<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                        --------------------------------

                                    FORM 10-Q

(Mark One)

[X]  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.

     FOR THE QUARTER ENDED JUNE 30, 1999

                                       or

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
     EXCHANGE ACT OF 1934.



                        COMMISSION FILE NUMBER: 000-25077

                     SEACOAST FINANCIAL SERVICES CORPORATION
             ------------------------------------------------------
             (Exact Name of Registrant as Specified in Its Charter)

          MASSACHUSETTS                             04-1659040
     ------------------------              ---------------------------------
     (State of Incorporation)              (IRS Employer Identification No.)

791 PURCHASE STREET, NEW BEDFORD, MASSACHUSETTS                  02740
-----------------------------------------------                ----------
   (Address of Principal Executive Offices)                    (Zip Code)

                                 (508) 984-6000
                         -------------------------------
                         (Registrant's Telephone Number)

                                       N/A
 -------------------------------------------------------------------------------
 Former Name, Former Address and Former Fiscal Year if Changed Since Last Report

Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

                                                       Yes    X         No _____

At August 11, 1999, the Company had 26,758,134 shares of common stock
outstanding.
<PAGE>

                     SEACOAST FINANCIAL SERVICES CORPORATION

                                      INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION                                                           PAGE NO.
                                                                                         --------
<S>           <C>                                                                        <C>
Item 1.  Financial Statements (unaudited)

              Consolidated Balance Sheets at June 30, 1999                                1
              and December 31, 1998

              Consolidated Statements of Income for the three months and six months       2
              ended June 30, 1999 and 1998

              Consolidated Statements of Changes in Stockholders' Equity                  3
              for the six months ended June 30, 1999 and 1998

              Consolidated Statements of Cash Flows for the six months ended              4
              June 30, 1999 and 1998

              Notes to Unaudited Consolidated Financial Statements                        6

Item 2.  Management's Discussion and Analysis of Financial                               13
         Condition and Results of Operations

              Liquidity and Capital Resources                                            16

              Impact of The Year 2000 Issue                                              17

Item 3.  Quantitative and Qualitative Disclosures About Market Risk                      18


PART II - OTHER INFORMATION

Item 1.  Legal Proceedings                                                               20

Item 2.  Changes in Securities and Use of Proceeds                                       20

Item 3.  Defaults upon Senior Securities                                                 20

Item 4.  Submission of Matters to a Vote of Security Holders                             20

Item 5.  Other Information                                                               20

Item 6.  Exhibits and Reports on Form 8-K                                                21

SIGNATURES                                                                               22

EXHIBIT 27 - Financial Data Schedule
</TABLE>
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                                                   June 30,     December 31,
                                                                                     1999          1998
                                                                                  -----------    -----------
<S>                                                                               <C>            <C>
ASSETS:
     Cash and due from banks ..................................................   $    61,289    $    54,006
     Federal funds sold .......................................................           101         47,413
                                                                                  -----------    -----------
       Total cash and cash equivalents ........................................        61,390        101,419
     Other short-term investments .............................................           173         31,119
     Investment securities--
       Available-for-sale, at fair value ......................................       261,164        294,527
       Held-to-maturity, at amortized cost ....................................        11,692         12,693
       Restricted equity securities ...........................................         9,355          9,035
     Loans held-for-sale ......................................................          --             --
     Loans, net (Note 4) ......................................................     1,605,645      1,388,140
     Accrued interest receivable ..............................................         9,437          8,523
     Banking premises and equipment, net (Note 3) .............................        22,328         19,743
     Other real estate owned ..................................................           934          1,391
     Net deferred tax asset ...................................................        12,563         10,715
     Other assets .............................................................        12,128         10,775
                                                                                  -----------    -----------
         Total assets .........................................................   $ 2,006,809    $ 1,888,080
                                                                                  ===========    ===========

LIABILITIES AND STOCKHOLDERS' EQUITY:
     Deposits (Note 5) ........................................................   $ 1,513,816    $ 1,497,215
     Short -term borrowings ...................................................        38,446         12,835
     Federal Home Loan Bank advances ..........................................       154,018         83,951
     Other borrowings .........................................................         1,959          1,987
     Mortgagors' escrow payments ..............................................         3,551          3,411
     Accrued expenses and other liabilities ...................................        14,750         17,169
                                                                                  -----------    -----------
         Total liabilities ....................................................     1,726,540      1,616,568
                                                                                  -----------    -----------
     COMMITMENTS AND CONTINGENCIES
     Stockholders' equity:
       Preferred stock, par value $.01 per share; authorized 10,000,000 shares;
         none issued ..........................................................          --             --
       Common stock, par value $.01 per share; authorized 100,000,000 shares;
         26,758,134 shares issued and outstanding .............................           268            268
       Additional paid-in capital .............................................       152,939        152,936
       Retained earnings ......................................................       138,685        127,263
       Accumulated other comprehensive income (loss) ..........................          (611)         2,337
       Unearned ESOP compensation .............................................       (10,873)       (11,153)
       Shares held in employee trust ..........................................          (139)          (139)
                                                                                  -----------    -----------
         Total stockholders' equity ...........................................       280,269        271,512
                                                                                  -----------    -----------
         Total liabilities and stockholders' equity ...........................   $ 2,006,809    $ 1,888,080
                                                                                  ===========    ===========
</TABLE>

   See accompanying notes to the unaudited consolidated financial statements.


                                       -1-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
                        CONSOLIDATED STATEMENTS OF INCOME
                                   (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

<TABLE>
<CAPTION>
                                                                  Three Months        Six Months
                                                                 Ended June 30,      Ended June 30,
                                                               -----------------   -----------------
                                                                1999      1998      1999      1998
                                                               -------   -------   -------   -------
<S>                                                            <C>       <C>       <C>       <C>
INTEREST AND DIVIDEND INCOME:
   Interest on loans .......................................   $29,249   $25,599   $57,125   $50,643
   Interest and dividends on investment securities .........     4,285     4,605     8,822     9,464
   Interest on federal funds sold and short-term investments        46       647       359     1,100
                                                               -------   -------   -------   -------
     Total interest and dividend income ....................    33,580    30,851    66,306    61,207
                                                               -------   -------   -------   -------

INTEREST EXPENSE:
   Interest on deposits ....................................    13,245    13,854    26,658    27,348
   Interest on borrowed funds ..............................     2,237     1,808     3,676     3,712
                                                               -------   -------   -------   -------
     Total interest expense ................................    15,482    15,662    30,334    31,060
                                                               -------   -------   -------   -------
     Net interest income ...................................    18,098    15,189    35,972    30,147

PROVISION FOR LOAN LOSSES ..................................       350       465       575       705
                                                               -------   -------   -------   -------
     Net interest income after provision
       for loan losses .....................................    17,748    14,724    35,397    29,442
                                                               -------   -------   -------   -------

NONINTEREST INCOME:
   Deposit and other banking fees ..........................     1,262     1,290     2,450     2,529
   Loan servicing fees, net ................................       155       190       324       391
   Card fee income, net ....................................       198       136       288       234
   Other loan fees .........................................       110       117       233       308
   Gain on sales of investment securities, net .............       121      --         158        11
   Gain on sales of loans, net .............................         4       434        78       758
   Other income ............................................       277       261       458       482
                                                               -------   -------   -------   -------
     Total noninterest income ..............................     2,127     2,428     3,989     4,713
                                                               -------   -------   -------   -------

NONINTEREST EXPENSE:
   Salaries and employee benefits ..........................     5,521     5,415    10,820    10,645
   Occupancy and equipment expenses ........................     1,427     1,263     2,935     2,482
   Data processing expenses ................................     1,084       839     2,245     1,614
   Marketing expenses ......................................       590       602     1,117     1,093
   Professional services expenses ..........................       468       327       702       613
   Other operating expenses ................................     1,962     1,610     3,837     3,325
                                                               -------   -------   -------   -------
     Total noninterest expense .............................    11,052    10,056    21,656    19,772
                                                               -------   -------   -------   -------
     Income before provision for income taxes ..............     8,823     7,096    17,730    14,383

PROVISION FOR INCOME TAXES .................................     3,018     2,563     6,308     5,455
                                                               -------   -------   -------   -------
     Net income ............................................   $ 5,805   $ 4,533   $11,422   $ 8,928
                                                               =======   =======   =======   =======

           Net income per share-diluted (Note 6) ...........   $  0.23       N/A   $  0.45       N/A
                                                               =======   =======   =======   =======
</TABLE>

See accompanying notes to the unaudited consolidated financial statements.


                                       -2-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998

                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     Additional                          Accumulated Other
                                                             Common   Paid-In                 Retained     Comprehensive
                                                             Stock    Capital     Surplus     Earnings     Income (Loss)
                                                             ------   --------   ---------    ---------- -----------------
<S>                                                          <C>      <C>        <C>           <C>         <C>
Balance, December 31, 1997 ...............................   $   --   $      --  $ 140,642     $      --   $   1,822
Net income ...............................................       --          --      8,928            --          --
Other comprehensive income -- Change in unrealized gain on
   securities available for sale, net of taxes ...........       --          --         --            --         552
     Comprehensive income ................................                                                        --
Transactions with stockholders of acquired entity ........       --          --        123            --          --
Change in intercorporate investment ......................       --          --     (4,254)           --        (803)
                                                             ------   ---------  ---------     ---------   ---------
Balance, June 30, 1998 ...................................   $   --   $      --  $ 145,439     $      --   $   1,571
                                                             ======   =========  =========     =========   =========

Balance, December 31, 1998 ...............................   $  268   $ 152,936  $       --    $ 127,263   $   2,337
Net income ...............................................       --          --          --       11,422          --
Other comprehensive income -- Change in unrealized gain
   (loss) on securities available for sale, net of taxes .       --          --          --           --      (2,948)
     Comprehensive income ................................                                                        --
Amortization of unearned ESOP compensation ...............       --           3          --           --          --
                                                             ------   ---------  ---------     ---------   ---------
Balance, June 30, 1999 ...................................   $  268   $ 152,939   $      --    $ 138,685   $    (611)
                                                             ======   =========   =========    =========   =========
</TABLE>

<TABLE>
<CAPTION>
                                                                   ESOP         Shares Held
                                                                 Unearned       in Employee
                                                               Compensation        Trust        Total
                                                             ----------------  -------------  ----------
<S>                                                            <C>               <C>          <C>
Balance, December 31, 1997 ...............................     $      --         $    --      $ 142,464
Net income ...............................................            --              --          8,928
Other comprehensive income -- Change in unrealized gain on
   securities available for sale, net of taxes ...........            --              --            552

     Comprehensive income ................................
Transactions with stockholders of acquired entity ........            --              --            123
Change in intercorporate investment ......................            --              --         (5,057)
                                                               ---------         -------      ---------
Balance, June 30, 1998 ...................................     $      --         $    --      $ 147,010
                                                               =========         =======      =========
Balance, December 31, 1998 ...............................     $ (11,153)        $  (139)     $ 271,512

Net income ...............................................            --              --         11,422
Other comprehensive income -- Change in unrealized gain
   (loss) on securities available for sale, net of taxes .            --              --         (2,948)
                                                                                               ---------
     Comprehensive income ................................
Amortization of unearned ESOP compensation ...............           280              --            283
                                                               ---------         -------      ---------
Balance, June 30, 1999 ...................................     $ (10,873)        $  (139)     $ 280,269
                                                               =========         =======      =========
</TABLE>

   See accompanying notes to the unaudited consolidated financial statements.


                                       -3-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                   1999        1998
                                                                ---------    ---------
<S>                                                             <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income ...............................................   $  11,422    $   8,928
   Adjustments to reconcile net income to net cash
       provided by (used in) operating activities --
     Depreciation ...........................................       1,227        1,218
     Amortization and accretion, net ........................         848          570
     Provision for loan losses ..............................         575          705
     Gain on sale of investment securities, net .............        (158)         (11)
     Other real estate owned income .........................         (58)         (32)
     Provision for deferred taxes ...........................          12          488
     Origination of loans held-for-sale .....................      (4,652)     (99,600)
     Proceeds from sales of loans originated for resale .....       4,730       87,010
     Gain on sales of loans, net ............................         (78)        (758)
     Net increase in accrued interest receivable ............        (914)        (309)
     Net (increase) decrease in other assets ................      (1,792)         156
     Net decrease in accrued expenses
       and other liabilities ................................      (2,373)      (1,252)
                                                                ---------    ---------
       Net cash provided by (used in) operating activities ..       8,789       (2,887)
                                                                ---------    ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
   Change in short-term investments, net ....................      30,946       (2,048)
   Purchase of securities classified as available-for-sale ..     (38,004)     (78,278)
   Purchase of securities classified as held-to-maturity ....          --       (2,320)
   Purchase of restricted equity securities .................        (320)        (130)
   Proceeds from sales, calls, paydowns and maturities of
     securities classified as available-for-sale ............      66,549       85,023
   Proceeds from paydowns, maturities and calls of securities
     classified as held-to-maturity .........................       1,000        5,150
   Purchase of loans ........................................      (5,486)      (3,911)
   Net increase in loans ....................................    (212,180)     (54,231)
   Recoveries of loans previously charged off ...............         300          283
   Proceeds from sales of other real estate owned ...........         158          781
   Purchase of premises and equipment .......................      (4,172)      (2,401)
                                                                ---------    ---------
       Net cash used in investing activities ................    (161,209)     (52,082)
                                                                ---------    ---------
</TABLE>


                                       -4-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                 FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998
                                   (UNAUDITED)
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                              1999         1998
                                                            ---------    ---------
<S>                                                         <C>          <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
   Increase in NOW, money market deposit and
     demand deposit accounts ............................   $  12,324    $  48,365
   Increase in passbook and other
     savings accounts ...................................      10,867       12,618
   Increase (decrease) in term certificates .............      (6,590)      18,002
   Advances from Federal Home Loan Bank .................      75,000       28,700
   Repayments of Federal Home Loan Bank advances ........      (4,933)     (34,803)
   Increase in short-term and other borrowings ..........      25,583        1,515
   Increase (decrease) in mortgagors' escrow payments ...         140         (123)
   Transactions with stockholders of acquired entity, net        --            123
   Payment of merger and stock offering costs ...........        --         (2,449)
                                                            ---------    ---------
       Net cash provided by financing activities ........     112,391       71,948
                                                            ---------    ---------
NET INCREASE (DECREASE) IN CASH
   AND CASH EQUIVALENTS .................................     (40,029)      16,979
CASH AND CASH EQUIVALENTS,
   BEGINNING OF YEAR ....................................     101,419       50,395
                                                            ---------    ---------
CASH AND CASH EQUIVALENTS,
   END OF PERIOD ........................................   $  61,390    $  67,374
                                                            =========    =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
   INFORMATION:
     Interest paid on deposits and borrowed funds .......   $  30,001    $  31,212
     Income taxes paid ..................................       9,228        5,595
SUPPLEMENTAL DISCLOSURE OF NONCASH
   TRANSACTIONS:
     Transfers from loans to other real estate owned ....         514        1,136
     Financed sales of other real estate owned ..........         871          959
</TABLE>

   See accompanying notes to the unaudited consolidated financial statements.


                                       -5-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(1)  BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

     The unaudited consolidated financial statements of Seacoast Financial
Services Corporation (the "Company" or "Seacoast Financial"), and its
wholly-owned subsidiaries, Compass Bank for Savings ("Compass" or "the Bank")
and Lighthouse Securities Corporation presented herein should be read in
conjunction with the consolidated financial statements of the Company as of and
for the year ended October 31, 1998 included as part of its Form 10-K. A change
in the Company's fiscal year end from October 31 to December 31 was voted by the
Board of Directors on January 28, 1999.

     On November 20, 1998, the Company completed its conversion from a mutual
bank holding company to a stock holding company with the issuance of 14,000,000
shares of common stock in an initial public offering. On December 4, 1998, the
Company completed its acquisition of Sandwich Bancorp, Inc. (Sandwich) in a
stock-for-stock exchange accounted for as a pooling of interests. The
accompanying financial statements have been restated to combine the assets,
liabilities, equity and results of operations of Sandwich as if the merger had
occurred as of December 31, 1997 as required by the pooling of interests method
of accounting.

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

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its Form 10-K filed
with the Securities and Exchange Commission. For interim reporting purposes, the
Company follows the same significant accounting policies.

ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS

     Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive income
with all other components referred to in the aggregate as other comprehensive
income. At June 30, 1999, the Company's other comprehensive income consisted of
unrealized gains (losses) on securities classified as available for sale, net of
taxes. The Company has presented its components of comprehensive income as part
of its statements of changes in stockholders' equity and, as required by SFAS
No. 130, has restated the prior period financial statements for comparative
purposes. Included in net income are gains on the sale of investment securities,
net of taxes, of $73,000 and $95,000 and three and six months ended June 30,
1999, respectively, and $0 and $7,000, respectively, for the comparable 1998
periods that had previously been classified with other comprehensive income.

     Effective November 1, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". In the opinion of
management, the Company functions as a single reportable operating unit and,
accordingly, the presentation of disaggregated information about segments of a
business enterprise is not applicable.

RECLASSIFICATIONS

     Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity.


                                       -6-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(2) CONVERSION AND MERGER

     The Company completed its mutual-to-stock conversion and the initial public
offering of common stock on November 20, 1998, whereby a total of 14,000,000
shares were sold at a purchase price of $10 per share. An Employee Stock
Ownership Plan (ESOP) set up by Compass acquired 8%, or 1,120,000, of the shares
issued, which was funded by a loan from the Company. Net proceeds of the
Conversion were $121,371,000 excluding the sale of ESOP shares, which were
internally funded.

     On December 4, 1998, the Company completed its acquisition of Sandwich.
Pursuant to the Amended and Restated Affiliation and Merger Agreement, each
share of common stock of Sandwich (other than 90,000 shares held by the Company
and the Bank and other than fractional shares) was converted into and became
exchangeable for 6.385 shares of the Company's common stock. The exchange ratio
was determined using a formula based on the Company's stock trading price
between the date of the Conversion and the closing of the acquisition. A total
of 12,758,134 shares were issued in connection with the acquisition.

     The following presentation reflects selected financial information on a
historical basis for Seacoast Financial and Sandwich and on a pro forma basis
assuming the merger was in effect for the periods presented (in thousands):


<TABLE>
<CAPTION>
                                                                                                           Seacoast
                                                                       Seacoast                           Financial
                                                                      Financial          Sandwich         (Restated)
                                                                     ------------       ----------       ------------
<S>                                                                  <C>                <C>              <C>
At June 30, 1998 and for the six months then ended:
   Net interest income.........................................      $     21,586       $    8,721       $     30,147
   Net income..................................................             6,586            2,342              8,928
   Total assets................................................         1,193,348          531,013          1,719,138
   Total deposits..............................................           997,398          444,750          1,442,148
   Stockholders' equity / Surplus..............................           107,677           44,556            147,010

For the three months ended June 30, 1998:
   Net interest income.........................................            10,889            4,300             15,189
   Net income..................................................             3,371            1,162              4,533
</TABLE>

     The restated balances reflect certain adjustments for the elimination of
Seacoast Financial's ownership of Sandwich common stock and the reclassification
of $64.8 million of Sandwich investment securities from the held-to-maturity
classification to securities available-for-sale.


                                       -7-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(2) CONVERSION AND MERGER (CONTINUED)

     The Company has identified and separately classified those costs
attributable to the merger. These costs encompass both costs directly
identifiable to the merger, such as professional fees for investment bankers,
attorneys and accountants, and contractual severance pay as well as costs
incurred by Sandwich and the Bank that result from the merger and do not
generally benefit the on-going activities of the banks. Merger-related costs
consist of the following items (in thousands):

<TABLE>
     <S>                                                                   <C>
     Professional fees.....................................................$2,692
     Severance pay......................................................... 2,555
     Asset write-offs......................................................   143
     Contractual obligations...............................................   406
     Shareholder meeting (including printing costs)........................   283
     Customer service (including checkbook replacements)...................   662
     Other.................................................................    72
                                                                           ------
                                                                           $6,813
                                                                           ======
</TABLE>

   These costs were expensed in the two month period ended December 31, 1998.

(3)  NEW CORPORATE HEADQUARTERS

     On December 1, 1998, the Bank closed on its acquisition of several parcels
of land in downtown New Bedford, Massachusetts to be used for the development of
the Company's and the Bank's corporate headquarters and main banking office. The
Bank purchased the land from the New Bedford Redevelopment Authority and an
optionholder for $550,000. In connection with this transaction, the Bank agreed
to donate one of its downtown New Bedford buildings to the City at the time it
takes occupancy of its proposed new corporate headquarters. In February 1999,
the Bank selected a general contractor for construction. Based on preliminary
estimates by its architectural consultants, it expects to expend approximately
$20 million in the construction of the building and the purchase of land,
furniture, fixtures and equipment. At the completion of the project, which is
estimated to be in 2000, all Bank personnel, except retail branch personnel, are
expected to be located in this building.

     As part of this transaction, the Bank entered into a Tax Increment
Financing Agreement with the City of New Bedford. This agreement provides a
reduction in future property taxes to the Bank in return for its investment,
through this project, in downtown New Bedford. The tax incentives extend over a
twenty year period and are scheduled to produce an estimated $1.2 million in
property tax reductions. This agreement is conditional and requires the Bank to
retain and create permanent jobs in the City.

     The Bank's plan to construct a new corporate headquarters will result in
the ultimate disposal of its existing corporate offices. One location is
currently being marketed for sale. Two other buildings will continue to be
utilized until the Bank relocates to its new corporate headquarters (one of
which will be donated to the City of New Bedford at that time). Based on
estimates of the fair value of these buildings and the benefits associated with
their continuing utilization through the estimated date of relocation, the Bank
recorded a write-down of $1,967,000 in December 1998.


                                       -8-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(4) LOANS

     Compass's loan portfolio consisted of the following:

<TABLE>
<CAPTION>
                                       June 30,    December 31,
                                         1999        1998
                                      ----------   ----------
                                          (In thousands)
<S>                                   <C>          <C>
Real estate loans:
   Residential (one-to-four family)   $  832,547   $  697,031
   Commercial .....................      207,973      201,636
   Home equity lines of credit ....       24,999       25,984
   Construction ...................       75,923       66,373
                                      ----------   ----------
     Total real estate loans ......    1,141,442      991,024
                                      ----------   ----------

Commercial loans ..................       70,003       58,829
                                      ----------   ----------

Consumer loans:
   Indirect auto loans ............      399,442      358,101
   Other ..........................       37,607       33,494
                                      ----------   ----------
   Total consumer loans ...........      437,049      391,595
   Less-Unearned discount .........       26,703       37,394
                                      ----------   ----------
     Total consumer loans, net ....      410,346      354,201
                                      ----------   ----------
     Total loans ..................    1,621,791    1,404,054
Less-Allowance for loan losses ....       16,146       15,914
                                      ----------   ----------

     Total loans, net .............   $1,605,645   $1,388,140
                                      ==========   ==========
</TABLE>

     Nonaccrual loans amounted to $5,841,000 and $6,016,000 at December 31, 1998
and June 30, 1999, respectively.

     Through December 1998, the majority of the Bank's indirect auto loans were
written as discounted installment loans. The precomputed interest on such loans
is accounted for as unearned discount and recognized in income on a level yield
basis. Beginning in January 1999, all indirect auto loans are originated as
simple interest loans. Accordingly, the balance of unearned discount declined
significantly during the first six months of 1999 and will continue to do so
over the next few years as the pre-1999 indirect auto loans are repaid.


                                       -9-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(5)  DEPOSITS

     A summary of deposit balances is as follows:

<TABLE>
<CAPTION>
                                             June 30,    December 31,
                                               1999          1998
                                            ----------   ----------
                                                (In thousands)
<S>                                         <C>          <C>
Demand deposit accounts .................   $  111,599   $  116,104
NOW and money market deposit accounts ...      447,149      430,320
Passbook and other savings accounts .....      216,328      205,461
                                            ----------   ----------

     Total noncertificate accounts ......      775,076      751,885
                                            ----------   ----------

Term certificates-

   Term certificates of $100,000 and over      157,069      154,589
   Term certificates less than $100,000 .      581,671      590,741
                                            ----------   ----------

     Total term certificate accounts ....      738,740      745,330
                                            ----------   ----------

     Total deposits .....................   $1,513,816   $1,497,215
                                            ==========   ==========
</TABLE>

(6)  EARNINGS PER SHARE

     Earnings per share for the three and six months ended June 30, 1998 is not
presented as the Company did not convert from a mutual to a stock form of
ownership until November 1998.

     Earnings per share for the three and six months ended June 30, 1999 are
based on the weighted average number of shares outstanding during the periods,
which amounted to 25,646,690 and 25,655,246 shares, respectively. Unallocated
ESOP shares are not considered outstanding for purposes of the computation of
earnings per share. There is only an insignificant difference in the number of
shares used in computing basic and diluted earnings per share and, accordingly,
such per share amounts do not differ.

(7)  STOCK INCENTIVE PLAN

     In March 1999, the Company's Board of Directors voted to adopt the 1999
Stock Incentive Plan (the Stock Incentive Plan) for officers, employees and
directors of Compass and the Company. The Stock Incentive Plan, which was
approved by stockholders at the adjourned annual meeting held on June 18, 1999,
is administered by a committee consisting of those members of the Compensation
Committee of the Company's Board of Directors who qualify as "outside
directors".

     The maximum number of shares of common stock issuable as a result of awards
under the Stock Incentive Plan shall be 1,960,000, which equals 14% of the
number of shares issued in connection with the Company's conversion from mutual
to stock form (subject to adjustment upon the occurrence of a stock dividend,
stock split or similar change in capitalization affecting the Company's common
stock). Of this number, up to 560,000 shares are issuable in connection with
"conditioned stock awards". A conditioned stock award is an award entitling the
recipient to acquire,


                                      -10-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(7)  STOCK INCENTIVE PLAN (CONTINUED)

at no cost or for a purchase price to be determined by the Compensation
Committee, shares of common stock subject to restrictions and conditions
determined at the date of grant. Conditions may be based on continuing
employment and/or achievement of performance goals. The remaining 1,400,000
shares issuable in connection with the Stock Incentive Plan may be either
incentive stock options (as defined in the Internal Revenue Code) or options
that do not so qualify (non-qualified options).

     Incentive stock options shall have an exercise price that is not less than
the fair market value at the date of grant and shall not be exercisable more
than ten years after the date of grant. All incentive stock options and
non-qualified options shall vest and become exercisable based on the
determination of the Compensation Committee. Payment of the exercise price for
option shares may be made 1) by cash or check, (2) with the consent of the
Compensation Committee, by delivery of shares of common stock, (3) with the
consent of the Compensation Committee, by reducing the number of option shares
otherwise issuable upon exercise of the option or (4) by other means acceptable
to the Compensation Committee, including any combination of the foregoing. At
the discretion of the Compensation Committee, options may include a so-called
"reload" feature whereby an optionee exercising an option by delivery of shares
of common stock would automatically be granted an additional option at the fair
market value of stock when such additional option is granted equal to the number
of shares so delivered.

     The Stock Incentive Plan also provides for the issuance of unrestricted
stock awards, performance share awards and stock appreciation rights (SARs).
SARs may be granted, at the discretion of the Compensation Committee,
simultaneously with and in conjunction with the grant of a stock option,
subsequent to and in conjunction with the grant of a non-qualified option or
alone and are deemed to be exercised on the last day of their term, if not
otherwise exercised by the holder, provided that the fair value of the common
stock subject to the SARs exceeds the exercise price on such date. The amount
paid upon exercise may be in additional stock or, in the discretion of the
Compensation Committee, in cash.

     In July 1999, the Compensation Committee approved the award of 560,000
shares of the Company's common stock to a group of officers and directors. Under
the terms of the award, there is no cost to the recipient for the shares, which
will vest annually over a five year period conditioned on continued employment
with the Company. Shares that do not vest are forfeited and are returned to the
Company. While the shares issued under this conditioned stock award are
outstanding, recipients have both voting and dividend rights in such shares.

     The total compensation cost of the conditioned stock award was determined
at the award date since both the number of shares and price to be paid (zero)
were known. This cost, which amounts to $6,370,000, will be spread ratably over
five years beginning in July 1999 and ending when all risks of forfeiture have
passed. Forfeitures will be recognized as a reduction of compensation costs in
the period in which they occur.

     In July 1999, the Compensation Committee also approved the grant of options
to officers and directors to acquire 1,243,000 shares of common stock at $11.375
per share, the fair market value at the date of grant. Such options will become
exercisable at a rate of 20% per year over the next five years.

     The Company will account for these options in accordance with Accounting
Principles Board Opinion No. 25 and, accordingly, will recognize no compensation
cost for options issued to employees and directors.


                                      -11-
<PAGE>

            SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
              NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
                             JUNE 30, 1999 AND 1998

(8)  STOCK REPURCHASE PROGRAM

     On July 22, 1999, the Board of Directors authorized the Company to
repurchase up to 1,000,000 shares in the open market to meet the anticipated
needs of stock awards and stock options issued in connection with the Stock
Incentive Plan. The Board of Directors delegated to the discretion of senior
management the authority to determine the timing of the repurchase program's
commencement, the timing of subsequent repurchases and the prices at which
repurchases will be made.

(9)  QUARTERLY CASH DIVIDEND

     On July 22, 1999, the Board of Directors voted the payment of its initial
quarterly cash dividend of $.05 per share. The dividend is payable on August 20,
1999 to stockholders of record on August 6, 1999.


                                      -12-
<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS

     This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events could differ materially from
those anticipated in the forward-looking statements. Important factors that
might cause such a difference include, among other things, general economic
conditions, particularly the real estate market, in the Company's primary market
area, potential increases in the Company's non-performing assets (as well as
increases in the allowance for loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation and supervision, including increased
deposit insurance premiums or capital or reserve requirements, the so-called
Year 2000 issue, changes in interest rates, and increased competition and bank
consolidations in the Company's market area.

COMPARISON OF FINANCIAL CONDITION AT JUNE 30, 1999 AND DECEMBER 31, 1998

     Total assets increased by $118.7 million from $1,888.1 million at December
31, 1998 to $2,006.8 million at June 30, 1999. During the six months ended June
30, 1999, Compass increased its loan portfolio by $217.7 million, or15.5%, which
was funded by liquid assets, principally federal funds sold and other short-term
investments, remaining from the proceeds of the November 1998 stock offering,
net deposit growth of $16.6 million and by additional Federal Home Loan Bank
borrowings of $91.2 million.

     The increase in loans occurred primarily in the residential mortgage,
indirect auto and commercial loan portfolios. From December 31, 1998 to June 30,
1999, residential mortgage loans increased by $135.5 million, or 19.4%, indirect
auto loans (net of unearned discounts) increased by $52.0 million, or 16.2% and
commercial loans increased by $11.2 million, or 19.0%. The growth during the six
months ended June 30, 1999 is generally attributable to the favorable interest
rate environment and economic conditions which prevailed during this period and,
more specifically, is due to the previously disclosed temporary change in
practice by Compass to retain in portfolio all fixed rate residential mortgage
loan originations. As a result, residential mortgage loan sales declined from
$86.3 million in the six months ended June 30, 1998 to $4.7 million in the
comparable period ended June 30, 1999. The growth in residential mortgage loans
was also aided by a program begun in August 1998 to fund adjustable rate
mortgages originated by loan correspondents. During the six months ended June
30, 1999, $67.8 million of such loans were funded. Loan originations through
this program are expected to be less than $8 million during the remainder of
1999. The Company has continued to emphasize the origination of indirect auto
loans through its network of automobile dealers causing the growth in this
portfolio.

     Total deposits at June 30, 1999 were $1,513.8 million, an increase of $16.6
million, compared to $1,497.2 million at December 31, 1998. This increase was
partially offset by a reduction of approximately 1% in the balance of
certificates of deposit. Core deposit account balances increased by 3.1% during
the six months ended June 30, 1999. The modest change in deposits during this
period is generally attributable to normal seasonal fluctuations, particularly
in the Cape Cod and Martha's Vineyard markets. Total borrowed funds were $194.4
million at June 30, 1999 compared to $98.8 million at December 31, 1998, an
increase of $95.6 million, or 96.8%. During the six months ended June 30, 1999,
Compass increased its net borrowings from the Federal Home Loan Bank by $91.2
million in order to fund loan growth, which included $21.2 million of borrowings
on Compass's line of credit of $38 million. Management believes that it will
continue to expand its Federal Home Loan Bank borrowings during the remainder of
1999 to partially fund anticipated loan growth.

     The increase in stockholders' equity of $8.8 million to $280.3 million at
June 30, 1999 resulted from the net income of $11.4 million for the six months
ended June 30, 1999 which was partially offset by a decline in the fair value on
securities available for sale, net of taxes, of $2.9 million.

COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998

     Net income was $5.8 million, or $.23 per diluted share, for the quarter
ended June 30, 1999 compared to net income of $4.5 million for the comparable
period in 1998. The 1999 results, as compared to 1998, include an increase of
$2.9 million, or 19.2%, in net interest income, a decrease of $301,000, or
12.4%, in non-interest income and an increase of $996,000, or 9.9%, in
non-interest expense. The Company's effective tax rate declined to 34.2% in 1999
from 36.1%


                                      -13-
<PAGE>

in the comparable 1998 period.

     INTEREST INCOME. Interest income for the quarter ended June 30, 1999 was
$33.6 million, compared to $30.9 million for the quarter ended June 30, 1998, an
increase of $2.7 million, or 8.7%. All of the increase in interest income
resulted from growth in average interest-earning assets of $241.7 million, or
14.9%, as the overall yield on interest-earning assets declined by 41 basis
points in the 1999 period. Yields continue to be impacted by aggressive price
competition for both new and existing loan relationships. The principal areas of
growth in average balances were related to real estate loans (up $176.9 million,
or 19.1%) and indirect auto loans (up $113.0 million, or 46.2%). Most of the
real estate loan growth resulted from increased originations and retention in
portfolio of one-to-four family real estate loans. The increase in indirect auto
loans resulted from an improved economic environment within Compass's local
markets and the continued emphasis of this area of lending.

     The net proceeds of the November 1998 stock offering of $121.4 million had
a positive impact on the Company's interest income and, in particular, its net
interest income. Of the increase of $2.7 million in interest income,
approximately $2.0 million is attributable to the earnings on the use of the net
proceeds of the stock offering during the quarter ended June 30, 1999.

     INTEREST EXPENSE. Interest expense for the quarter ended June 30, 1999 was
$15.5 million compared to $15.7 million for the quarter ended June 30, 1998, a
decrease of $180,000 or 1.1%. This decrease resulted from a 37 basis points
decline in the cost of all funds from 4.39% in 1998 to 4.02% in 1999,
substantially offset by a higher average balance of interest-bearing liabilities
(up $110.6 million, or 7.7%). Average interest-bearing deposit balances
increased $74.3 million, or 5.7%, during the quarter ended June 30, 1999
compared to the same period in 1998.

     Interest expense on borrowed funds increased $429,000 in the quarter ended
June 30, 1999 due to a $36.3 million, or 30.6%, increase in the average balance
of such funds partially offset by a 32 basis point reduction in the average rate
paid on borrowed funds to 5.78% in the 1999 period compared to 6.10% in the 1998
period.

     PROVISION FOR LOAN LOSSES. Compass provides for loan losses in order to
maintain the allowance for loan losses at a level that management estimates is
appropriate to absorb future charge-offs of loans deemed uncollectible. In
determining the appropriate level of the allowance for loan losses, management
considers past and anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume and type of
lending and the levels of nonperforming and other classified loans. The amount
of the allowance is based on estimates and ultimate losses may vary from such
estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly in order to maintain the adequacy of
the allowance.

     Compass provided $350,000 for loan losses in the quarter ended June 30,
1999 compared to $465,000 in the quarter ended June 30, 1998. The provision was
primarily attributable to the growth in the loan portfolio.

     NON-INTEREST INCOME. Total non-interest income was $2.1 million for the
quarter ended June 30, 1999 compared to $2.4 million in the same period of 1998,
a decrease of $301,000. Gains on the sale of loans and investments declined by
$309,000 during the quarter ended June 30, 1999 as compared to the comparable
period in 1998 as a result of the temporary change in practice, initiated by the
Bank in November 1998, whereby fixed rate residential mortgage loans with terms
of 15 years or longer are not being sold in the secondary mortgage market. This
change resulted from the Sandwich acquisition and the stock offering and their
impact on the sensitivity of the balance sheet to changes in interest rates
along with the relative attractiveness of the yield and expected duration of
such mortgage loans. While the Company expects to return to selling longer-term
fixed rate residential mortgage loans later in 1999, until it does so, the
Company expects to experience a decline in its gains on the sale of loans.

     NON-INTEREST EXPENSE. Non-interest expense increased by $996,000, or 9.9%,
from $10.1 million for the quarter ended June 30, 1998 to $11.1 million for the
quarter ended June 30, 1999. Of this increase, $106,000 related to salaries and
employee benefits, which rose 2.0% to $5.5 million for the quarter ended June
30, 1999. With overall salary levels increasing by approximately 4% in 1999, and
given additional costs attributable to the ESOP established in November 1998,
the increase in salaries and employee benefits has been partially offset by
elimination of certain executive positions at the former Sandwich Bank.


                                      -14-
<PAGE>

     Occupancy and equipment expenses increased $164,000, or 13.0%, to $1.4
million for the quarter ended June 30, 1999. This increase was due to an
increase in rent expense and depreciation attributable to relocation of the
Bank's Operations and Consumer Lending Departments, the opening of a new branch
in Plymouth as well as an upgraded branch in Westport.

     Data processing expenses increased $245,000, or 29.2%, to $1.1 million for
the quarter ended June 30, 1999. This increase was due to a number of factors
such as new services, including laser printing and Internet services, the
installation of additional communication lines and related network changes,
outsourcing of cash letter processing, Y2K compliance costs and volume-related
core processing costs due to increases in loans and deposits.

     Other non-interest expenses increased $352,000, or 21.9%, for the quarter
ended June 30, 1999. This increase is due primarily to certain nonrecurring
costs associated with the merger with Sandwich as well as additional costs
associated with being a publicly-owned company.

     INCOME TAXES. The effective tax rate for the quarter ended June 30, 1999
was 34.2% compared to 36.1% in the same period in 1998. This reduction in
overall tax rate is due to greater utilization of non-bank subsidiaries that are
taxed at lower rates for state tax purposes and an increase in federal low
income housing tax credits.

COMPARISON OF OPERATING RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998

     Net income was $11.4 million, or $.45 per diluted share, for the six months
ended June 30, 1999 compared to net income of $8.9 million for the comparable
period in 1998. The 1999 results, as compared to 1998, include an increase of
$5.8 million, or 19.3%, in net interest income, a decrease of $724,000, or
15.4%, in non-interest income and an increase of $1.9 million, or 9.5%, in
non-interest expense. The Company's effective tax rate declined to 35.6% in 1999
from 37.9% in the comparable 1998 period.

     INTEREST INCOME. Interest income for the six months ended June 30, 1999 was
$66.3 million, compared to $61.2 million for the six months ended June 30, 1998,
an increase of $5.1 million, or 8.3%. All of the increase in interest income
resulted from growth in average interest-earning assets of $220.2 million, or
13.7%, as the overall yield on interest-earning assets declined by 37 basis
points in the 1999 period. Yields continue to be impacted by aggressive price
competition for both new and existing loan relationships. The principal areas of
growth in average balances were related to real estate loans (up $144.9 million,
or 15.8%) and indirect auto loans (up $110.9 million, or 47.5%). Most of the
real estate loan growth resulted from increased originations and retention in
portfolio of one-to-four family real estate loans. The increase in indirect auto
loans resulted from an improved economic environment within Compass's local
markets and the continued emphasis of this area of lending.

     The net proceeds of the November 1998 stock offering of $121.4 million had
a positive impact on the Company's interest income and, in particular, its net
interest income. Of the increase of $5.1 million in interest income,
approximately $3.6 million is attributable to the earnings on the use of the net
proceeds of the stock offering during the six months ended June 30, 1999.

     INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
was $30.3 million compared to $31.1 million for the six months ended June 30,
1998, a decrease of $726,000 or 2.3%. This decrease resulted from a 36 basis
points decline in the cost of all funds from 4.39% in 1998 to 4.03% in 1999,
substantially offset by a higher average balance of interest-bearing liabilities
(up $91.5 million, or 6.5%). Average interest-bearing deposit balances increased
$85.9 million, or 6.6%, during the six months ended June 30, 1999 compared to
the same period in 1998.

     Interest expense on borrowed funds decreased $36,000, or 1.0%, in the six
months ended June 30, 1999 due to a $5.6 million, or 4.6%, increase in the
average balance of such funds partially offset by a 33 basis points reduction in
the average rate paid on borrowed funds to 5.80% in the 1999 period compared to
6.13% in the 1998 period.

     PROVISION FOR LOAN LOSSES. Compass provided $575,000 for loan losses in the
six months ended June 30, 1999 compared to $705,000 in the six months ended June
30, 1998. The provision was primarily attributable to the growth in the loan
portfolio.


                                      -15-
<PAGE>

     NON-INTEREST INCOME. Total non-interest income was $4.0 million for the six
months ended June 30, 1999 compared to $4.7 million in the same period of 1998,
a decrease of $724,000. Gains on the sale of loans and investments declined by
$533,000 during the six months ended June 30, 1999 as compared to the comparable
period in 1998 as a result of the previously noted temporary change in practice
whereby fixed rate residential mortgage loans with terms of 15 years or longer
are not being sold in the secondary mortgage market.

     Other non-interest income decreased by $191,000 during the six months ended
June 30, 1999 compared to the comparable 1998 period. The principal items
causing this decline were the waiver of the monthly deposit fee for customers of
the former Sandwich Bank for February 1999 due to the conversion of accounts to
Compass's computer system and the growing impact of the amortization of mortgage
servicing rights which resulted from application of SFAS No. 125 by Compass in
1996 and which reduces loan servicing fee income.

     NON-INTEREST EXPENSE. Non-interest expense increased by $1.9 million, or
9.6%, from $19.8 million for the six months ended June 30, 1998 to $21.7 million
for the six months ended June 30, 1999. Of this increase, $175,000 related to
salaries and employee benefits, which rose 1.6% to $10.8 million for the six
months ended June 30, 1999. With overall salary levels increasing by
approximately 4% in 1999, and given additional costs attributable to the ESOP
established in November 1998, the increase in salaries and employee benefits has
been partially offset by elimination of certain executive positions at the
former Sandwich Bank.

     Occupancy and equipment expenses increased $453,000, or 18.3%, to $2.9
million for the six months ended June 30, 1999. This increase was due to an
increase in maintenance costs and rent expense attributable to relocation of the
Bank's Operations and Consumer Lending Departments, the opening of a new branch
in Plymouth as well as an upgraded branch in Westport and weather-related
maintenance costs.

     Data processing expenses increased $631,000, or 39.1%, to $2.2 million for
the six months ended June 30, 1999. This increase was due to a number of factors
such as new services, including laser printing and Internet services, the
installation of additional communication lines and related network changes,
outsourcing of cash letter processing, Y2K compliance costs and volume-related
core processing costs due to increases in loans and deposits.

     Other non-interest expenses increased $512,000, or 15.4%, for the six
months ended June 30, 1999. This increase is due primarily to certain
nonrecurring costs associated with the merger with Sandwich as well as
additional costs associated with being a publicly-owned company.

     INCOME TAXES. The effective tax rate for the six months ended June 30, 1999
was 35.6% compared to 37.9% in the same period in 1998. This reduction in
overall tax rate is due to greater utilization of non-bank subsidiaries that are
taxed at lower rates for state tax purposes and an increase in federal low
income housing tax credits.

LIQUIDITY AND CAPITAL RESOURCES

     Compass's liquidity, represented by cash and cash equivalents and debt
securities, is a product of its operating, investing, and financing activities.
The Bank's primary sources of funds are deposits, borrowings, principal and
interest payments on outstanding loans, mortgage-backed securities and
collateralized mortgage obligations, maturities of investment securities and
funds provided from operations, which in recent years had included the proceeds
on the sale of fixed rate residential mortgage loans. While scheduled payments
from the amortization of loans and mortgage related securities and maturing
investment securities are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates. Compass
invests excess funds, if any, in federal funds sold and other short-term
investments which provide liquidity to meet lending requirements.

     Compass is a voluntary member of the Federal Home Loan Bank of Boston (FHLB
of Boston) and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to other parties. Qualified
collateral generally consists of residential first mortgage loans, U.S.
Government and agency securities (both issued or guaranteed) and funds on
deposit at the FHLB of Boston. At June 30, 1999, Compass had approximately
$544.2 million in unused borrowing capacity that is contingent upon the purchase
of additional FHLB of Boston stock.

     At June 30, 1999, Compass had outstanding commitments to originate loans
totaling $54.9 million. Compass also


                                      -16-
<PAGE>

had outstanding commitments under existing lines of credit of $71.6 million as
well as unadvanced commitments under construction loans totaling $32.1 million.
In addition, the Bank has certain commitments outstanding in connection with the
construction of its corporate headquarters building, currently in progress,
totaling $17.3 million. The Company believes that it has adequate sources of
liquidity to fund these commitments.

     Liquidity management is both a daily and long term function of business
management. The measure of a bank's liquidity is its ability to meet its cash
commitments at all times with available cash or by conversion of other assets to
cash at a reasonable price. At June 30,1999, the Company maintained cash and due
from banks, short-term investments and debt securities (other than mortgage
related securities) maturing within one year of $120.2 million, or 6.0% of total
assets.

     The Company's "Tier 1" capital measured 20.56% of risk-weighted assets at
June 30, 1999. Total capital, including the "Tier 2" allowance for loan losses,
was 21.80% of risk-weighted assets. The leverage capital ratio was 14.15%. These
ratios placed the Company in the "well-capitalized" category according to
regulatory standards.

IMPACT OF THE YEAR 2000 ISSUE

     The Year 2000 Issue (commonly referred to as "Y2K") is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. The Y2K issue, which is common to most corporations,
including banks, concerns the inability of information systems, primarily (but
not exclusively) computer software programs, to properly recognize and process
date-sensitive information as the Year 2000 approaches and beyond. The following
constitutes the Company's Y2K readiness disclosure under the Year 2000
Information and Readiness Disclosure Act.

     Since Compass's information systems functions are either outsourced to
service bureaus or processed in-house using programs developed by third-party
vendors, the direct effort to correct Y2K issues is being undertaken largely by
third parties and is therefore not totally within Compass's direct control.
Compass is bringing its mission critical operating systems into compliance with
Y2K requirements through the installation of updated or replacement programs
developed by third parties.

     Compass began addressing the Y2K issue in the Fall of 1996 when it formed a
Y2K Project Team comprised of financial, operations, information systems,
internal audit, compliance, lending, corporate services, loan servicing and
retail personnel. A formal Y2K Action Plan was developed by the Y2K Project Team
and approved by the Board of Directors in 1997. The Board of Directors receives
quarterly Year 2000 status reports on all mission critical systems and related
testing details. During 1998, Compass engaged an outside consultant to assist in
providing limited Y2K assurance. Notwithstanding this engagement, Compass
retains responsibility for Y2K issues, plans and compliance efforts.

     The Y2K Project Team has completed an assessment, identified mission
critical systems, and created a formal tracking system identifying all third
party vendors and their Y2K compliant version of all bank installed systems.
Mission critical systems include hardware, software, program interfaces,
operating systems as well as other mechanical or computer-generated requirements
that are beyond Compass's main central processing system and network. Based upon
the results of the assessment, Compass established internal time frames to
upgrade or replace its existing hardware and software systems and added to the
Information Systems staff in the first quarter of 1999. During the second
quarter, Compass completed the planned upgrade to its 34 retail branches with
new Y2K compliant hardware and branch teller platform software. Additionally,
Compass replaced other specific hardware and software that had been identified
as non-compliant according to schedule. Accordingly, Compass's information
technology infrastructure has been determined to be Year 2000 ready and is
deployed for use.

     Compass's plan to resolve the Y2K issue was developed along the five phase
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997 which consisted
of (i) awareness; (ii) assessment; (iii) renovation; (iv) validation; and (v)
implementation. The awareness phase has been completed. The Y2K assessment was
completed and monitoring of service bureau and vendor progress is ongoing.
Renovation of third party systems that were identified as non-compliant have
been substantially upgraded or replaced by the compliant version by June 30,
1999. All non critical software applications affected by the millennium have
been


                                      -17-
<PAGE>

identified. It is expected that these applications will be upgraded and Y2K
compliant by October 31, 1999. The Y2K Project Team has developed and
implemented test plans of all mission critical systems. Compass conducted a
successful test of its key transaction processing system with its service bureau
in the fourth quarter of 1998. In addition, Compass and its outside consultant
have reviewed documentation of its service bureaus' test results during the
first quarter of 1999 and found the results of the tests to be acceptable.
Compass has developed its Y2K contingency plan incorporating certain elements of
its bankwide Disaster Recovery Plan. Also, Compass is working with its service
bureau to create a remote branch Mobile Recovery Unit, located in Framingham,
Massachusetts to be used in the event of a catastrophic telecommunications or
power failure. The remote branch Mobile Recovery Unit would be created at an off
premises site that is capable of creating its own emergency power for extended
periods of time. Key documents would then be delivered to the remote branch
which is capable of transmitting data to Compass's service bureau. Both
locations also have emergency power to continue processing customer account
activity. The Compass contingency plan was completed by June 30, 1999 in
accordance with the Interagency Regulatory Statement on Contingency Planning.
Validation of contingency plans and re-testing of certain applications will
continue throughout 1999, if necessary, to provide maximum assurance that all
hardware and software will be Y2K compliant. Compass's efforts are focused on
its ability to provide continued service to customers and to process data in the
event of temporary problems beyond the Bank's control.

     The chief components of Compass's expense related to the Y2K issue are
currently believed to be the replacement of personal computer equipment and the
purchase or upgrade of third-party software. External maintenance and internal
modification costs will be expensed as incurred. Costs of new hardware and
software will be capitalized and depreciated in accordance with Compass
policies. Management expects to expend in the range of $950,000 to $1.0 million
on its Year 2000 readiness efforts. Through June 30, 1999, Compass had expended
approximately $923,000. Costs of the Y2K project are based on current estimates
and actual results could vary from such estimates. If the resolution plan is
unsuccessful, it may have a material, adverse effect on Compass's future
operating results and financial condition.

     Recognizing the importance of customer awareness, Compass has completed
three mailings of Y2K information to all customers with statement accounts.
Also, letters have been sent to major commercial loan customers and automobile
dealerships informing them of the Year 2000 Issue and how it can impact
businesses. An overall assessment of the Y2K readiness of Compass's commercial
loan customers was completed in October 1998, with an overall assessment of low
to medium risk. The Bank will continue to monitor its large commercial loan
relationships through account officers contact programs. Also, new and renewed
commercial credits greater than $100,000 include a Y2K analysis as part of the
normal underwriting decision process.

     To date, Compass has not identified any system which presents a material
risk of not being Year 2000 ready in a timely fashion or for which a suitable
alternative cannot be implemented. However, as Compass progresses with its Year
2000 project, it may identify systems which do present a material risk of Year
2000 disruption. Such disruption could include, among other things, the
inability to process and underwrite loan applications, to credit deposits and
withdrawals from customer accounts, to credit loan payments or track
delinquencies, to properly reconcile and record daily activity or to engage in
normal banking activities. Additionally, if Compass's commercial customers are
not Year 2000 compliant and suffer adverse effects on their operations, their
ability to meet their obligations to the Bank could be adversely affected. The
failure of Compass to identify systems which require Year 2000 hardware and
software upgrades that are critical to the Bank's operations or the failure of
the Bank or others with which the Bank does business to become Year 2000 ready
in a timely manner could have a material adverse impact on the Bank's financial
condition and results of operations. Moreover, to the extent that the risks
posed by the Year 2000 problem are pervasive in data processing and transmission
and communications services worldwide, the Bank cannot predict with any
certainty that its operations will remain materially unaffected after January 1,
2000 or on dates preceding this date at which time post- January 1, 2000 dates
become significant within the Bank's systems.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     The chief market risk factor affecting the financial condition and
operating results of the Company is interest rate risk. This risk is managed by
periodic evaluation of the interest risk inherent in certain balance sheet
accounts, determination of the level of risk considered appropriate given
Compass's capital and liquidity requirements, business strategy, performance
objectives and operating environment and maintenance of such risks within
guidelines approved


                                      -18-
<PAGE>

by the Board. Through such management, Compass seeks to reduce the vulnerability
of its net earnings to changes in interest rates. Compass's Asset/Liability
Committee, comprised of senior management, is responsible for managing interest
rate risk and reviewing with the Board of Directors on a quarterly basis its
activities and strategies, the effect of those strategies on Compass's and the
Company's operating results, Compass's interest rate risk position and the
effect changes in interest rates would have on Compass's net interest income.
The extent of movement of interest rates is an uncertainty that could have a
negative impact on the earnings of the Company.

      The principal strategies the Company and Compass generally use to manage
interest rate risk include (i) emphasizing the origination and retention of
adjustable-rate loans, origination of indirect auto loans which have relatively
short maturities and origination of loans with maturities at least partly
matched with those of the deposits and borrowings funding the loans, (ii)
investing in debt securities with relatively short maturities and (iii)
classifying a significant portion of its investment portfolio as available for
sale so as to provide sufficient flexibility in liquidity management.

     The Company quantifies its interest-rate risk exposure using a
sophisticated simulation model. Simulation analysis is used to measure the
exposure of net interest income to changes in interest rates over a specified
time horizon. Simulation analysis involves projecting future interest income and
expense under various rate scenarios. Compass's internal guidelines on interest
rate risk specify that for every 100 basis points immediate shift in interest
rates, its estimated net interest income over the next 12 months should decline
by less than 5%.

     In utilizing a 300 basis point increase in rates in its simulation model,
the full impact of annual rate caps of 200 basis points common to most
adjustable rate mortgage loan products is considered. The rate shocks used
assume an instantaneous and parallel change in interest rates. Prepayment speeds
for loans are based on published median dealer forecasts for each interest rate
scenario.

     As of June 30, 1999, the Company's estimated exposure as a percentage of
estimated net interest income for the next twelve and twenty-four month periods
is as follows:

<TABLE>
<CAPTION>
                                         PERCENTAGE CHANGE IN ESTIMATED
                                           NET INTEREST INCOME OVER:
                                     ------------------------------------
                                         12 MONTHS           24 MONTHS
                                     ------------------------------------
<S>                                     <C>                  <C>
300 basis point increase in rates       (11.69%)             (8.32%)
200 basis point decrease in rates         0.30%              (3.38%)
</TABLE>

     Based on the scenario above, net income would be adversely affected (within
Compass's internal guidelines) in both the twelve and twenty-four month periods
in the 300 basis point increase scenario, while in the 200 basis point decrease
scenario, net interest income is virtually unaffected in the 12 month horizon
and is adversely affected in the 24 month horizon. For each one percentage point
change in net interest income, the effect on net income would be $505,000,
assuming a 37% tax rate.


                                      -19-
<PAGE>

OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

     The Company and Compass are not involved in any pending legal proceedings
other than in the ordinary course of business. Management believes that the
resolution of these matters will not materially affect the business or
consolidated financial condition of the Company and Compass.

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 SECURITY HOLDERS

         The Company held its annual meeting of stockholders on May 20, 1999 at
         which time the five nominees for director, as set forth in the proxy
         materials for the meeting, were elected with the following votes cast.

<TABLE>
<CAPTION>
                                                    FOR                   WITHHELD
                                                 ----------               -------
              <S>                                <C>                      <C>
              Manuel G. Camacho                  22,886,471               360,756
              Kevin G. Champagne                 22,908,700               338,527
              Mary F. Hebditch                   22,911,158               336,069
              Carl Ribeiro                       22,912,800               334,427
              Gerald H. Silvia                   22,880,408               366,819
</TABLE>

         At the adjournment of the annual meeting held on June 18, 1999, the
         stockholders approved the Company's 1999 Stock Incentive Plan with the
         following votes cast:

<TABLE>
              <S>                           <C>
              For                           17,863,407
              Against                        2,406,213
              Abstentions                      358,511
              Broker non-votes               3,862,747
</TABLE>

ITEM 5.  OTHER INFORMATION

         Not applicable.


                                      -20-
<PAGE>

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

a.       Exhibits

<TABLE>
<S>            <C>
  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***
10.1*          Form of Employment Agreement by and among Seacoast Financial Services Corporation, Compass Bank for Savings
               and Kevin G. Champagne**
10.2*          Form of Employment Agreement by and among Compass Bank for Savings, Seacoast Financial Services Corporation
               and certain Officers of Compass Bank for Savings**
10.3*          Form of Change in Control Agreements by and among Seacoast Financial Services Corporation, Compass Bank for
               Savings, Kevin G. Champagne and certain other Officers of Compass Bank for Savings**
10.4*          Form of Change in Control Agreement by and among Seacoast Financial Services Corporation, Compass Bank for
               Savings and certain Officers of Compass Bank for Savings**
10.5*          Form of Executive Salary Continuation Agreements made and entered into by and between Compass Bank for Savings
               and Kevin G. Champagne, Arthur W. Short, John D. Kelleher and Francis S. Mascianica and forms of amendments
               thereto**
10.6*          Trust Agreement, made as of December 18, 1992 by and between Compass Bank for Savings and Shawmut
               Bank, N.A.**
10.7*          Compass Bank for Savings 1999 Incentive Compensation Plan******
10.8           Amended and Restated Affiliation and Merger Agreement dated at of March 23, 1998 by and among Seacoast
               Financial Services Corporation, Compass Bank for Savings, Sandwich Bancorp, Inc. and the Sandwich Co-operative
               Bank**
10.9           Stock Option Agreement dated as of March 23, 1998 by and between Sandwich Bancorp, Inc. and Seacoast Financial
               Services Corporation**
10.10          Form of Voting Agreements between Seacoast Financial Services Corporation and the Directors of Sandwich Bancorp,
               Inc.**
10.11          Form of Affiliates Agreements between Seacoast Financial Services Corporation and certain affiliates of Sandwich
               Bancorp, Inc.**
10.12*         Compass Bank for Savings Executive Deferred Compensation Plan**
10.13*         Rabbi Trust for Compass Bank for Savings Executive Deferred Compensation Plan**
10.14(a)*      Employment Agreements dated July 18, 1994 by and between Sandwich Co-operative Bank and Frederic D. Legate,
               Dana S. Briggs and George L. Larson***
10.14(b)*      1998 Amendment of Employment Agreements dated July 18, 1994 by and between Sandwich Co-operative Bank and
               Frederic D. Legate, Dana S. Briggs and George L. Larson***
10.15(a)*      Employment Agreement dated December 17, 1991 by and between Sandwich Cooperative Bank and David A.
               Parsons***
10.15(b)*      1998 Amendment to Employment Agreement dated December 17, 1991 by and between Sandwich Co-operative Bank
               and David A. Parsons***
10.16*         Sandwich Co-operative Bank 1983 Directors Deferred Income Agreement***
10.17*         Sandwich Co-operative Bank 1992 Directors Deferred Compensation Plan***
10.18*         Supplemental Executive Retirement Agreements dated May 5, 1995 by and between Sandwich Co-operative Bank
               and Frederic D. Legate, Dana S. Briggs, George L. Larson and David A. Parsons and amendments thereto***
10.19*         Seacoast Financial Services Corporation 1999 Stock Incentive Plan*****
11             A statement regarding earnings per share is included in Item 1, Note 6, of this Report.
27             EDGAR Financial Data Schedule
</TABLE>

----------------
*         Management compensatory plan or arrangement.
**        Incorporated by reference 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 May
          15, 1998.
***       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 Proxy Statement on Schedule
          14A filed with the Securities and Exchange Commission on April 16,
          1999.
******    Incorporated by reference to the Company's Quarterly Report on Form
          10-Q filed with the Securities and Exchange Commission on May 14,
          1999.

b.       Reports on Form 8-K:

               None filed during the quarter.


                                      -21-
<PAGE>

                                   SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                        SEACOAST FINANCIAL SERVICES CORPORATION
                                        ---------------------------------------
                                                   (Registrant)

Date: August 12, 1999                   By /s/ KEVIN G. CHAMPAGNE
                                           -------------------------------------
                                           Kevin G. Champagne
                                           President and Chief Executive Officer

Date: August 12, 1999                   By /s/ FRANCIS S. MASCIANICA, JR.
                                           -------------------------------------
                                           Francis S. Mascianica, Jr.
                                           Treasurer


                                      -22-