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**SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549**

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**FORM 10-Q**

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**(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,  2001** |
|                                     |                                                                                             |
| **or**                                   |
|                                     |                                                                                             |
| ** ̈**                               | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |

**COMMISSIONFILE NUMBER: 000-25077**

**SEACOAST FINANCIAL SERVICES CORPORATION**

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(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. Yes ý      No o

At August 10, 2001, the Company had24,754,936 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, 2001 and December 31, 2000 |
|                               |   |
|                               | Consolidated  Statements of Income for the three months and six months ended June 30, 2001  and 2000 |
|                               |   |
|                               | Consolidated  Statements of Changes in Stockholders’ Equity for the six months ended June  30, 2001 and 2000 |
|                               |   |
|                               | Consolidated  Statements of Cash Flows for the six months ended June 30, 2001 and 2000 |
|                               |   |
|                               | Notes  to Unaudited Consolidated Financial Statements |
|                               |   |
|                               | Item  2. | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                               |   |
|                               | Liquidity and Capital  Resources |
|                               |   |
|                               | Item  3. | Quantitative  and Qualitative Disclosures about Market Risk |
|                               |   |
| **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**                     |   |
|                                    |  |  |  |

 

 

 

**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES****CONSOLIDATED BALANCE SHEETS****(Unaudited)****(In thousands, except shareamounts)**

|                                        | June 30,                                                                        |      | December 31, |
|---------------------------------------------|---------------------------------------------------------------------------------|-----------|--------------|
|                                        | 2001                                                                            |      | 2000         |
|                                        |                                                                            |           |         |  |
| ASSETS:                                     |                                                                            |      |         |
|                                        | Cash  and due from banks                                                        | $         | 99,473       |   | $ | 101,665  |
|                                        | Federal  funds sold                                                             | 74,016    |         | 5,848  |
|                                        | Short-term  investment                                                          | 10,000    |         | —  |
|                                        |                                                                            |           |         |  |
|                                        | Total  cash and cash equivalents                                                | 183,489   |         | 107,513  |
|                                        | Investment  securities—                                                    |      |         |   |
|                                        | Available-for-sale,  at fair value                                              | 247,522   |         | 248,855  |
|                                        | Held-to-maturity,  at amortized cost                                            | 20,915    |         | 29,728  |
|                                        | Restricted  equity securities                                                   | 38,013    |         | 28,974  |
|                                        | Loans  held-for-sale                                                            | 14,359    |         | 13,666  |
|                                        | Loans,  net (Note 3)                                                            | 2,524,415 |         | 2,338,251  |
|                                        | Accrued  interest receivable                                                    | 16,083    |         | 14,927  |
|                                        | Banking  premises and equipment, net                                            | 51,918    |         | 50,878  |
|                                        | Other  real estate owned, net                                                   | 556       |         | 86  |
|                                        | Net  deferred tax asset                                                         | 10,681    |         | 11,247  |
|                                        | Intangible  assets, net  (Note 2)                                          | 36,226    |         | 38,800  |
|                                        | Other  assets                                                                   | 8,457     |         | 7,840  |
|                                        |                                                                            |           |         |  |
|                                        | Total  assets                                                                   | $         | 3,152,634    |   | $ | 2,890,765  |
|                                        |                                                                                 |      |              |
|                                        |                                                                            |      |         |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY: |                                                                            |      |         |
|                                        | Deposits  (Note 4)                                                              | $         | 2,049,803    |   | $ | 1,989,630  |
|                                        | Short-term  borrowings                                                          | 31,438    |         | 31,427  |
|                                        | Federal  Home Loan Bank advances                                                | 748,767   |         | 556,958  |
|                                        | Other  borrowings                                                               | 1,852     |         | 1,881  |
|                                        | Mortgagors’  escrow payments                                               | 4,162     |         | 4,428  |
|                                        | Accrued  expenses and other liabilities                                         | 18,897    |         | 18,253  |
|                                        |                                                                            |           |         |  |
|                                        | Total  liabilities                                                              | 2,854,919 |         | 2,602,577  |
|                                        |                                                                            |           |         |  |
|                                        | COMMITMENTS  AND CONTINGENCIES                                                  |      |         |   |
|                                        | Stockholders’  equity (Notes 7 and 8):                                     |      |         |   |
|                                        | Preferred  stock, par value $.01 per share; authorized 10,000,000 shares;       |      |         |   |
|                                        | none  issued                                                                    | —    |         | —  |
|                                        | Common  stock, par value $.01 per share; authorized 100,000,000 shares;         |      |         |   |
|                                        | 26,758,136  shares issued                                                       | 268       |         | 268  |
|                                        | Additional  paid-in capital                                                     | 153,048   |         | 152,795  |
|                                        | Treasury  stock, at cost, 1,988,200 shares in 2001 and 1,799,775 shares in 2000 | (20,812   | )            | (17,990) |
|                                        | Retained  earnings                                                              | 176,773   |         | 166,865  |
|                                        | Accumulated  other comprehensive income                                         | 2,133     |         | 791  |
|                                        | Unearned  compensation - ESOP and restricted stock                              | (13,480   | )            | (14,384) |
|                                        | Shares  held in employee trust                                                  | (215      | )            | (157) |
|                                        |                                                                            |           |         |  |
|                                        | Total  stockholders’ equity                                                | 297,715   |         | 288,188  |
|                                        |                                                                            |           |         |  |
|                                        | Total  liabilities and stockholders’ equity                                | $         | 3,152,634    |   | $ | 2,890,765  |
|                                        |                                                                            |           |         |  |
|                                             |                                                                                 |           |              |  |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes to the unaudited consolidated financial statements.

 

**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME****(Unaudited)****(In thousands, except per shareamounts)**

 

|                           | Three Months   Ended June 30,                              |   | Six Months  Ended June 30, |   |
|--------------------------------|------------------------------------------------------------|--------|----------------------------|--------|
|                           |                                                            |   |                            |   |
|                           | 2001                                                       |   | 2000                       |   | 2001 |   | 2000 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
| INTEREST  AND DIVIDEND INCOME: |                                                       |   |                       |   |   |   |   |   |
|                           | Interest  on loans                                         | $      | 48,434                     |   | $ | 35,877 |   | $ | 95,712 |   | $ | 69,090 |   |
|                           | Interest  and dividends on investment securities           | 4,742  |                       | 4,323  |   | 9,713 |   | 8,469 |   |
|                           | Interest  on federal funds sold and short-term investments | 716    |                       | 25     |   | 1,197 |   | 34 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Total  interest and dividend income                        | 53,892 |                       | 40,225 |   | 106,622 |   | 77,593 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           |                                                       |   |                       |   |   |   |   |   |
| INTEREST  EXPENSE:             |                                                       |   |                       |   |   |   |   |   |
|                           | Interest  on deposits                                      | 18,507 |                       | 14,952 |   | 37,774 |   | 28,702 |   |
|                           | Interest  on borrowed funds                                | 10,242 |                       | 5,446  |   | 19,706 |   | 10,103 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Total  interest expense                                    | 28,749 |                       | 20,398 |   | 57,480 |   | 38,805 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Net  interest income                                       | 25,143 |                       | 19,827 |   | 49,142 |   | 38,788 |   |
|                           |                                                       |   |                       |   |   |   |   |
| PROVISION  FOR LOAN LOSSES     | 1,475                                                      |   | 1,200                      |   | 2,875 |   | 2,250 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Net  interest income after provision for loan losses       | 23,668 |                       | 18,627 |   | 46,267 |   | 36,538 |   |
|                           |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           |                                                       |   |                       |   |   |   |   |   |
| NONINTEREST  INCOME:           |                                                       |   |                       |   |   |   |   |   |
|                           | Deposit  and other banking fees                            | 2,115  |                       | 1,544  |   | 4,017 |   | 2,936 |   |
|                           | Loan  servicing fees, net                                  | 248    |                       | 141    |   | 529 |   | 344 |   |
|                           | Card  fee income, net                                      | 214    |                       | 149    |   | 287 |   | 165 |   |
|                           | Other  loan fees                                           | 363    |                       | 198    |   | 720 |   | 423 |   |
|                           | Gain  on sales of investment securities, net               | 15     |                       | — |   | 14 |   | 4 |   |
|                           | Gain  on sales of loans, net                               | 182    |                       | 1      |   | 221 |   | 1 |   |
|                           | Other  income                                              | 428    |                       | 268    |   | 775 |   | 607 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Total  noninterest income                                  | 3,565  |                       | 2,301  |   | 6,563 |   | 4,480 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           |                                                       |   |                       |   |   |   |   |   |
| NONINTEREST  EXPENSE:          |                                                       |   |                       |   |   |   |   |   |
|                           | Salaries  and employee benefits                            | 8,051  |                       | 6,461  |   | 16,051 |   | 13,156 |   |
|                           | Occupancy  and equipment expenses                          | 2,213  |                       | 1,402  |   | 4,368 |   | 2,847 |   |
|                           | Data  processing expenses                                  | 1,459  |                       | 1,164  |   | 3,044 |   | 2,322 |   |
|                           | Marketing  expenses                                        | 913    |                       | 643    |   | 1,532 |   | 1,168 |   |
|                           | Professional  services expenses                            | 677    |                       | 485    |   | 1,483 |   | 804 |   |
|                           | Amortization  of intangibles (Notes 2 and 9)               | 734    |                       | 151    |   | 1,470 |   | 303 |   |
|                           | Other  operating expenses                                  | 2,020  |                       | 1,276  |   | 3,926 |   | 2,688 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Total  noninterest expense                                 | 16,067 |                       | 11,582 |   | 31,874 |   | 23,288 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Income  before provision for income taxes                  | 11,166 |                       | 9,346  |   | 20,956 |   | 17,730 |   |
|                           |                                                       |   |                       |   |   |   |   |   |   |
| PROVISION  FOR INCOME TAXES    | 4,165                                                      |   | 3,347                      |   | 7,224 |   | 6,303 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           | Net  income                                                | $      | 7,001                      |   | $ | 5,999 |   | $ | 13,732 |   | $ | 11,427 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                           |                                                       |   |                       |   |   |   |   |   |
| EARNINGS  PER SHARE (Note 5):  |                                                       |   |                       |   |   |   |   |   |
|                           | Basic                                                      | $      | 0.30                       |   | $ | 0.25 |   | $ | 0.59 |   | $ | 0.48 |   |
|                           |                                                       |        |                       |        |   |  |   |  |   |
|                           | Diluted                                                    | $      | 0.29                       |   | $ | 0.25 |   | $ | 0.58 |   | $ | 0.48 |   |
|                           |                                                            |   |                            |   |  |   |  |   |
|                                |                                                            |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes to the unaudited consolidated financial statements.

** **

**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES****CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY****FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000****(Unaudited)****(In thousands, except per shareamounts)**

 
|                                                                                                         | Common  Stock         |   | Additional  Paid-In  Capital |   | Treasury  Stock |   | Retained  Earnings |    | Accumulated Other  Comprehensive  Income (Loss) |   | Unearned  Compensation  ESOP/Restricted  Stock |   | Shares Held  in Employee  Trust |   | Total  |   |
|--------------------------------------------------------------------------------------------------------------|-----------------------|--------|------------------------------|--------|-----------------|--------|--------------------|---------|-------------------------------------------------|--------|------------------------------------------------|--------|---------------------------------|--------|--------|--------|
|                                                                                                         |                       |   |                              |   |                 |   |                    |    |                                                 |   |                                                |   |                                 |   |        |   |
|                                                                                                         |                  |   |                         |   |            |   |               |    |                                            |   |                                           |   |                            |   |   |   |
| Balance,  December 31, 1999                                                                                  | $                     | 268    |                         | $      | 152,702         |   | $                  | (9,310  | )                                               | $      | 149,256                                        |   | $                               | (2,430 | )      | $      | (16,326 | ) | $ | (139 | ) | $ | 274,021 |   |
| Repurchase  of common stock (Note 7)                                                                         | —                |   | —                       |   | (6,641          | )      | —             |    | —                                          |   | —                                         |   | —                          |   | (6,641 | )      |
| Net  income                                                                                                  | —                |   | —                       |   | —          |   | 11,427             |    | —                                          |   | —                                         |   | —                          |   | 11,427 |   |
| Other  comprehensive income — Change in unrealized loss on securities available for  sale, net of taxes | —                |   | —                       |   | —          |   | —             |    | (364                                            | )      | —                                         |   | —                          |   | (364   | )      |
|                                                                                                         | Comprehensive  income |   |                         |   |            |   |               |    |                                            |   |                                           |   |                            |   |   | 11,063 |   |
| Cash  dividends - $.12 per share                                                                             | —                |   | —                       |   | —          |   | (2,939             | )       | —                                          |   | —                                         |   | —                          |   | (2,939 | )      |
| Amortization  of unearned compensation                                                                       | —                |   | (14                          | )      | —          |   | —             |    | —                                          |   | 937                                            |   | —                          |   | 923    |   |
| Other                                                                                                        | —                |   | 100                          |   | —          |   | —             |    | —                                          |   | —                                         |   | (7                              | )      | (93    | )      |
|                                                                                                         |                       |   |                              |   |                 |   |                    |    |                                                 |   |                                                |   |                                 |   |        |   |
| Balance,  June 30, 2000                                                                                      | $                     | 268    |                         | $      | 152,788         |   | $                  | (15,951 | )                                               | $      | 157,744                                        |   | $                               | (2,794 | )      | $      | (15,389 | ) | $ | (146 | ) | $ | 276,520 |   |
|                                                                                                         |                       |   |                              |   |                 |   |                    |    |                                                 |   |                                                |   |                                 |   |        |   |
|                                                                                                         |                  |   |                         |   |            |   |               |    |                                            |   |                                           |   |                            |   |   |   |
|                                                                                                         |                  |   |                         |   |            |   |               |    |                                            |   |                                           |   |                            |   |   |   |
| Balance,  December 31, 2000                                                                                  | $                     | 268    |                         | $      | 152,795         |   | $                  | (17,990 | )                                               | $      | 166,865                                        |   | $                               | 791    |   | $      | (14,384 | ) | $ | (157 | ) | $ | 288,188 |   |
| Exercise  of stock options                                                                                   | —                |   | 18                           |   | 221             |   | —             |    | —                                          |   | —                                         |   | —                          |   | 239    |   |
| Repurchase  of common stock (Note 7)                                                                         | —                |   | —                       |   | (3,043          | )      | —             |    | —                                          |   | —                                         |   | —                          |   | (3,043 | )      |
| Net  income                                                                                                  | —                |   | —                       |   | —          |   | 13,732             |    | —                                          |   | —                                         |   | —                          |   | 13,732 |   |
| Other  comprehensive income — Change in unrealized gain on                                              |                  |   |                         |   |            |   |               |    |                                            |   |                                           |   |                            |   |   |   |
| securities  available for sale, net of taxes                                                                 | —                |   | —                       |   | —          |   | —             |    | 1,342                                           |   | —                                         |   | —                          |   | 1,342  |   |
|                                                                                                         | Comprehensive  income |   |                         |   |            |   |               |    |                                            |   |                                           |   |                            |   |   | 15,074 |   |
| Cash  dividends - $.16 per share                                                                             | —                |   | —                       |   | —          |   | (3,824             | )       | —                                          |   | —                                         |   | —                          |   | (3,824 | )      |
| Amortization  of unearned compensation                                                                       | —                |   | 104                          |   | —          |   | —             |    | —                                          |   | 904                                            |   | —                          |   | 1,008  |   |
| Other                                                                                                        | —                |   | 131                          |   | —          |   | —             |    | —                                          |   | —                                         |   | (58                             | )      | 73     |   |
|                                                                                                         |                       |   |                              |   |                 |   |                    |    |                                                 |   |                                                |   |                                 |   |        |   |
| Balance,  June 30, 2001                                                                                      | $                     | 268    |                         | $      | 153,048         |   | $                  | (20,812 | )                                               | $      | 176,773                                        |   | $                               | 2,133  |   | $      | (13,480 | ) | $ | (215 | ) | $ | 297,715 |   |
|                                                                                                         |                       |   |                              |   |                 |   |                    |    |                                                 |   |                                                |   |                                 |   |        |   |
|                                                                                                              |                       |        |                              |        |                 |        |                    |         |                                                 |        |                                                |        |                                 |        |        |        |  |  |  |  |  |  |  |  |  |  |  |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

**SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS****FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000****(Unaudited)****(In Thousands)**

 

|                                               | 2001                                                                                         |     | 2000           |     |
|----------------------------------------------------|----------------------------------------------------------------------------------------------|----------|----------------|----------|
|                                               |                                                                                              |     |                |     |
| CASH  FLOWS FROM OPERATING ACTIVITIES:             |                                                                                         |     |           |     |
|                                               | Net  income                                                                                  | $        | 13,732         |     | $ | 11,427 |   |
|                                               | Adjustments  to reconcile net income to net cash provided by operating activities —     |     |      |     |   |
|                                               |
|                                               | Depreciation                                                                                 | 1,992    |           | 1,211    |   |
|                                               | Amortization  and accretion, net                                                             | 1,418    |           | 449      |   |
|                                               | Purchase  accounting amortization, net                                                       | (276     | )              | —   |   |
|                                               | Stock-based  compensation                                                                    | 1,008    |           | 923      |   |
|                                               | Provision  for loan losses                                                                   | 2,875    |           | 2,250    |   |
|                                               | Gain  on sales of investment securities, net                                                 | (14      | )              | (4       | ) |
|                                               | Other  real estate owned losses (income)                                                     | (47      | )              | —   |   |
|                                               | Gain  on sale of fixed assets                                                                | (103     | )              | —   |   |
|                                               | Provision  (benefit) for deferred taxes                                                      | (877     | )              | (665     | ) |
|                                               | Originations  of loans held-for-sale                                                         | (16,222  | )              | (1,496   | ) |
|                                               | Proceeds  from sales of loans originated for sale                                            | 15,750   |           | 498      |   |
|                                               | Gain  on sales of loans, net                                                                 | (221     | )              | (1       | ) |
|                                               | Net  increase in accrued interest receivable                                                 | (1,156   | )              | (1,928   | ) |
|                                               | Net  (increase) decrease in other assets                                                     | (100     | )              | 899      |   |
|                                               | Net  increase in accrued expenses and other liabilities                                      | 675      |           | 496      |   |
|                                               |                                                                                         |          |           |          |   |
|                                               | Net  cash provided by operating activities                                                   | 18,434   |           | 14,059   |   |
|                                               |                                                                                         |          |           |          |   |
|                                               |                                                                                         |     |           |     |
| CASH  FLOWS FROM INVESTING ACTIVITIES:             |                                                                                         |     |           |     |
|                                               | Change  in short-term investments, net                                                       | —   |           | 224      |   |
|                                               | Purchase  of securities classified as available-for-sale                                     | (39,259  | )              | (26,065  | ) |
|                                               | Purchase  of securities classified as held-to-maturity                                       | (1,038   | )              | (1,000   | ) |
|                                               | Purchase  of restricted equity securities                                                    | (9,039   | )              | (3,653   | ) |
|                                               | Proceeds  from sales, calls, paydowns and maturities of                                      |     |           |     |   |
|                                               | securities  classified as available-for-sale                                                 | 42,745   |           | 47,997   |   |
|                                               | Proceeds  from calls, paydowns and maturities of securities classified as held  -to-maturity | 9,855    |           | 1,000    |   |
|                                               |
|                                               | Purchase  of loans                                                                           | (1,300   | )              | (12,626  | ) |
|                                               | Net  increase in loans                                                                       | (186,963 | )              | (194,718 | ) |
|                                               | Recoveries  of loans previously charged off                                                  | 194      |           | 205      |   |
|                                               | Proceeds  from sales of other real estate owned                                              | 23       |           | 162      |   |
|                                               | Proceeds  from sales of fixed assets                                                         | 262      |           | —   |   |
|                                               | Purchase  of premises and equipment                                                          | (3,191   | )              | (12,060  | ) |
|                                               |                                                                                         |          |           |          |   |
|                                               | Net  cash used in investing activities                                                       | (187,711 | )              | (200,534 | ) |
|                                               |                                                                                         |          |           |          |   |
| CASH FLOWS FROM  FINANCING ACTIVITIES:             |                                                                                         |     |           |     |
|                                               | Increase in NOW, money  market deposit demand deposit accounts                               | $        | 55,029         |     | $ | 24,655 |   |
|                                               | Increase in passbook  and other savings accounts                                             | 16,468   |           | 4,128    |   |
|                                               | Increase (decrease) in  certificates of deposit                                              | (11,294  | )              | 116,450  |   |
|                                               | Advances from Federal  Home Loan Bank                                                        | 305,946  |           | 260,000  |   |
|                                               | Repayments of Federal  Home Loan Bank advances                                               | (114,115 | )              | (179,274 | ) |
|                                               | Decrease in short-term  and other borrowings                                                 | (18      | )              | (10,093  | ) |
|                                               | Decrease in  mortgagors’ escrow payments                                                | (266     | )              | (421     | ) |
|                                               | Exercise of stock  options                                                                   | 239      |           | —   |   |
|                                               | Tax benefit of stock  awards                                                                 | 131      |           | —   |   |
|                                               | Repurchase of common  stock                                                                  | (3,043   | )              | (6,641   | ) |
|                                               | Cash dividends                                                                               | (3,824   | )              | (2,939   | ) |
|                                               |                                                                                         |          |           |          |   |
|                                               | Net cash provided by  financing activities                                                   | 245,253  |           | 205,865  |   |
|                                               |                                                                                         |          |           |          |   |
|                                               |                                                                                         |     |           |     |   |
| Net Increase in Cash  and Cash Equivalents         | 75,976                                                                                       |     | 19,390         |     |   |
| Cash and Cash  Equivalents, Beginning of Year      | 107,513                                                                                      |     | 60,351         |     |   |
|                                               |                                                                                              |     |                |     |   |
| Cash and Cash  Equivalents, End of Period          | $                                                                                            | 183,489  |           | $        | 79,741 |   |
|                                               |                                                                                              |     |                |     |
|                                               |                                                                                         |     |           |     |
| Supplemental  Disclosure of Cash Flow Information: |                                                                                         |     |           |     |
|                                               | Interest paid on  deposits and borrowed funds                                                | $        | 56,695         |     | $ | 38,670 |   |
|                                               | Income taxes paid                                                                            | 9,443    |           | 6,492    |   |
|                                               |                                                                                         |     |           |     |   |
| Supplemental  Disclosure of Noncash Transactions:  |                                                                                         |     |           |     |   |
|                                               | Transfers from loans  to other real estate owned                                             | 446      |           | 61       |   |
|                                               | Financed sales of  other real estate owned                                                   | —   |           | 222      |   |
|                                                    |                                                                                              |          |                |          |  |  |  |  |  |  |  |  |  |  |  |  |  |

Seeaccompanying notes to the unaudited consolidated financial statements.

 

**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES****NOTES TO UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS****JUNE 30, 2001 AND 2000**

| **(1)** | **BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT  ACCOUNTING POLICIES** |
|---------|---------------------------------------------------------------------------|

**Basisof Presentation**

             Theunaudited consolidated financial statements of Seacoast Financial ServicesCorporation and its wholly-owned subsidiaries, Compass Bank for Savings(“Compass”), Nantucket Bank and Lighthouse Securities Corporation (collectivelyreferred to herein as “the Company”) presented herein should be read inconjunction with the consolidated financial statements of the Company as of andfor the year ended December 31, 2000 included as part of its Form 10-K.

             Inthe opinion of management, the accompanying unaudited financial statementsreflect all adjustments (consisting of normal recurring adjustments) anddisclosures necessary 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**

             TheCompany’s significant accounting policies are described in Note 1 of the Notesto Consolidated Financial Statements included in its Form 10-K for the yearended December 31, 2000 filed with the Securities and Exchange Commission.  For interim reporting purposes, the Companyfollows the same significant accounting policies.

**Reclassifications**

             Certainreclassifications have been made to the prior year financial statements toconform to the 2001 presentation.  Suchreclassifications have no effect on previously reported net income.

| **(2)** | **ACQUISITION OF HOME PORT  BANCORP, INC.** |
|---------|---------------------------------------------|

             OnDecember 31, 2000, the Company completed its acquisition of  Home Port Bancorp, Inc. (Home Port) for$68.2  million in cash, exclusive oftransaction costs.  Home Port was theholding company for Nantucket Bank, a three branch savings bank located onNantucket Island, Massachusetts.  Thistransaction has been accounted for using the purchase method of accounting and,accordingly, Home Port’s results of operations are included in the Company’sconsolidated statements of income from the date of acquisition.

             TheCompany’s pro forma summarized results of operations for the three months andsix months ended June 30, 2000, assuming Home Port had been acquired as ofJanuary 1, 1999, are as follows (in thousands):

|                        | Three Months         |   | Six Months    |   |
|-----------------------------|----------------------|--------|---------------|--------|
|                        | Ended June 30        |   | Ended June 30 |   |
|                        |                      |   |               |   |
| Interest  income            | $                    | 46,621 |          | $      | 90,092 |   |
| Interest  expense           | 24,225               |   | 46,240        |   |
|                        |                      |   |               |   |
|                        | Net  interest income | 22,396 |          | 43,852 |   |
| Provision  for loan losses  | 1,250                |   | 2,350         |   |
| Noninterest  income         | 2,722                |   | 5,317         |   |
| Noninterest  expense        | 14,131               |   | 28,285        |   |
|                        |                      |   |               |   |
|                        | Income  before taxes | 9,737  |          | 18,534 |   |
| Provision  for income taxes | 3,719                |   | 7,064         |   |
|                        |                      |   |               |   |
|                        | Net  income          | $      | 6,018         |   | $ | 11,470 |   |
|                        |                 |        |          |        |   |
|                        | Earnings  per share  | $      | 0.25          |   | $ | 0.48 |   |
|                        |                 |        |          |        |   |

             Intangibleassets resulting from this acquisition total $36.4 million.  This asset is being amortized on astraight-line basis over 15 years. Amortization expense was $606,000 and $1.2 million for the three monthsand six months ended June 30, 2001, respectively.

| **(3)** | **LOANS** |
|---------|-----------|

The loan portfolio consisted of thefollowing:

|                           | June  30,   2001                 |      | December  31,  2000 |      |
|--------------------------------|----------------------------------|-----------|---------------------|-----------|
|                           |                                  |      |                     |      |
|                           | (In  thousands)                  |      |
| Real estate loans:             |                             |      |                |      |
|                           | Residential (one-to-four family) | $         | 1,301,699           |      | $ | 1,212,595 |   |
|                           | Commercial                       | 337,598   |                | 322,724   |   |
|                           | Home equity lines of credit      | 42,979    |                | 39,932    |   |
|                           | Construction                     | 106,809   |                | 109,360   |   |
|                           |                             |           |                |           |   |
|                           | Total real estate loans          | 1,789,085 |                | 1,684,611 |   |
|                           |                             |           |                |           |   |
| Commercial loans               | 131,576                          |      | 100,789             |      |
|                           |                                  |      |                     |      |
| Consumer loans:                |                             |      |                |      |
|                           | Indirect auto loans              | 575,785   |                | 528,653   |   |
|                           | Less-unearned discount           | 3,500     |                | 6,781     |   |
|                           |                             |           |                |           |   |
|                           | Indirect auto loans, net         | 572,285   |                | 521,872   |   |
|                           | Other                            | 58,720    |                | 56,060    |   |
|                           |                             |           |                |           |   |
|                           | Total consumer loans,net         | 631,005   |                | 577,932   |   |
|                           |                             |           |                |           |   |
|                           | Total loans                      | 2,551,666 |                | 2,363,332 |   |
| Less-allowance for loan losses | 27,251                           |      | 25,081              |      |
|                           |                                  |      |                     |      |
|                           | $                                | 2,524,415 |                | $         | 2,338,251 |   |
|                           |                                  |      |                     |      |
|                                |                                  |           |                     |           |  |  |  |  |

             Non-accrualloans amounted to $6,107,000 and $9,853,000 at December 31, 2000 and June 30,2001, respectively.

 

| **(4)** | **DEPOSITS** |
|---------|--------------|
|    |         |

Asummary of deposit balances is as follows:

|   | June 30,   2001                         |      | December 31, 2000 |      |
|--------|-----------------------------------------|-----------|------------------------|-----------|
|   |                                         |      |                        |      |
|   | (In thousands)                     |      |
|   | Demand  deposit accounts                | $         | 181,128                |      | $ | 159,740 |   |
|   | NOW  and money market deposit accounts  | 611,419   |                   | 577,778   |   |
|   | Passbook  and other savings accounts    | 251,938   |                   | 235,470   |   |
|   |                                    |           |                   |           |   |
|   | Total  non-certificate accounts         | 1,044,485 |                   | 972,988   |   |
|   |                                    |           |                   |           |   |
|   |                                    |      |                   |      |
|   | Certificates  of deposit -              |      |                   |      |   |
|   | Term  certificates of $100,000 and over | 269,865   |                   | 265,583   |   |
|   | Term  certificates less than $100,000   | 735,453   |                   | 751,059   |   |
|   |                                    |           |                   |           |   |
|   | Total  certificates of deposit          | 1,005,318 |                   | 1,016,642 |   |
|   |                                    |           |                   |           |   |
|   | $                                       | 2,049,803 |                   | $         | 1,989,630 |   |
|   |                                         |      |                        |      |
|        |                                         |           |                        |           |  |  |  |  |  |  |

 

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

             BasicEPS for the three months and six months ended June 30, 2000 and 2001 wascomputed based on the weighted average number of shares outstanding during theperiods, using the following share balances:

|                | 2001       |   | 2000       |   |
|---------------------|------------|--------|------------|--------|
|                |            |   |            |   |
| Three  months ended | 23,410,423 |   | 23,705,021 |   |
|                |            |   |            |   |
| Six  months ended   | 23,446,690 |   | 23,871,184 |   |
|                |            |   |            |   |

             UnallocatedESOP shares and unvested restricted stock awards are not considered outstandingfor purposes of the computation of basic EPS and have been excluded from theshares presented above.  Diluted EPSreflects the potential dilution that could occur if certain agreements to issuecommon stock were exercised and has been computed after giving consideration tothe dilutive effect of the Company’s stock options and unvested restrictedstock awards.

|   | **(6)** | **BUSINESS  SEGMENT INFORMATION** |
|--------|---------|-----------------------------------|

             Thecommunity banking business segment consists of commercial and retailbanking.  Banking services are providedwithin the framework of two full-service community banks which have similareconomic characteristics, products and services, distribution channels andregulatory environments.  Accordingly,disaggregated segment information for each bank is not presented.  The community banking segment derives itsrevenues from a wide range of banking services, including investing and lendingactivities and acceptance of demand, savings and time deposits, merchant creditcard services as well as servicing loans for investors.  There is no major customer, as defined, andthe banks operate within a single geographic area (southeastern Massachusetts,including the islands of Martha’s Vineyard and Nantucket).

             Non-reportableoperating segments of the Company’s operations which do not have similarcharacteristics to the community banking operations and do not meet thequantitative thresholds requiring disclosure, are included in the Othercategory in the disclosure of business segments below.  These non-reportable segments include theParent Company.

             Reportablesegment specific information and reconciliation to consolidated financialinformation as of June 30, 2001 and 2000 and for the six month periods thenended are as follows (in thousands):

| June 30, 2001 |                      | Community    Banking |      | Other   |    | Other    Adjustments and Eliminations |     | Consolidated |      |
|---------------|---------------------------|----------------------|-----------|---------|---------|---------------------------------------|----------|--------------|-----------|
|               |                      |                      |      |         |    |                                       |     |              |      |
|          | Investment securities     |                 | $         | 302,586 |    | $                                     | 3,864    |         | $         | — |   | $ | 306,450 |   |
|          | Net loans                 |                 | 2,524,415 |    | 10,439  |                                  | (10,439  | )            | 2,524,415 |   |
|          | Total assets              |                 | 3,148,363 |    | 298,523 |                                  | (294,252 | )            | 3,152,634 |   |
|          | Total deposits            |                 | 2,050,902 |    | —  |                                  | (1,099   | )            | 2,049,803 |   |
|          | Total borrowings          |                 | 782,057   |    | —  |                                  | —   |         | 782,057   |   |
|          | Total liabilities         |                 | 2,854,111 |    | 808     |                                  | —   |         | 2,854,919 |   |
|          | Net interest income       |                 | 49,038    |    | 511     |                                  | (407     | )            | 49,142    |   |
|          | Provision for loan losses |                 | 2,875     |    | —  |                                  | —   |         | 2,875     |   |
|          | Noninterest income        |                 | 6,563     |    | —  |                                  | —   |         | 6,563     |   |
|          | Noninterest expense       |                 | 31,150    |    | 724     |                                  | —   |         | 31,874    |   |
|          | Net income                |                 | 13,874    |    | 13,732  |                                  | (13,874  | )            | 13,732    |   |
|               |                           |                      |           |         |         |                                       |          |              |           |  |  |  |  |  |

** **

| June  30, 2000 |                       | Community  Banking |      | Other   |    | Other   Adjustments and Eliminations |     | Consolidated |      |
|----------------|----------------------------|--------------------|-----------|---------|---------|--------------------------------------|----------|--------------|-----------|
|                |                       |                    |      |         |    |                                      |     |              |      |
|           | Investment  securities     |               | $         | 251,075 |    | $                                    | 2,909    |         | $         | — |   | $ | 253,984 |   |
|           | Net  loans                 |               | 1,935,428 |    | 10,569  |                                 | (10,569  | )            | 1,935,428 |   |
|           | Total  assets              |               | 2,338,251 |    | 276,746 |                                 | (273,787 | )            | 2,341,210 |   |
|           | Total  deposits            |               | 1,660,855 |    | —  |                                 | —   |         | 1,660,855 |   |
|           | Total  borrowings          |               | 385,255   |    | —  |                                 | —   |         | 385,255   |   |
|           | Total  liabilities         |               | 2,064,464 |    | 226     |                                 | —   |         | 2,064,690 |   |
|           | Net  interest income       |               | 38,724    |    | 478     |                                 | (414     | )            | 38,788    |   |
|           | Provision  for loan losses |               | 2,250     |    | —  |                                 | —   |         | 2,250     |   |
|           | Total  noninterest income  |               | 4,480     |    | —  |                                 | —   |         | 4,480     |   |
|           | Total  noninterest expense |               | 22,755    |    | 533     |                                 | —   |         | 23,288    |   |
|           | Net  income                |               | 11,462    |    | 11,427  |                                 | (11,462  | )            | 11,427    |   |
|                |                            |                    |           |         |         |                                      |          |              |           |  |  |  |  |  |

 

|   | **(7)** | **STOCK  REPURCHASE PROGRAMS** |
|--------|---------|--------------------------------|

             InJuly 1999, the Board of Directors authorized the Company to repurchase up to1,000,000 shares in the open market to meet the anticipated needs of stockawards and stock options issued in connection with the 1999 Stock IncentivePlan.  In October 1999 and July 2000,the Board of Directors, with the approval of the Commissioner of Banks,authorized the Company to repurchase up to an additional 1,231,900 and1,254,312 shares, respectively, in the open market.  The Board of Directors delegated to the discretion of seniormanagement the authority to determine the timing of the repurchase programs’commencement, the timing of subsequent repurchases and the prices at whichrepurchases will be made.

             Asof August 10, 2001, the Company had repurchased 2,584,200 shares of its commonstock under these programs at a total cost of $27,919,249, of which 2,569,200shares at a cost of $27,663,046 had been repurchased as of June 30, 2001.

|   | **(8)** | **QUARTERLY  CASH DIVIDEND** |
|--------|---------|------------------------------|

             OnJuly 26, 2001, the Board of Directors voted the payment of a quarterly cashdividend of $.09 per share.  Thedividend is payable on August 24, 2001 to stockholders of record on August 10,2001.

| **(9)** | **RECENT  ACCOUNTING PRONOUNCEMENTS** |
|---------|---------------------------------------|

             InJuly  2001, the Financial AccountingStandards Board (FASB) issued SFAS No. 141, “Business Combinations” which iseffective for transactions initiated after June 30, 2001.  Under SFAS No. 141, all businesscombinations must be accounted for using the purchase method of accounting; useof the pooling-of-interests method is no longer permitted.  In addition, this Statement requires thatcertain intangible assets acquired in a business combination be recognizedapart from goodwill.Under the transition provisions of SFAS No. 141, no changein the amount of the purchase price assigned to the assets acquired andliabilities assumed in a business combination completed before July 1, 2001 andaccounted for by the purchase method shall occur except for certain identifiedintangible assets which were separately recognized at the time of thetransaction.  Management does notbelieve that any adjustments to the allocation of the purchase price for theCompany’s acquisition of Home Port in December 2000 will be required as aresult of the application of SFAS No. 141.

             InJuly 2001, the FASB also issued SFAS No. 142, “Goodwill and Other IntangibleAssets” which is effective for fiscal years beginning after December 15,2001.  Under current accountingstandards, goodwill resulting from a business combination is amortized againstincome over its estimated useful life. Under SFAS No. 142, goodwill is no longer amortized as an expense after2001 but instead is reviewed and tested for impairment using a fair valuemethodology prescribed in this Statement. Goodwill will be tested for impairment at least annually or morefrequently as a result of an event or change in circumstances (e.g. recurringoperating losses by the acquired entity) that would indicate an impairmentadjustment may be necessary.  Managementdoes not currently anticipate any realization issues related to the goodwillreflected in the accompanying consolidated balance sheet that would require animpairment adjustment upon adoption of SFAS No. 142.

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

**Forward-Looking Statements**

             ThisForm 10-Q contains certain “forward-looking statements” within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of the SecuritiesExchange Act of 1934.  When used in thisreport, the words or phrases, “will likely result,” “are expected to,” “willcontinue,” “is anticipated,” “estimate,” “believe,” or similar expressions areintended to identify such forward-looking statements.  Actual events could differ materially from those anticipated inthe forward-looking statements. Important factors that might cause such a difference include, amongother things, general economic conditions, particularly the real estate market,in the Company’s primary market area, potential increases in the Company’snonperforming assets (as well as increases in the allowance for loan lossesthat might be necessary), concentrations of loans in a particular geographicarea or with certain large borrowers, changes in government regulation andsupervision, including increased deposit insurance premiums or capital orreserve requirements, changes in interest rates, and increased competition andbank consolidations in the Company’s market area.  These and other factors that might cause differences betweenactual and anticipated results, performance and achievements are discussed ingreater detail in this Item 2.

**Acquisition of Home Port**

             OnDecember 31, 2000, the Company completed its acquisition of Home Port and itsbank subsidiary, Nantucket Bank, in a transaction accounted for under thepurchase method of accounting. Accordingly, while the consolidated assets and liabilities of Home Portare reflected in the Company’s consolidated balance sheets at June 30, 2001 andDecember 31, 2000, the results of operations of Home Port for the quarter andsix months ended June 30, 2000 are not included in the consolidated statementof income for those periods, as required by the purchase method ofaccounting.  The impact of this acquisitionon the consolidated statement of income for the quarter and six months endedJune 30, 2001 has been segregated in the accompanying discussion of thecomparison of operating results for 2001 and 2000.

**Comparison of Financial Condition at June 30, 2001and December 31, 2000**

             Totalassets increased by $261.8 million from $2,890.8 million at December 31, 2000to $3,152.6 million at June 30, 2001. During the six months ended June 30, 2001, the loan portfolio increasedby $188.3 million, or 8.0%, which was funded principally by additional FederalHome Loan Bank advances of $191.7 million and, to a lesser extent, depositgrowth of $60.2 million.  During the sixmonths ended June 30, 2001, the Company’s borrowings from the Federal Home LoanBank (FHLB) exceeded its actual funding needs by approximately $75 million dueto the favorable rates offered.  Theweighted average interest rate on FHLB advances taken during  2001 was 4.78%.  In addition, these borrowings provide liquidity in the event theCompany experiences deposit outflows during the remainder of 2001.  This outflow may occur due to certificate ofdeposit customers who, based on current rates, may experience a substantialreduction in their reinvestment rate. At June 30, 2001, these additional funds were invested in federal fundssold and short-term investments.

             Theincrease in loans occurred primarily in the residential mortgage, indirect autoand commercial loan portfolios.  FromDecember 31, 2000 to June 30, 2001, residential mortgage loans increased by$89.1 million, or 7.3%, indirect auto loans (net of unearned discounts)increased by $50.4 million, or 9.7% and commercial loans increased by $30.8million, or 30.5%.  Compass hascontinued  to retain all residentialmortgage loan originations in portfolio and has continued to emphasize theorigination of indirect auto loans through its network of automobile dealerswhich has been expanded to include dealers in communities contiguous to themetropolitan Boston area.  The growth incommercial loans was primarily with existing customers to fund businessexpansion and seasonal borrowing needs.

             Totaldeposits at June 30, 2001 were $2,049.8 million, an increase of $60.2 million,compared to $1,989.6 million at December 31, 2000.  Core deposit account balances increased by $71.5 million, or7.3%, during the first half of 2001. The growth  in core depositsduring this period was generally attributable to normal seasonal fluctuationsand the shift in balances from certificates of deposit  reflecting the impact of the lower interest rates currently being offered.

             Theincrease in stockholders’ equity of $9.5 million to $297.7 million at June 30,2001 resulted from the net income of $13.7 million for the six months endedJune 30, 2001 and an increase of $1.3 million in the market value of investmentsecurities available for sale, net of taxes, which were partially offset bycash dividends and stock repurchases totaling $6.9 million.  During 1999 and 2000, the Company announcedthree stock repurchase programs aggregating 3,486,212 shares.  As of August 10, 2001, 2,584,200 shares hadbeen repurchased leaving up to 902,012 shares for repurchase.  Management expects to repurchase theremaining shares under these programs over the next nine to twelve months..

**Comparison of Operating Results for the QuartersEnded June 30, 2001 and 2000**

             Aspreviously noted, the acquisition of Home Port on December 31, 2000 had asignificant impact on changes in the components of the Company’s consolidatedstatements of income between the quarters ended June 30, 2001 and 2000.  The following table segregates NantucketBank’s impact on such changes (in thousands):

 

|                       | Quarter  Ended June 30, 2001 |   |            |   |   |
|----------------------------|------------------------------|--------|-----------------|--------|--------|
|                       |                              |   |            |   |   |
|                       | Consolidated                 |   | Nantucket  Bank |   | Net    |   | Quarter  Ended  June 30, 2000 |   | Net  Change |   |
|                       |                              |   |                 |   |        |   |  |   |  |   |
|                       |                         |   |            |   |   |   |   |   |   |   |
| Interest income            | $                            | 53,892 |            | $      | 6,585  |   | $ | 47,307 |   | $ | 40,225 |   | $ | 7,082 |   |
| Interest expense           | 28,749                       |   | 3,875           |   | 24,874 |   | 20,398 |   | 4,476 |   |
| Provision for loan losses  | 1,475                        |   | 50              |   | 1,425  |   | 1,200 |   | 225 |   |
| Noninterest income         | 3,565                        |   | 675             |   | 2,890  |   | 2,301 |   | 589 |   |
| Noninterest expense        | 16,067                       |   | 2,355           |   | 13,712 |   | 11,582 |   | 2,130 |   |
|                       |                              |   |                 |   |        |   |  |   |  |   |
|                       | Income before taxes          | 11,166 |            | 980    |   | 10,186 |   | 9,346 |   | 840 |   |
| Provision for income taxes | 4,165                        |   | 567             |   | 3,598  |   | 3,347 |   | 251 |   |
|                       |                              |   |                 |   |        |   |  |   |  |   |
|                       | Net income                   | $      | 7,001           |   | $      | 413 |   | $ | 6,588 |   | $ | 5,999 |   | $ | 589 |   |
|                       |                         |        |            |        |   |  |   |  |   |  |   |

             Theremaining discussion, unless otherwise indicated, addresses the net changepresented above, which excludes the impact due to the acquisition of NantucketBank.

             *Interest Income*.  Interest income for the quarter ended June30, 2001 was $47.3 million compared to $40.2 million for the quarter ended June30, 2000, an increase of $7.1 million, or 17.6%.  The increase in interest income resulted from growth in averageinterest-earning assets of $402.5 million, or 18.7%, partially offset by adecrease in the overall yield on interest-earning assets of 7 basis points inthe 2001 period.  The principal areas ofgrowth in average balances were related to real estate loans (up $192.2million, or 14.8%) and indirect auto loans (up $94.7 million, or 20.3%).  Most of the real estate loan growth resultedfrom increased originations and retention in portfolio of one-to-four familyreal estate loans.  The increase inindirect auto loans resulted from the positive economic environment withinCompass’s local markets and the continued geographic expansion of the networkof participating dealers.

             *Interest Expense*.  Interest expense for the quarter ended June30, 2001 was $24.9 million compared to $20.4 million for the quarter ended June 30, 2000, an increase of $4.5 millionor 21.9%.  This increase resulted from a9 basis points increase in the cost of funds from 4.41% in 2000 to 4.50% in2001, and a higher average balance of interest-bearing liabilities (up $361.6million, or 19.5%).  Average interest-bearingdeposit balances increased $166.9 million, or 11.2%, during the quarter endedJune 30, 2001 compared to the same period in 2000.

             Interestexpense on borrowed funds increased $2.4 million in the quarter ended June 30,2001 due to a $194.7  million  increase in the average balance of suchfunds, partially offset by a 36 basis points decrease in the average rate paidon borrowed funds to 5.65% in the 2001 period.

             Theincremental increase of 16 basis points in the cost of funds over the yield oninterest-earning assets during the quarter ended June 30, 2001, as compared tothe same period in 2000, reflects the competitive pricing for certificates ofdeposits throughout 2000.  With therecent series of reductions in interest rates initiated by the Federal ReserveBoard in 2001 and the scheduled maturity of nearly 90% of certificates ofdeposit outstanding at December 31, 2000 in 2001 (particularly in the secondhalf of the year), management believes that the Company’s interest rate marginwill improve during the remainder of the year.

             *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 future charge-offs of loans deemed uncollectible.  In determining the appropriate level of theallowance for loan losses, management considers past and anticipated lossexperience, evaluations of underlying collateral, prevailing economicconditions, the nature and volume of the loan portfolio and the levels ofnonperforming and other classified loans. The amount of the allowance is based on estimates 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.

             Compassprovided $1.4 million for loan losses in the quarter ended June 30, 2001compared to $1.2 million in the quarter ended June 30, 2000.  The increase of $225,000 in 2001 was primarilyattributable to  growth in the loanportfolio.  The total allowance(including Nantucket Bank) of $27.3 million at June 30, 2001 represented 1.07%of total loans compared to 1.06% at December 31, 2000.  At June 30, 2001, the allowance for loanlosses as a percentage of non-performing loans was 276.6% compared to 410.7% atDecember 31, 2000.  The increase innon-performing loans in 2001 is largely attributable to one commercial loancustomer with an aggregate loan balance of $2.5 million.
             *Noninterest Income.*  Total noninterest income was $2.9 millionfor the quarter ended June 30, 2001 compared to $2.3 million in the same periodof 2000, an increase of  $589,000, or25.6%.  This increase was principallycaused by checking account related income, ATM/Debit card usage and, to alesser extent, nonrecurring income of $120,000 primarily from the sale ofproperty.

             *Noninterest Expense*.   Noninterest expense increased by $2.1million or 18.4%, from $11.6 million for the quarter ended June 30, 2000 to$13.7 million for the quarter ended June 30, 2001.  This increase reflected increases in all areas of expenseincluding salaries and employee benefits ($579,000), occupancy and equipment($555,000), data processing ($118,000), marketing ($202,000), professional services($136,000), and other noninterest expense ($564,000).

             Salariesand employee benefits increased $579,000, or 9.0%, during the quarter endedJune 30, 2001, due to overall salary increases averaging 4.5% and increases instaffing necessitated by franchise expansion (two new branches) and thestart-up of Compass’s private banking initiative.

             Occupancyand equipment expenses increased $555,000, or 39.6%, during the quarter endedJune 30, 2001.  This increase wasprimarily due to higher costs associated with the new corporate offices and newbranches in Seekonk and Mattapoisett, as well as higher utility costs caused byincreases in rates charged by service providers.

             Dataprocessing expenses increased $118,000, or 10.1%, during the quarter ended June30, 2001 due primarily to volume-related services such as item processing andATM usage.  These increases werepartially offset by a rate decrease received from the Company’s core processingservice provider.

             Marketingexpenses increased $202,000, or 31.4%, during the quarter ended June 30,2001.  This increase was attributable toproduction and media costs for television commercials, partially offset bydecreases in promotions, print advertising and direct marketing.

             Professionalservices expenses increased $136,000, or 28.0%, during the quarter ended June30, 2001.  This increase reflectsconsulting and legal fees associated with the start-up of Compass’s privatebanking initiative and other consulting services.

             Othernoninterest expense increased $564,000, during the quarter ended June 30,2001.  Exclusive of a non-recurring itemrelated to the acquisition of Sandwich Bancorp, Inc. recognized in the quarterended June 30, 2000, noninterest expense increased by $404,000, or 28.2% duringthe quarter ended June 30, 2001.  Thisincrease reflects primarily volume-related items such as printing, supplies andtelephone costs.

             *Income Taxes*. The effective tax rate(including Nantucket Bank) for the quarter ended June 30, 2001 was 37.3%compared to 35.8% in the same period in 2000. This increase from 2001 reflects the impact of nondeductible goodwillamortization.

**Comparison of Operating Results for the Six MonthsEnded June 30, 2001 and 2000**

             Thefollowing table segregates Nantucket Bank’s impact on changes in the componentsof the Company’s consolidated statements of income between the six monthperiods ended June 30, 2001 and 2000 (in thousands):
 Six  Months Ended June 30, 2001            Consolidated Nantucket  Bank Net Six  Months Ended  June 30, 2000 Net  Change                  Interest income$106,622 $13,156 $93,466 $77,593 $15,873 Interest expense57,480 7,833 49,647 38,805 10,842 Provision for loan losses2,875 100 2,775 2,250 525 Noninterest income6,563 1,089 5,474 4,480 994 Noninterest expense31,874 4,657 27,217 23,288 3,929        Income before taxes20,956 1,655 19,301 17,730 1,571 Provision for income taxes7,224 1,016 6,208 6,303 (95)       Net income$13,732 $639 $13,093 $11,427 $1,666        
             Theremaining discussion, unless otherwise indicated, addresses the net changepresented above, which excludes the impact due to the acquisition of NantucketBank.

             *Interest Income.*  Interest income for the six months endedJune 30, 2001 was $93.5 million, compared to $77.6 million for the sixmonths  ended June 30, 2000, an increaseof $15.9 million, or 20.5%. The increase in interest income resulted from growthin average interest-earning assets of $395.4 million, or 18.8%, and an increasein the overall yield on interest-earning assets of 10 basis points in the 2001period.  The principal areas of growthin average balances were related to real estate loans (up $200.6 million, or15.8%) and indirect auto loans (up $97.3 million, or 21.6%).  Most of the real estate loan growth resultedfrom increased origination and retention in portfolio of one-to-four familyreal estate loans.  The increase inindirect auto loans resulted from the positive economic environment withinCompass's local markets and the continued emphasis of this area of lending.

             *Interest Expense*.  Interest expense for the six months endedJune 30, 2001 was $49.6 million compared to $38.8  million for the six months ended June 30, 2000, an increase of$10.8 million or 27.9%.  This increaseresulted from a  27 basis point increasein the cost of all funds from 4.32% in 2000 to 4.59% in 2001, and a higheraverage balance of interest-bearing liabilities (up $364.3 million, or20.3%).  Average interest-bearingdeposit balances increased $183.5 million, or 12.6%, during the six months ended June 30, 2001 compared tothe same period in 2000.

             Interestexpense on borrowed funds increased $4.9 million in the six months ended June30, 2001 to $15.0 million due to a $180.9 million increase in the averagebalance of such funds, partially offset by a 16 basis point decrease in theaverage rate paid on borrowed funds to 5.75% in the 2001 period.

             Theincrease in the cost of funds in 2001 reflects the lingering effect of theseries of rate increases initiated by the Federal Reserve Board beginning inJune 1999 and continuing into 2000 as well as the greater utilization ofcertificates of deposit and FHLB advances as funding sources.  With the series of rate reductions initiatedby the Federal Reserve Board in 2001 and the scheduled maturity of nearly 90%of certificates of deposit outstanding at December 31, 2000 in 2001 (particularlyin the second half of the year), management believes that Compass’s interestmargin will improve during the remainder of the year.  The incremental increase of 17 basis points in the cost of fundsover the yield on interest-earning assets during the six months ended June 30,2001, as compared to the same period in 2000, reflects the faster repricingcharacteristics of Compass’s interest-bearing liabilities as compared to itsinterest-earning assets.

             *Provision for Loan Losses*.  Compass provided $2.8 million for loanlosses in the six months ended June 30, 2001 compared to $2.3 million in thecomparable prior year period.  Theincrease of $525,000 in 2001 was primarily attributable to the growth in theloan portfolio.

             *Non-InterestIncome*.  Total non-interest income was $5.5 million forthe six months ended June 30, 2001 compared to $4.5 million in the same periodof 2000, an increase of $994,000 or 22.2%. This increase was principally caused by increases in checking accountrelated income, ATM/Debit card usage and, to a lesser extent, increases in loanfee income and non-recurring income of $150,000 primarily from the sale ofproperty.

             *Noninterest Expense*.  Noninterest expense increased by $3.9million, or 16.9%, from $23.3 million for the six months ended June 30, 2000 to$27.2 million for the six months ended June 30, 2001.  This increase reflected increases in all areas of expenseincluding salaries and employee benefits ($915,000), occupancy and equipment($1.0 million), data processing ($364,000), marketing ($253,000), professionalservices ($577,000) and other noninterest expense ($864,000).

             Salariesand employee benefits increased $915,000, or 7.0%, during the six months endedJune 30, 2001, due to overall salary increases averaging 4.5%, increases instaffing necessitated by franchise expansion (three new branches) and thestart-up of Compass’s private banking initiative as well as increases inemployee health insurance costs and the ESOP.

             Occupancyand equipment expenses increased $1.0 million, or 35.2%, during the six monthsended June 30, 2001.  This increase wasprimarily due to higher costs associated with the new corporate offices and newbranches in New Bedford, Seekonk and Mattapoisett, as well as higher utilitycosts caused by increases in rates charged by service providers.

             Dataprocessing expenses increased $364,000, or 15.7 %, during the six months endedJune 30, 2001 due primarily to volume-related services such as item processing,expanded branch and ATM networks and ATM/Debit card usage.  These increases were partially offset by arate decrease received on certain services from the Company’s core processingservice provider.

             Marketingexpenses increased $253,000, or 21.6%, during the six months ended June 30,2001.  This increase was attributable toproduction and media costs for television commercials, partially offset bydecreases in promotions, print advertising and direct marketing.

             Professionalservices expenses increased $577,000, or 71.8%, during the six months  ended June 30, 2001.  This increase primarily reflects consultingand legal fees associated with the start-up of Compass’s private bankinginitiative, certain non-recurring costs for tax services, costs associated withan assessment of the risk management function and other consulting services.

             Othernoninterest expense increased $864,000, or 32.1%, during the six months endedJune 30, 2001.  Exclusive of anon-recurring item related to the acquisition of Sandwich Bancorp, Inc.recognized in 2000, noninterest expense increased by 19.8% during 2001.  This increase reflects primarilyvolume-related items such as printing, supplies and telephone costs.

             *Income Taxes*. The effective tax rate(including Nantucket Bank) for the six months ended June 30, 2001 was 34.5%compared to 35.6% in the same period in 2000. In 2001, the Company completed an analysis addressing the impact of arecent Tax Court decision on the deductibility of certain merger-related costsincurred in connection with the acquisition of Sandwich Bancorp, Inc. in1998.  Based on this analysis, theprovision for income taxes was reduced by $479,000 for the six months endedJune 30, 2001.  Exclusive of thisnon-recurring item, the effective tax rate in 2001 was 36.8%.  This increase from 2000 reflects the impactof nondeductible goodwill amortization.

**Liquidity and Capital Resources**

             Liquidity,represented by cash and cash equivalents and debt securities is a product ofthe Company’s operating, investing, and financing activities.  The Company’s primary sources of funds aredeposits, borrowings, principal and interest payments on outstanding loans andmortgage-backed securities, maturities of investment securities and fundsprovided from operations.  Whilescheduled payments from the amortization of loans and mortgage relatedsecurities and maturing investment securities are relatively predictablesources of funds, deposit flows and loan prepayments are greatly influenced bygeneral interest rates and, in the case of deposits, other instrumentsavailable to the public such as mutual funds and annuities.

             Asvoluntary members of the Federal Home Loan Bank of Boston (FHLB), Compass andNantucket Bank are entitled to borrow an amount up to the value of theirqualified collateral that has not been pledged to others.  Qualified collateral generally consists ofresidential first mortgage loans, U.S. Government and agency securities andfunds on deposit at the FHLB.  At June30, 2001, Compass and Nantucket Bank had approximately $338.2 million and $56.7million, respectively, in unused borrowing capacity that is contingent upon thepurchase of additional FHLB stock.  Useof this borrowing capacity may also be impacted by regulatory capitalrequirements.

             Liquiditymanagement is both a daily and long-term function of business management.  The measure of a bank’s liquidity is itsability to meet its cash commitments at all times with available cash or byconversion of other assets to cash at a reasonable price.  At June 30, 2001, the Company maintainedcash and due from banks, federal funds sold and debt securities maturing withinone year of $196.3 million, or 6.23% of total assets.  The Company invests excess funds, if any, in federal funds soldwhich provides liquidity to meet lending requirements.  During 2001, the Company borrowed from theFHLB approximately $75 million more than was required to meet its immediateneeds in order to take advantage of interest rates which management consideredto be favorable.  In addition, theseborrowings provide liquidity in the event the Company experiences deposit outflowsduring the remainder of 2001.  Thisoutflow may occur due to certificate of deposit customers who, based on currentrates, may experience a substantial reduction in their reinvestment rate.  At June 30, 2001, these additional fundswere invested in federal funds sold and short-term investments.

             AtJune 30, 2001, the Company had commitments to originate loans, unusedoutstanding lines of credit, standby letters of credit and undisbursed proceedsof loans totaling $258.0 million.  TheCompany anticipates that it will have sufficient funds available to meet itscurrent loan commitments.  Certificatesof deposit maturing within one year from June 30, 2001 amounted to $855.2million.  The Company expects that asignificant portion of maturing certificate accounts will be retained asdeposits at maturity.

             The Company’s and theBanks’ capital ratios at June 30, 2001 were as follows:
 Seacoast Financial Compass Nantucket Bank  **** **** **** Total  Capital (to risk weighted assets)13.47%12.17%15.61%Tier  1 Capital (to risk weighted assets)12.20 10.98 14.34** **Tier  1 Capital (to average assets)8.54 7.89 9.11** **
             Theseratios placed the Company in excess of regulatory standards and the Banks inthe “well capitalized” category as set forth by the FDIC.

**Item 3.  Quantitative and QualitativeDisclosures about Market Risk**

             Thechief market risk factor affecting the financial condition and operatingresults of the Company is interest rate risk. This risk is managed by periodic evaluation of the interest riskinherent in certain balance sheet accounts, determination of the level of riskconsidered appropriate given capital and liquidity requirements, businessstrategy, performance objectives and operating environment and maintenance ofsuch risks within guidelines approved by the Board of Directors.  Through such management, the Company seeksto reduce the vulnerability of its net earnings to changes in interestrates.  Each Bank’s Asset/LiabilityCommittee, comprised of senior management, is responsible for managing interestrate risk and reviewing with its Board of Directors on a quarterly basis itsactivities and strategies, the effect of those strategies on operating results,the Bank’s interest rate risk position and the effect changes in interest rateswould have on net interest income. The extent of movement of interest rates isan uncertainty that could have a negative impact on earnings.

             Theprincipal strategies that the Company generally uses to manage interest raterisk include (i) emphasizing the origination and retention of adjustable-rateloans, origination of indirect auto loans (Compass only) which have relativelyshort maturities  and origination ofloans with maturities at least partly matched with those of the deposits andborrowings funding the loans, (ii) investing in debt securities with relativelyshort maturities and (iii) classifying a significant portion of its investmentportfolio as available for sale so as to provide sufficient flexibility inliquidity management.

             TheCompany and the Banks quantify their interest rate risk exposure using asophisticated simulation model. Simulation analysis is used to measure the exposure of net interestincome to changes in interest rates over a specified time horizon.  Simulation analysis involves projectingfuture interest income and expense under various rate scenarios.  Internal guidelines on interest rate riskspecify that for every 100 basis points immediate shift in interest rates, theestimated net interest income over the next 12 months should decline by lessthan 5%.

             Inutilizing a 300 basis point increase in rates in its simulation model, the fullimpact of annual rate caps of 200 basis points common to most adjustable ratemortgage loan products is considered. The rate shocks used assume an instantaneous and parallel change ininterest rates and that no strategies are implemented in response to the changein interest rates.  Prepayment speedsfor loans are based on published median dealer forecasts for each interest ratescenario.

             Asof June 30, 2001, the Company's estimated exposure as a percentage of estimatednet interest income for the next twelve and twenty-four month periods is asfollows:
 **Percentage Change in Estimated**  **Net Interest Income Over:**  ****  **12 Months** **24 Months**** ** **** **** 300  basis point increase in rates(8.34)% (7.04)% 200  basis point increase in rates(0.45)% (2.88)% 
             Basedon the scenario above, net income would be adversely affected (within internalguidelines) in both the twelve and twenty-four month periods.  For each one percent change in net interestincome, the effect on net income would be $750,000 assuming a 36% tax rate.

**PART II - OTHER INFORMATION**
**Item1.  Legal Proceedings**
             TheCompany is not involved in any pending legal proceedings other than thoseinvolved in the ordinary course of business. Management believes that the resolution of these matters will notmaterially affect its business or the consolidated financial condition of theCompany.

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

             Notapplicable.
**Item3.  Defaults Upon Senior Securities**
             Notapplicable.
**Item 4. Submission of Matters to A Vote of Security Holders**
             TheCompany held its annual meeting of stockholders on May 17, 2001 at which timethe four nominees for director, as set forth in the proxy materials for themeeting, were elected with the following votes cast:
 For Withheld  Glen  F. Johnson13,208,574 128,813J.  Louis LeBlanc13,208,320 129,067Frederic  D. Legate13,209,033 128,354A.  William Munro13,210,833 126,554**Item5.  Other Information**
             Notapplicable.

**Item 6. Exhibits and Reports onForm 8-K**
a.Exhibits:2.1Agreement and Plan of Merger by and  between Seacoast Financial Services Corporation and Home Port Bancorp, Inc.  date as of July 20, 2000++++++2.2Stock Option Agreement between Home  Port Bancorp, Inc. and Seacoast Financial Services Corporation dated as of  July 20, 2000++++++3.1Articles of Organization of Seacoast  Financial Services Corporation+++3.2By-Laws of Seacoast Financial Services  Corporation+++4Specimen 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 January 2000  Incentive Compensation Plan +++++10.12*Compass Bank for Savings Executive  Deferred Compensation Plan+10.13*Rabbi Trust for Compass Bank for  Savings Executive Deferred Compensation Plan+10.17*Sandwich Co-operative Bank 1992  Directors Deferred Compensation Plan++10.20*Seacoast Financial Services Corporation  1999 Stock Incentive Plan++++11A statement regarding earnings per  share is included in Item 1, Note 5, of this report.b.Reports on Form 8-K: No reports on Form  8-K were filed during the quarter ended June 30, 2001.
 

 

*              Management compensatory plan or arrangement.

+  Incorporated by reference to the Company’sRegistration Statement on Form S-1 (333-52889), filed with the Securities andExchange Commission under the Company’s prior name, “The 1855 Bancorp”, on May15, 1998.

++ Incorporated by reference to Amendment No. 1 tothe Company’s Registration Statement on Form S-1 (333-52889), filed with theSecurities and Exchange Commission under the Company’s prior name, “The 1855Bancorp”, on August 14, 1998.

+++           Incorporated by reference to theCompany’s Registration Statement on Form 8-A filed with the Securities andExchange Commission on November 18, 1998.

++++         Incorporated by reference to theCompany’s Proxy Statement on Schedule 14A filed with the Securities andExchange Commission on April 16, 1999.

+++++      Incorporated by reference to the Company’sAnnual Report on Form 10-K filed with the Securities and Exchange Commission onMarch 28, 2000.

++++++Incorporatedby reference to the Company’s Current Report on Form 8-K filed with the SEC onAugust 3, 2000.

 

**SIGNATURES**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
 Seacoast  Financial Services Corporation  (Registrant)  Date: August 10, 2001By /s/ Kevin G. Champagne   Kevin G. Champagne  President and Chief Executive Officer  Date: August 10, 2001By /s/ Francis S. Mascianica, Jr.   Francis S. Mascianica, Jr.  Treasurer, as Principal Financial and  Accounting Officer