benefit attributable to REIT dividends in 2003. (SeeNote 9).

 

15

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**Comparisonof Operating Results for the Six Months Ended June 30, 2003 and 2002**

 

Net income amounted to $10.3million, $.45 per diluted share, for the six months ended June 30, 2003, ascompared to net income of $18.2 million, $.77 per diluted share, in thecorresponding period of 2002.  Thefinancial performance in the first six months of 2003 was negatively impactedby the recording of a state income tax provision of $4.9 million, net offederal income tax benefit, as well as a charge of $1.0 million representing aninterest tax deficiency on a settlement with the DOR.  (See Note 9)

 

*Interest Income.*  Interest income for the sixmonths ended June 30, 2003 was $108.9 million, compared to $107.2 million forthe six months ended June 30, 2002, an increase of $1.6 million, or 1.5%.  The increase in interest income resultedfrom growth in average interest-earning assets of $403.9 million, or 12.4%,offset by a decrease in the overall yield on interest-earning assets of 24basis points in the 2003 period.  Theprincipal areas of growth in average balances were real estate loans (up $352.8million, or 19.0%) and indirect auto loans (up $143.0 million, or 22.6%),offset by a decrease in investment securities ($82.4 million, or 14.0%).  Most of the real estate loan growth resultedfrom home growth originations and retention of those loans in portfolio, and toa lesser extent, loans acquired through the purchase of Bay State.  The increase in indirect auto loans resultedfrom the prevailing favorable interest rate environment and the continuedgeographic expansion of the network of participating dealers and regions.  The decrease in investment securities wasprimarily the result of funding loan growth during the period and cash requiredto purchase Bay State.

 

*Interest Expense.*  Interest expense for the sixmonths ended June 30, 2003 was $43.1 million compared to $48.2 million for thesix months ended June 30, 2002, a decrease of $5.1 million or 10.6%.  This decrease resulted from a 56 basispoints decrease in the cost of funds from 3.32% in 2002 to 2.76% in 2003, partiallyoffset by a higher average balance of interest-bearing deposits (up $233.8million, or 11.4%).

 

Interest expense on borrowedfunds decreased $624,000 in the six months ended June 30, 2003 to $20.8 milliondue primarily to a decrease of 70 basis points in the average rate paid onborrowed funds, from 5.02% in the same period last year 2002 to 4.32% for sixmonths ended June 2003.  During the2003 period, the average balance of borrowed funds increased $108.8 million, or12.7%, as a result of the purchase of Bay State and to fund loan growth.

 

The decrease in the cost offunds in 2003 reflects what we believe is a current consumer bias to preserveprincipal, remain liquid and deposit funds into non-time deposit accounts.  We believe that the current low interestrate environment and stock market volatility, combined with the slow growth inour economy, have induced consumers to seek insured deposit accounts thatprovide a safe haven for their investable funds.  Material increases in the average balances of non-time depositsreflect this positioning.   From June30, 2002 to June 30, 2003 the average balance of non-time deposits increasedfrom $1.1 billion to $1.3 billion while the cost associated with these accountsdecreased 31 basis points from 1.51% in 2002 to 1.20%  in 2003.  Also, it should benoted that the average balance increase in non-time deposits has beeninfluenced, to a lesser extent, for one month, by the purchase of Bay State onMay 31, 2003.    In addition, with theexpectation that the Federal Reserve’s Open Market Committee will not beinclined to immediately initiate a series of interest rate increases, webelieve that consumers will continue to invest in non-time deposit accounts.

 

*Provision for Loan Losses.*  TheCompany provided $4.2 million for loan losses in the six months ended June 30,2003 compared to $3.5 million in the comparable prior year period.  The increase of $639,000 in 2003 wasprimarily attributable to the growth in the loan portfolio.

 

*Noninterest Income.* Total noninterest income was $8.1 million for the six months endedJune 30, 2003 compared to $6.8 million in the same period of 2002, an increaseof $1.2 million, or 17.9%.  Thisincrease was principally caused by increases in retail and checking accountrelated income ($517,000), ATM/Debit card usage ($232,000), other loan fees($314,000) and gains on investment securities ($413,000), offset by decreaseson the sale of loans ($10,000), loan servicing fees ($90,000), merchant cardfee income ($71,000) and other miscellaneous income ($80,000).

 

*Noninterest Expense.* Noninterest expense increased by $6.7million, or 19.6%, from $33.9 million for the six months ended June 30, 2002 to$40.6 million for the six months ended June 30, 2003.  This increase reflected increases in salaries and employeebenefits ($2.2 million), occupancy and equipment expenses ($1.1 million), dataprocessing ($696,000), marketing expenses ($248,000), professional services($530,000), amortization of goodwill and intangibles ($25,000), and othernoninterest expense ($1.8 million).

 

Salaries and employeebenefits increased $2.2 million or 12.0%, during the six months ended June 30,2003.  This increase was partially theresult of salary increases averaging 4.5%, coupled with additions to staff inLending Departments, Retail Banking and other operational support departments,an increase in commissions paid on loan refinancing activities, an increase inovertime payroll due to the data processing conversion, and other additions tostaff related to company growth supplemented by increases in employeebenefits.  In addition, salary andbenefit expense increased due to the acquisition of Bay State on May 31, 2003.

 

16

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Occupancy and equipmentexpenses increased $1.1 million, or 24.1% during the six months ended June 30,2003. The increase was primarily the result of branch expansion and the relatedexpenses to operate them during the period. In addition, there were increases in depreciation expense for computerequipment related to the conversion of the data processing function.  Also, to a lesser extent the acquisition ofBay State contributed to the increase.

 

Data processing expensesincreased $696,000, or 19.9%, during the six months ended June 30, 2003 dueprimarily to core processing activities which are volume-related such as itemprocessing, loan and deposit account activity, ATM and electronic bill paymentprocessing, data line communication expenses and to a lesser extent, theacquisition of Bay State which is currently on a different core processingsystem

 

Marketing expenses increased$248,000, or 20.0%, during the six months ended June 30, 2003.  This increase was attributable to anincrease in outside agency fees, newspaper advertising, premium promotions,partially offset by decreases in production costs and direct marketing.

 

Professional servicesexpenses increased $530,000, or 43.1%, during the six months ended June 30,2002.  This increase primarily reflectsincreases in corporate and outside professional services associated with the conversionof the data processing function which occurred in the second quarter 2003.  These increases were partially offset bydecreases in audit and tax preparation and consulting services for privatebanking.

 

Amortization of intangiblesincreased $25,000, or 6.1%, during the six months ended June 30, 2003.  This increase is attributed to an increasein identifiable core deposit and other intangibles as a result of theacquisition of Bay State.

 

Other noninterest expense increased $1.8 million, or41.5%, during the six months ended June 30, 2003.  This increase reflects primarily the net interest tax deficiencycharge related to the REIT settlement with the Massachusetts DOR and increasein postage, building security repossession and litigations.

 

*MinorityInterest Expense. *Interestexpense totaled $2.7 million for the six months ended June 30, 2003, ascompared with $407,000 for the comparable period of 2002.  This increase was due to the issuance ofcapital securities in May 2002 and March 2003.

 

*IncomeTaxes. *During the six months ended June 30, 2003, the companyrecorded a state income tax provision of $4.9 million, net of the federalincome tax benefit, as a result of the settlement with the Massachusetts DORthat retroactively disallowed the REIT dividend deduction for the years endedDecember 31, 1999 through December 31, 2002. Due primarily to the impact of this extra tax provision, the effectivetax rate was 60.9% for the six months ended June 30, 2003 compared to 35.0% forthe same period in 2002.  Exclusive ofthis provision and the interest deficiency charge, the effective tax rate forthe six months ended June 30, 2003 would have been 40.8% compared to 35.0% inthe same period in 2002.  This increasefrom 2002 primarily reflects the impact of the elimination of the tax benefitattributable to REIT dividends in 2003.

 

17

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

 

Total assets increased by$775.8 million from $3.7 billion at December 31, 2002 to $4.5 billion at June30, 2003.  This increase was largely dueto the acquisition of Bay State during the second quarter of 2003 which added$683 million to total assets.

 

**INVESTMENTSECURITIES**

 

Investment securitiesdecreased from $489.8 million as of December 31, 2002, to $437.7 million atJune 30, 2003.  This decrease was due tosales, calls, paydowns and maturities exceeding reinvestment.  Cash flows from investments were used inpart, to finance the acquisition of Bay State. The securities portfolio consists primarily of United States Treasuryand Agency securities all rated AAA by rating agencies.

 

**LOANS**

 

The followingtable shows the composition of the Company’s loan portfolio at:

 
|                             |   | **June 30,  2003** |      | **December 31,  2002** |   |
|----------------------------------|--------|--------------------|-----------|------------------------|--------|
|                             |   | **(In thousands)** |      |
| Real  estate loans:              |   |               |      |
| Residential (one-to-four family) |   | $                  | 1,888,869 |                   | $      | 1,513,388 |   |
| Commercial                       |   | 533,068            |      | 356,610                |   |
| Construction                     |   | 133,239            |      | 110,166                |   |
| Home equity lines of credit      |   | 96,614             |      | 67,794                 |   |
| Total real estate loans          |   | 2,651,790          |      | 2,047,958              |   |
| Commercial loans                 |   | 142,772            |      | 127,822                |   |
| Consumer loans:                  |   |               |      |                   |   |
| Indirect auto loans              |   | 785,475            |      | 770,574                |   |
| Less-unearned discount           |   | 44                 |      | 210                    |   |
| Indirect auto loans, net         |   | 785,431            |      | 770,364                |   |
| Other                            |   | 46,995             |      | 45,027                 |   |
| Total consumer loans, net        |   | 832,426            |      | 815,391                |   |
| Total loans                      |   | $                  | 3,626,988 |                   | $      | 2,991,171 |   |

 

Loans serviced for others ona non-recourse basis at June 30, 2003 and December 31, 2002 amounted to $214.6million and $249.0 million, respectively.

 

Total loans increased by$635.8 million during the first six months of 2003.  This increase was primarily attributable to approximately $517million of loans obtained as a result of the Bay State acquisition.

 

Residential real estateloans (which excludes loans held-for-sale) increased $375.5 million fromDecember 31, 2002 to June 30, 2003. Excluding the Bay State acquisition, loans increased $66.9 million asthe Company continued to hold all loan originations in its portfolio.  It is expected that sales of fixed rateloans will occur during the third quarter of 2003 in order to modestlyreposition the portfolio.

 

Commercial real estateloans increased $176.5 million from December 31, 2002.  Excluding Bay State, commercial real estateincreased by $17.4 million.

 

Construction loansincreased $23.1 million from December 31, 2002.  Excluding Bay State, construction loans increased by $11.5million.

 

Home equity lines ofcredit increased by $28.8 million from December 31, 2002.  Excluding Bay State, the increase was $15.2million. This growth was achieved through a special marketing program thatprovided a lower fixed rate for the first six months.

 

Indirect auto loansincreased by $15.1 million from December 31, 2002 to June 30, 2003.  Bay State did not have any indirect autoloans in its portfolio.  The annualizedgrowth in this business line of approximately 4% is lower than our historicalgrowth rate.  This slowdown is a resultof a number of factors including consumers opting for cash out refinances, andmanufacturer direct loans as financing sources, as well as increasedcompetition.  Primarily for thesereasons, management believes that the rate of growth will continue to bemoderate.

 

18

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**RISKMANAGEMENT**

 

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

 

**CREDITRISK MANAGEMENT**

 

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

 

**RISKELEMENTS**

 

The following table setsforth information regarding non-performing assets:

 
|                                                                      |   | **6/30/03**                 |   | **12/31/02** |   |
|---------------------------------------------------------------------------|--------|-----------------------------|--------|--------------|--------|
|                                                                      |   | **(Dollars  in thousands)** |
| Non-accrual loans (1):                                                    |   |                        |   |         |   |
| Real estate loans:                                                        |   |                        |   |         |   |
| Residential                                                               |   | $                           | 2,591  |         | $      | 3,654 |   |
| Commercial                                                                |   | 3,739                       |   | 3,978        |   |
| Construction                                                              |   | 1,262                       |   | —       |   |
| Home equity                                                               |   | 50                          |   | 77           |   |
| Commercial loans                                                          |   | 4,667                       |   | 5,028        |   |
| Indirect auto loans                                                       |   | 1,425                       |   | 1,194        |   |
| Other consumer loans                                                      |   | 59                          |   | 142          |   |
| Total non-accrual loans                                                   |   | 13,793                      |   | 14,073       |   |
| Restructured loans (2)                                                    |   | —                      |   | —       |   |
| Other real estate owned and repossessed autos                             |   | 366                         |   | 1,350        |   |
| Total non-performing assets                                               |   | $                           | 14,159 |         | $      | 15,423 |   |
|                                                                      |   |                        |   |         |   |
| Allowance for loan losses as a percent of total  loans                    |   | 1.15                        | %      | 1.15         | %      |
| Allowance for loan losses as a percent of total non-performing loans  (3) |   | 303.0                       | %      | 244.1        | %      |
| Non-performing loans as a percent of total loans                          |   | 0.38                        | %      | 0.47         | %      |
| Non-performing assets as a percent of total assets                        |   | 0.32                        | %      | 0.42         | %      |

 

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

(2)               Restructured loans represent performingloans for which concessions have been granted due to borrower’s financialcondition.

(3)               Non-performing loans are comprised ofnon-accrual loans and restructured loans.

 

Loans are consideredimpaired when it is probable that the Company will not be able to collectprincipal, interest and fees according to the contractual terms of the loanagreement.  Total impaired loans at June30, 2003 and, December 31, 2002, were $10.0 million and $9.5 million,respectively.

 

19

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The following table sets forth activity in theallowance for loan losses for the periods indicated:

 
|                                                  |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                  |   | **2003**                          |   | **2002**                        |   | **2003** |   | **2002** |   |
|                                                  |   | **(In thousands)**                |   |
| Balance at beginning of period                        |   | $                                 | 34,709 |                            | $      | 30,332 |   | $ | 34,354 |   | $ | 29,513 |   |
| Provision for loan losses                             |   | 2,087                             |   | 2,000                           |   | 4,174 |   | 3,535 |   |
| Acquired allowance                                    |   | 6,147                             |   | —                          |   | 6,147 |   | — |   |
| Charge-offs:                                          |   |                              |   |                            |   |   |   |   |   |
| Mortgage loans:                                       |   |                              |   |                            |   |   |   |   |   |
| Residential                                           |   | —                            |   | (44                             | )      | — |   | (44 | ) |
| Commercial                                            |   | —                            |   | —                          |   | (6 | ) | — |   |
| Home equity                                           |   | —                            |   | —                          |   | — |   | — |   |
| Construction                                          |   | —                            |   | —                          |   | — |   | — |   |
| Commercial loans                                      |   | (287                              | )      | (166                            | )      | (407 | ) | (410 | ) |
| Indirect auto loans                                   |   | (1,549                            | )      | (617                            | )      | (3,237 | ) | (1,222 | ) |
| Other consumer loans                                  |   | (9                                | )      | (15                             | )      | (11 | ) | (19 | ) |
| Total charge-offs                                     |   | (1,845                            | )      | (842                            | )      | (3,661 | ) | (1,695 | ) |
| Recoveries:                                           |   |                              |   |                            |   |   |   |   |   |
| Mortgage loans:                                       |   |                              |   |                            |   |   |   |   |   |
| Residential                                           |   | 44                                |   | 57                              |   | 44 |   | 57 |   |
| Commercial                                            |   | 8                                 |   | —                          |   | 8 |   | 31 |   |
| Home equity                                           |   | —                            |   | —                          |   | — |   | — |   |
| Construction                                          |   | —                            |   | —                          |   | — |   | — |   |
| Commercial loans                                      |   | 3                                 |   | 28                              |   | 5 |   | 51 |   |
| Indirect auto loans                                   |   | 616                               |   | 50                              |   | 695 |   | 133 |   |
| Other consumer loans                                  |   | 28                                |   | 6                               |   | 31 |   | 6 |   |
| Total recoveries                                      |   | 699                               |   | 141                             |   | 783 |   | 278 |   |
|                                                  |   |                              |   |                            |   |   |   |   |   |
| Net charge-offs                                       |   | (1,146                            | )      | (701                            | )      | (2,878 | ) | (1,417 | ) |
|                                                  |   |                              |   |                            |   |   |   |   |   |
| Balance at end of period                              |   | $                                 | 41,797 |                            | $      | 31,631 |   | $ | 41,797 |   | $ | 31,631 |   |
|                                                  |   |                              |   |                            |   |   |   |   |   |
| Ratio of annualized net charge-offs to  average loans |   | 0.14                              | %      | 0.10                            | %      | 0.18 | % | 0.11 | % |

 

The increase in indirectauto loan charge-offs during the three and six months ending June 30 of 2003versus 2002 is due in part to the significant growth in the portfolio duringthe past year (average balances increased $143 million or 23%), coupled withrising unemployment and lower values realized from repossessed auto sales.

 

**DEPOSITS**

 

A summary of deposit balancesis as follows:

 
|                                   |   | **June 30,  2003** |      | **December 31,****2002** |   |
|----------------------------------------|--------|--------------------|-----------|--------------------------|--------|
|                                   |   | **(In thousands)** |      |
| Demand deposit accounts                |   | $                  | 258,652   |                     | $      | 196,869 |   |
| NOW and money market deposit accounts  |   | 1,125,684          |      | 873,019                  |   |
| Passbook and other savings accounts    |   | 397,039            |      | 320,528                  |   |
| Total non-certificate accounts         |   | 1,781,375          |      | 1,390,416                |   |
|                                   |   |               |      |                     |   |
| Certificates of deposit -              |   |               |      |                     |   |
| Term certificates of $100,000 and over |   | 325,120            |      | 285,664                  |   |
| Term certificates less than $100,000   |   | 790,347            |      | 727,795                  |   |
| Total certificates of deposit          |   | 1,115,467          |      | 1,013,459                |   |
| Total deposits                         |   | $                  | 2,896,842 |                     | $      | 2,403,875 |   |

 

20

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Total depositsat June 30, 2003 were $2.9 billion, an increase of $493.0 million, compared to$2.4 billion at December 31, 2002.  Thisincrease was largely due to the Bay State acquisition which added $434.4million to total deposits. Core deposit account balances (non-certificate)increased by $391.0 million during the quarter.  The increase in core deposits during the quarter was generallyattributable to the Bay State acquisition, normal seasonal fluctuations,continued uncertainty in the stock market as consumers seek safety andliquidity, as well as the result of less attractive rates being offered on termdeposit products. A slight decrease in certificates of deposits (excluding theeffects of the Bay State acquisition) was primarily the result of declininginterest rates for this type of product and consumers wanting to maintain aliquid position.

 

**OTHERFUNDING SOURCES**

 

Totalborrowings increased $185.3 million from December 31, 2002 to June 30,2003.  The majority of this increase infunding represents term debt from the Federal Home Loan Bank of Bostonresulting from the acquisition of Bay State.

 

Capital TrustSecurities increased $14.5 million from December 31, 2002 to June 30,2003.  The Company issued through asubsidiary trust, a capital security in March 2003, which qualifies as Tier 1capital for regulatory purposes.

 

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

The increasein stockholders’ equity of $72.9 million to $392.4 million at June 30, 2003resulted mainly from common stock issued in conjunction with the acquisition ofBay State of $71.9 million, net comprehensive income of $11.9 million, offsetby cash dividends and stock repurchases totaling $12.0 million. There remains326,459 shares available for repurchase under the Company’s fourth repurchaseprogram announced in September 2002.

 

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 the Federal Home LoanBank of Boston (FHLB), Compass and Nantucket Bank are entitled to borrow anamount up to the value of its qualified collateral that has not been pledged toothers.  Qualified collateral generallyconsists of residential first mortgage loans, U.S. Government and agencysecurities and funds on deposit specifically pledged to the FHLB.  At June, 2003, Compass and Nantucket Bankhad approximately $412.7 million and $19.3 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 isboth a daily and long-term function of business management.  The measure of a Bank’s liquidity is itsability to meet its cash commitments at all times with available cash or byconversion of other assets to cash at a reasonable price.  At June 30, 2003, the Company maintainedcash and due from banks, federal funds sold, short-term investments and debtsecurities maturing within one year of $290.4 million, or 6% of totalassets.  The Company invests excessfunds, if any, in federal funds sold which provides liquidity to meet lendingrequirements.

 

At June 30, 2003, the Company had commitments tooriginate loans, unused outstanding lines of credit, standby letters of creditand undisbursed proceeds of loans totaling $446.4 million. The Companyanticipates that it will have sufficient funds available to meet its currentcommitments.  Certificates of deposit maturingwithin one year from June 30, 2003 amounted to $617.5 million.  The Company expects that a significantportion of maturing certificate accounts will be retained at maturity.

 

The Company’s and the Banks’ capital ratios at June30, 2003 were as follows:

 
|                                     |   | **Seacoast  Financial** |   | **Compass  Bank** |   | **Nantucket** |    |
|------------------------------------------|--------|-------------------------|--------|-------------------|--------|---------------|---------|
| Total Capital (to risk weighted assets)  |   | 12.09                   | %      | 10.56             | %      | 13.48         | %  |
| Tier 1 Capital (to risk weighted assets) |   | 10.79                   |   | 9.29              |   | 12.22         |    |
| Tier 1 Capital (to average assets)       |   | 8.35                    |   | 7.33              |   | 8.71          |    |

 

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

 

21

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

 

The chief market risk factor affecting the financialcondition and operating results of the Company is interest rate risk. This riskis managed by periodic evaluation of the interest risk inherent in certainbalance sheet accounts, determination of the level of risk consideredappropriate given capital and liquidity requirements, business strategy,performance objectives and operating environment and maintenance of such riskswithin guidelines approved by the Board of Directors.  Through such management, the Company seeks to reduce thevulnerability of its net earnings to changes in interest rates.  Each Bank’s Asset/Liability Committee,comprised of senior management, is responsible for managing interest rate riskand reviewing with its Board of Directors on a quarterly basis its activitiesand strategies, the effect of those strategies on operating results, the Bank’sinterest rate risk position and the effect changes in interest rates would haveon net interest income. The extent  ofmovement of interest rates is an uncertainty that could have a negative impacton earnings.

 

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

 

The Company and the Banks quantify theirinterest rate risk exposure using a sophisticated simulation model.  Simulation analysis is used to measure theexposure of net interest income to changes in interest rates over a specifiedtime horizon.  Simulation analysisinvolves projecting future interest income and expense under various ratescenarios.  Internal guidelines oninterest rate risk specify that for every 100 basis points immediate shift ininterest rates, the estimated net interest income over the next 12 monthsshould decline by less than 5%.

 

In utilizing a 300 basis point increase inrates in its simulation model, the full impact of annual rate caps of 200 basispoints common to most adjustable rate mortgage loan products isconsidered.  The rate shocks used assumean instantaneous and parallel change in interest rates and that no strategiesare 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 June 30, 2003, the Company’s estimated exposureas a percentage of estimated net interest income for the next twelve andtwenty-four month periods is as follows:

 
|                                      |   | **Percentage Change in Estimated  Net Interest Income Over:** |   |
|-------------------------------------------|--------|---------------------------------------------------------------|--------|
|                                      |   | **12 months**                                                 |   | **24 months** |   |
| 300 basis point increase in rates         |   | (10.95                                                        | )%     | (7.3 | )% |
| 50 basis point decrease in rates (Note 1) |   | 0.3                                                           | %      | (1.2 | )% |

 

----

(1)          Due to the low interest rate environment in effect at June 30, 2003(the average Federal Fund overnight rates were trading below 1.00%) thesimulation model could only be rate shocked down 50 basis points.

 

For each one-percentage point change in net interestincome, the effect on net income would be $939,000, assuming a 41% tax rate.

 

22

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**Item4.  Controls and Procedures**

 

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

 

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

 

(b)         Changes in Internal Controls.  There were no changes in our internalcontrol over financial reporting identified in connection with the evaluationrequired by Exchange Act Rules 13a-15(d) and 15d-15(d) that occurred during thefiscal quarter covered by this report that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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

 

On May 31,2003, we completed the acquisition of Bay State Bancorp, Inc.  In the course of our due diligence for thattransaction we evaluated Bay State’s system of internal control over financialreporting and concluded that it provided reasonable assurance regarding thereliability of financial reporting and the preparation of financial statementsfor external purposes in accordance with accounting principles generallyaccepted in the United States of America, as provided in Exchange Act Rule13a-15(f).  The integration of Bay Stateinto the Fiserv EDP platform is scheduled for later this year or early in 2004.

 

23

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

 

**Item 1. Legal Proceedings**

 

The Company is not involved in any pendinglegal proceedings other than those involved in the ordinary course ofbusiness.  Management believes that theresolution of these matters will not materially affect its business or theconsolidated financial condition of the Company.

 

**Item 2.  Changes in Securities and Use of Proceeds**

 

Not applicable.

 

**Item 3.  Defaults Upon Senior Securities**

 

Not applicable.

 

**Item 4. Submission of Matters to A Vote of SecurityHolders**

 

The Company held its annualmeeting of Stockholders on May 20, 2003 at which time the following fournominees for director, as set forth in the proxy for the meeting, were electedwith the following votes cast:

 
|                    |   | **For**    |   | **Withheld** |   |
|-------------------------|--------|------------|--------|--------------|--------|
| Howard C. Dyer, Jr.     |   | 18,448,701 |   | 124,802      |   |
| Thornton P. Klaren, Jr. |   | 18,443,277 |   | 130,226      |   |
| Reale J. Lemieux        |   | 18,440,001 |   | 133,502      |   |
| Joseph H. Silverstein   |   | 18,440,569 |   | 132,934      |   |

 

In addition,stockholders cast their votes for the approval of the 2003 stock incentive planas follows:

 
| **For**    |   | **Against** |   | **Abstained** |   |
|------------|--------|-------------|--------|---------------|--------|
| 16,895,640 |   | 1,583,088   |   | 94,775        |   |

 

**Item 5. Other Information**

 

Not applicable.

 

**Item 6.****       ****Exhibits an****d Reports on Form 8-****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. +++ |
|   |   |                                                                                                                                                                            |
| 3.1    |   | Articles of Organization  of Seacoast Financial Services Corporation++                                                                                                          |
|   |   |                                                                                                                                                                            |
| 3.2    |   | By-Laws of Seacoast  Financial Services Corporation++                                                                                                                           |
|   |   |                                                                                                                                                                            |
| 4      |   | Specimen certificate for  the common stock of Seacoast Financial Services Corporation+                                                                                          |
|   |   |                                                                                                                                                                            |
| 11     |   | A statement regarding  earnings per share is included in Item 1, Note 5, of this report.                                                                                        |
|   |   |                                                                                                                                                                            |
| 31     |   | Rule 13a-14(a)/15d-14(a)  Certifications                                                                                                                                        |
|   |   |                                                                                                                                                                            |
| 32     |   | Section 1350  Certifications                                                                                                                                                    |
|   |   |                                                                                                                                                                            |
| b.     |   | We filed a Current Report  on Form 8-K on April 24, 2003, June 5, 2003, June 24, 2003 and July 25, 2003  under Items 5 and 7 of Form 8-K.                                       |

 

24

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----

| +      |   | 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.                                                                                                           |

 

25

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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,thereunto duly authorized.

 

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

 

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