**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

** **

**(Mark One)**

 

| **ý** |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934.**  |
|------------|--------|--------------------------------------------------------------------------------------------------|
|       |   |                                                                                             |
|       |   | **FOR THE  QUARTER ENDED SEPTEMBER 30, 2002**                                                    |
|       |   |                                                                                             |
| **or**     |
|       |   |                                                                                             |
| **o**      |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF  1934.** |

 

**COMMISSION FILE NUMBER: 000-25077**

 

**SEACOAST FINANCIAL SERVICES CORPORATION**

(ExactName of Registrant as Specified in Its Charter)

 

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

 

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

 

Yes    ý    No   o

At November 14, 2002, the Company had23,833,174 shares of common stock outstanding.

 

 

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**SEACOAST FINANCIAL SERVICES CORPORATION**

**INDEX**

 
| **PART I -  FINANCIAL INFORMATION**                                                                               |
|-------------------------------------------------------------------------------------------------------------------|
|                                                                                                              |
| Item 1.   Financial Statements (Unaudited)                                                              |
|                                                                                                              |
| Consolidated  Balance Sheets at September 30, 2002 and December 31, 2001                                          |
|                                                                                                              |
| Consolidated Statements of Income  for the three months and nine months ended September 30, 2002 and 2001         |
|                                                                                                              |
| Consolidated Statements of Changes  in Stockholders' Equity for the nine months ended September 30, 2002 and 2001 |
|                                                                                                              |
| Consolidated  Statements of Cash Flows for the nine months ended September 30, 2002 and  2001                     |
|                                                                                                              |
| 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                                   |
|                                                                                                              |
| Item 4.    Controls and Procedures                                                                      |
|                                                                                                              |
| **PART II - OTHER INFORMATION**                                                                                   |
|                                                                                                              |
| Item 1.   Legal Proceedings                                                                             |
|                                                                                                              |
| Item 2.   Changes in Securities and Use of Proceeds                                                     |
|                                                                                                              |
| Item 3.   Defaults upon Senior Securities                                                               |
|                                                                                                              |
| Item  4.   Submission of Matters to a Vote  of Security Holders                                         |
|                                                                                                              |
| Item 5.   Other Information                                                                             |
|                                                                                                              |
| Item 6.    Exhibits and Reports on Form 8-K                                                             |
|                                                                                                              |
| **SIGNATURES**                                                                                                    |
|                                                                                                              |
| **CERTIFICATION**                                                                                                 |

 

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

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

 
|                                                                                                          |   | **September  30,  2002** |      | **December  31,  2001** |      |
|---------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|-------------------------|-----------|
|                                                                                                          |   | **(Unaudited)**          |      |                    |      |
| ASSETS                                                                                                        |   |                     |      |                    |      |
| Cash and due from banks                                                                                       |   | $                        | 112,035   |                    | $         | 87,834 |   |
| Federal funds sold                                                                                            |   | 137,742                  |      | 92,899                  |      |
| Short-term investments                                                                                        |   | 10,000                   |      | 10,000                  |      |
| Total cash and cash equivalents                                                                               |   | 259,777                  |      | 190,733                 |      |
| Investment securities —                                                                                  |   |                     |      |                    |      |
| Available-for-sale, at fair value                                                                             |   | 425,984                  |      | 405,788                 |      |
| Held-to-maturity, at amortized cost; fair value $19,529 in 2002 and  $20,900 in 2001                          |   | 18,764                   |      | 20,551                  |      |
| Restricted equity securities                                                                                  |   | 43,434                   |      | 40,837                  |      |
| Loans held-for-sale                                                                                           |   | 7,496                    |      | 19,675                  |      |
| Loans, net (Note 3)                                                                                           |   | 2,842,281                |      | 2,545,469               |      |
| Accrued interest receivable                                                                                   |   | 15,931                   |      | 15,872                  |      |
| Banking premises and equipment, net                                                                           |   | 53,261                   |      | 51,294                  |      |
| Other real estate owned, net                                                                                  |   | —                   |      | 427                     |      |
| Net deferred tax asset                                                                                        |   | 9,984                    |      | 9,895                   |      |
| Goodwill (Note 2)                                                                                             |   | 33,903                   |      | 33,903                  |      |
| Intangible assets (Note 2)                                                                                    |   | 1,752                    |      | 2,370                   |      |
| Other assets                                                                                                  |   | 10,141                   |      | 10,653                  |      |
| Total assets                                                                                                  |   | $                        | 3,722,708 |                    | $         | 3,347,467 |   |
| LIABILITIES AND STOCKHOLDERS' EQUITY                                                                          |   |                     |      |                    |      |
| Deposits (Note 4)                                                                                             |   | 2,433,545                |      | $                       | 2,192,357 |   |
| Short-term borrowings                                                                                         |   | 43,671                   |      | 34,584                  |      |
| Federal Home Loan Bank advances                                                                               |   | 830,317                  |      | 786,917                 |      |
| Other borrowings                                                                                              |   | 1,789                    |      | 1,840                   |      |
| Mortgagors' escrow payments                                                                                   |   | 5,114                    |      | 4,761                   |      |
| Accrued expenses and other liabilities                                                                        |   | 31,651                   |      | 21,284                  |      |
| Total liabilities                                                                                             |   | $                        | 3,346,087 |                    | $         | 3,041,743 |   |
|                                                                                                          |   |                     |      |                    |      |
| Guaranteed Preferred Beneficial Interests  in our Junior Subordinated Deferrable Interest Debentures (Note 9) |   | 55,017                   |      | —                  |      |
|                                                                                                          |   |                     |      |                    |      |
| 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                                                                                    |   | 153,777                  |      | 153,216                 |      |
| Retained earnings                                                                                             |   | 209,958                  |      | 189,743                 |      |
| Treasury stock, at cost, 2,872,462 shares in 2002 and 2,439,000  shares in 2001                               |   | (37,877                  | )         | (28,185                 | )         |
| Accumulated other comprehensive income                                                                        |   | 6,994                    |      | 3,531                   |      |
| Unearned compensation - ESOP and restricted stock                                                             |   | (11,218                  | )         | (12,575                 | )         |
| Shares held in employee trust                                                                                 |   | (298                     | )         | (274                    | )         |
| Total stockholders' equity                                                                                    |   | 321,604                  |      | 305,724                 |      |
| Total liabilities and stockholders' equity                                                                    |   | $                        | 3,722,708 |                    | $         | 3,347,467 |   |

** **

See accompanying notes to the unaudited consolidated financialstatements. 

 

1

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**SEACOAST FINANCIALSERVICES CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME(Unaudited)(In thousands, except per share amounts)**

 
|                                                      |   | **Three  Months  Ended September 30,** |       | **Nine  Months  Ended September 30,** |       |
|-----------------------------------------------------------|--------|----------------------------------------|------------|---------------------------------------|------------|
|                                                      |   | **2002**                               |       | **2001**                              |       | **2002** |   | **2001** |   |
| INTEREST AND  DIVIDEND INCOME                             |   |                                   | ** ** |                                  | ** ** |   | ** ** |   | ** ** |
| Interest on loans                                         |   | $                                      | 48,339     |                                  | $          | 49,190 |   | $ | 142,441 |   | $ | 144,902 |   |
| Interest and dividends on investment securities           |   | 6,045                                  |       | 4,732                                 |       | 18,443 |   | 14,445 |   |
| Interest on federal funds sold and short-term investments |   | 686                                    |       | 1,427                                 |       | 1,421 |   | 2,624 |   |
| Total interest and dividend income                        |   | 55,070                                 |       | 55,349                                |       | 162,305 |   | 161,971 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| INTEREST EXPENSE                                          |   |                                   |       |                                  |       |   |   |   |   |
| Interest on deposits                                      |   | 13,184                                 |       | 18,221                                |       | 39,964 |   | 55,995 |   |
| Interest on borrowed funds                                |   | 10,854                                 |       | 10,839                                |       | 32,273 |   | 30,545 |   |
| Total interest expense                                    |   | 24,038                                 |       | 29,060                                |       | 72,237 |   | 86,540 |   |
| Net interest income                                       |   | 31,032                                 |       | 26,289                                |       | 90,068 |   | 75,431 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| PROVISION FOR LOAN LOSSES                                 |   | 1,850                                  |       | 1,550                                 |       | 5,385 |   | 4,425 |   |
| Net interest income after provision for loan losses       |   | 29,182                                 |       | 24,739                                |       | 84,683 |   | 71,006 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| NONINTEREST INCOME                                        |   |                                   |       |                                  |       |   |   |   |   |
| Deposit and other banking fees                            |   | 2,677                                  |       | 2,296                                 |       | 7,310 |   | 6,118 |   |
| Loan servicing fees, net                                  |   | 95                                     |       | 246                                   |       | 528 |   | 775 |   |
| Merchant card fee income, net                             |   | 406                                    |       | 414                                   |       | 907 |   | 896 |   |
| Other loan fees                                           |   | 508                                    |       | 299                                   |       | 1,075 |   | 1,019 |   |
| Gain (loss) on sale of investment securities, net         |   | (71                                    | )          | 57                                    |       | (163 | ) | 71 |   |
| Gain on sales of loans, net                               |   | 22                                     |       | 107                                   |       | 205 |   | 328 |   |
| Other income                                              |   | (80                                    | )          | 267                                   |       | 521 |   | 1,042 |   |
| Total non-interest income                                 |   | 3,557                                  |       | 3,686                                 |       | 10,383 |   | 10,249 |   |
| NONINTEREST EXPENSE                                       |   |                                   |       |                                  |       |   |   |   |   |
| Salaries and employee benefits                            |   | 9,321                                  |       | 8,230                                 |       | 28,017 |   | 24,281 |   |
| Occupancy and equipment expenses                          |   | 2,350                                  |       | 2,116                                 |       | 6,797 |   | 6,484 |   |
| Data processing expenses                                  |   | 2,124                                  |       | 1,566                                 |       | 5,624 |   | 4,610 |   |
| Marketing expenses                                        |   | 751                                    |       | 665                                   |       | 1,994 |   | 2,197 |   |
| Professional services expenses                            |   | 526                                    |       | 719                                   |       | 1,757 |   | 2,202 |   |
| Amortization of goodwill and intangibles (Note 2)         |   | 204                                    |       | 732                                   |       | 618 |   | 2,202 |   |
| Other operating expenses                                  |   | 1,964                                  |       | 1,963                                 |       | 6,410 |   | 5,889 |   |
| Total non-interest expense                                |   | 17,240                                 |       | 15,991                                |       | 51,217 |   | 47,865 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| Minority interest expense (Note 9)                        |   | 1,222                                  |       | —                                |       | 1,629 |   | — |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| Income before provision for income taxes                  |   | 14,277                                 |       | 12,434                                |       | 42,220 |   | 33,390 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| PROVISION FOR INCOME TAXES                                |   | 5,019                                  |       | 4,400                                 |       | 14,804 |   | 11,624 |   |
| Net income                                                |   | $                                      | 9,258      |                                  | $          | 8,034 |   | $ | 27,416 |   | $ | 21,766 |   |
|                                                      |   |                                   |       |                                  |       |   |   |   |   |
| EARNINGS PER SHARE (Note 5):                              |   |                                   |       |                                  |       |   |   |   |   |
| Basic                                                     |   | $                                      | 0.41       |                                  | $          | 0.34 |   | $ | 1.20 |   | $ | 0.93 |   |
| Diluted                                                   |   | $                                      | 0.40       |                                  | $          | 0.34 |   | $ | 1.17 |   | $ | 0.92 |   |

 

See accompanying notes to the unaudited consolidated financialstatements.

 

2

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**SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS'EQUITYFOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001**

** **

**(Unaudited)**

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

** **
|                                                                                                        |   | **Common  Stock** |   | **Additional  Paid-In Capital** |   | **Retained  Earnings** |   | **Treasury  Stock** |    | **Accumulated  Other Comprehensive  Income (Loss)** |   | **Unearned  Compensation  ESOP  /Restricted  Stock** |   | **Shares  Held  In  Employee  Trust** |   | **Total** |   |
|-------------------------------------------------------------------------------------------------------------|--------|-------------------|--------|---------------------------------|--------|------------------------|--------|---------------------|---------|-----------------------------------------------------|--------|------------------------------------------------------|--------|---------------------------------------|--------|-----------|--------|
|                                                                                                        |   |              |   |                            |   |                   |   |                |    |                                                |   |                                                 |   |                                  |   |      |   |
| Balance, December 31, 2000                                                                                  |   | $                 | 268    |                            | $      | 152,795                |   | $                   | 166,865 |                                                | $      | (17,990                                              | )      | $                                     | 791    |      | $      | (14,384 | ) | $ | (157 | ) | $ | 288,188 |   |
| Exercise of stock options                                                                                   |   | —            |   | 18                              |   | —                 |   | 221                 |    | —                                              |   | —                                               |   | —                                |   | 239       |   |
| Repurchase of common stock (Note 7)                                                                    |   | —            |   | —                          |   | —                 |   | (5,192              | )       | —                                              |   | —                                               |   | —                                |   | (5,192    | )      |
| Net income                                                                                                  |   | —            |   | —                          |   | 21,766                 |   | —              |    | —                                              |   | —                                               |   | —                                |   | 21,766    |   |
| Other comprehensive income — Change in unrealized gain on securities  available for sale, net of taxes |   | —            |   | —                          |   | —                 |   | —              |    | 3,428                                               |   | —                                               |   | —                                |   | 3,428     |   |
| Comprehensive income                                                                                        |   | —            |   | —                          |   | —                 |   | —              |    | —                                              |   | —                                               |   | —                                |   | 25,194    |   |
| Cash dividends - $.25 per share                                                                             |   | —            |   | —                          |   | (5,965                 | )      | —              |    | —                                              |   | —                                               |   | —                                |   | (5,965    | )      |
| Amortization of unearned compensation                                                                       |   | —            |   | 183                             |   | —                 |   | —              |    | —                                              |   | 1,357                                                |   | —                                |   | 1,540     |   |
| Other                                                                                                       |   | —            |   | 131                             |   | —                 |   | —              |    | —                                              |   | —                                               |   | (111                                  | )      | 20        |   |
| Balance, September 30, 2001                                                                                 |   | $                 | 268    |                            | $      | 153,127                |   | $                   | 182,666 |                                                | $      | (22,961                                              | )      | $                                     | 4,219  |      | $      | (13,027 | ) | $ | (268 | ) | $ | 304,024 |   |
|                                                                                                        |   |              |   |                            |   |                   |   |                |    |                                                |   |                                                 |   |                                  |   |      |   |
|                                                                                                        |   |              |   |                            |   |                   |   |                |    |                                                |   |                                                 |   |                                  |   |      |   |
| Balance, December 31, 2001                                                                                  |   | $                 | 268    |                            | $      | 153,216                |   | $                   | 189,743 |                                                | $      | (28,185                                              | )      | $                                     | 3,531  |      | $      | (12,575 | ) | $ | (274 | ) | $ | 305,724 |   |
| Exercise of stock options                                                                                   |   | —            |   | 141                             |   | —                 |   | 273                 |    | —                                              |   | —                                               |   | —                                |   | 414       |   |
| Repurchase of common stock (Note 7)                                                                    |   | —            |   | —                          |   | —                 |   | (9,965              | )       | —                                              |   | —                                               |   | —                                |   | (9,965    | )      |
| Net income                                                                                                  |   | —            |   | —                          |   | 27,416                 |   | —              |    | —                                              |   | —                                               |   | —                                |   | 27,416    |   |
| Other comprehensive income — Change in unrealized gain on securities  available for sale, net of taxes |   | —            |   | —                          |   | —                 |   | —              |    | 3,463                                               |   | —                                               |   | —                                |   | 3,463     |   |
| Comprehensive income                                                                                        |   | —            |   | —                          |   | —                 |   | —              |    | —                                              |   | —                                               |   | —                                |   | 30,879    |   |
| Cash dividends - $.31 per share                                                                             |   | —            |   | —                          |   | (7,200                 | )      | —              |    | —                                              |   | —                                               |   | —                                |   | (7,200    | )      |
| Amortization of unearned compensation                                                                       |   | —            |   | 449                             |   | —                 |   | —              |    | —                                              |   | 1,357                                                |   | —                                |   | 1,806     |   |
| Other (Note 9)                                                                                              |   | —            |   | (29                             | )      | —                 |   | —              |    | —                                              |   | —                                               |   | (24                                   | )      | (53       | )      |
| Balance, September 30, 2002                                                                                 |   | $                 | 268    |                            | $      | 153,777                |   | $                   | 209,958 |                                                | $      | (37,877                                              | )      | $                                     | 6,994  |      | $      | (11,218 | ) | $ | (298 | ) | $ | 321,604 |   |

 

3

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001**

**(Unaudited)**

**(In Thousands)**

 
|                                                                                                |   | **2002** |    | **2001** |   |
|-----------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| CASH FLOWS FROM OPERATING ACTIVITIES:                                                               |   |     |    |     |   |
| Net income                                                                                          |   | $        | 27,416  |     | $      | 21,766 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities —            |   |     |    |     |   |
| Depreciation                                                                                        |   | 3,293    |    | 2,984    |   |
| Amortization and accretion, net                                                                     |   | 1,213    |    | 43       |   |
| Purchase accounting amortization, net                                                               |   | 498      |    | 1,968    |   |
| Stock-based compensation                                                                            |   | 1,805    |    | 1,540    |   |
| Provision for loan losses                                                                           |   | 5,385    |    | 4,425    |   |
| (Gain) loss on sale of investment securities, net                                                   |   | 163      |    | (71      | )      |
| Loss on pension plan curtailment                                                                    |   | 446      |    | —   |   |
| Other real estate owned income                                                                      |   | (30      | )       | (47      | )      |
| Gain on sale of fixed assets                                                                        |   | (172     | )       | (99      | )      |
| Benefit for deferred taxes                                                                          |   | (2,351   | )       | (1,208   | )      |
| Originations of loans held-for-sale                                                                 |   | (9,587   | )       | (23,974  | )      |
| Proceeds from sales of loans originated for sale                                                    |   | 21,971   |    | 29,534   |   |
| Gain on sales of loans, net                                                                         |   | (205     | )       | (328     | )      |
| Net (increase) decrease in accrued interest receivable                                              |   | (59      | )       | 202      |   |
| Net (increase) decrease in other assets                                                             |   | 651      |    | (2,460   | )      |
| Net increase in accrued expenses and other liabilities                                              |   | 9,990    |    | 3,921    |   |
| Net cash provided by operating activities                                                           |   | 60,427   |    | 38,196   |   |
|                                                                                                |   |     |    |     |   |
| CASH FLOWS FROM INVESTING ACTIVITIES:                                                               |   |     |    |     |   |
| Purchase of securities classified as available-for-sale                                             |   | (180,522 | )       | (147,186 | )      |
| Purchase of securities classified as held-to-maturity                                               |   | (1,098   | )       | (3,195   | )      |
| Purchase of restricted equity securities                                                            |   | (2,597   | )       | (11,959  | )      |
| Proceeds from sales, calls, paydowns and maturities of securities  classified as available-for-sale |   | 164,532  |    | 63,334   |   |
| Proceeds from calls, paydowns and maturities of securities classified  as held-to-maturity          |   | 2,779    |    | 10,191   |   |
| Proceeds from sale of restricted equity securities                                                  |   | —   |    | 96       |   |
| Purchase of loans                                                                                   |   | (12,079  | )       | (1,557   | )      |
| Net increase in loans                                                                               |   | (290,791 | )       | (245,716 | )      |
| Recoveries of loans previously charged off                                                          |   | 818      |    | 457      |   |
| Proceeds from sales of other real estate owned                                                      |   | 370      |    | 540      |   |
| Proceeds from sales of fixed assets                                                                 |   | 497      |    | 268      |   |
| Purchase of premises and equipment                                                                  |   | (5,613   | )       | (4,099   | )      |
| Net cash used in investing activities                                                               |   | (323,704 | )       | (338,826 | )      |
|                                                                                                |   |     |    |     |   |
| CASH FLOWS FROM FINANCING ACTIVITIES:                                                               |   |     |    |     |   |
| Increase in NOW, money market deposit and demand deposit accounts                                   |   | $        | 170,754 |     | $      | 166,831 |   |
| Increase in passbook and other savings accounts                                                     |   | 36,606   |    | 30,169   |   |
| Increase (decrease) in certificates of deposit                                                      |   | 33,873   |    | (3,740   | )      |
| Advances from Federal Home Loan Bank                                                                |   | 170,500  |    | 369,946  |   |
| Repayments of Federal Home Loan Bank advances                                                       |   | (127,067 | )       | (144,189 | )      |
| Increase in short-term and other borrowings                                                         |   | 9,036    |    | 5,350    |   |
| Increase in mortgagors' escrow payments                                                             |   | 353      |    | 1,115    |   |
| Net proceeds issuance of junior subordinated deferrable interest  debentures                        |   | 55,017   |    | —   |   |
| Exercise of stock options                                                                           |   | 273      |    | 239      |   |
| Tax benefit of stock awards                                                                         |   | 141      |    | 131      |   |
| Repurchase of common stock                                                                          |   | (9,965   | )       | (5,192   | )      |
| Cash dividends                                                                                      |   | (7,200   | )       | (5,965   | )      |
| Net cash provided by financing activities                                                           |   | 332,321  |    | 414,695  |   |
|                                                                                                |   |     |    |     |   |
| Net increase in cash and cash equivalents                                                           |   | 69,044   |    | 114,065  |   |
| Cash and cash equivalents, beginning of year                                                        |   | 190,733  |    | 107,513  |   |
| Cash and cash equivalents, end of period                                                            |   | $        | 259,777 |     | $      | 221,578 |   |
|                                                                                                |   |     |    |     |   |
| Supplemental disclosure of cash flow information:                                                   |   |     |    |     |   |
| Interest paid on deposits and borrowed funds                                                        |   | 72,584   |    |     | 85,599 |   |
| Income taxes paid                                                                                   |   | 6,619    |    | 11,118   |   |
|                                                                                                |   |     |    |     |   |
| Supplemental disclosure of noncash transactions:                                                    |   |     |    |     |   |
| Transfer from loans to loans held-for-sale                                                          |   | —   |    | 23,801   |   |
| Transfers from loans to other real estate owned                                                     |   | 82       |    | 833      |   |
| Financed sales of other real estate owned                                                           |   | 76       |    | 68       |   |

 

Seeaccompanying notes to the unaudited consolidated financial statements.

 

4

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**SEACOAST FINANCIAL SERVICES CORPORATION ANDSUBSIDIARIES**

**NOTES****TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**SEPTEMBER 30, 2002 AND 2001**

** **

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

 

**Basis of Presentation**

 

The unaudited consolidated financialstatements of Seacoast Financial Services Corporation and its wholly-ownedsubsidiaries, Compass Bank for Savings ("Compass"), Nantucket Bank,Lighthouse Securities Corporation and Seacoast Capital Trust I (Note 9)(collectively referred to herein as "the Company") presented hereinshould be read in conjunction with the consolidated financial statements of theCompany as of and for the year ended December 31, 2001 included as part of itsForm 10-K.  All intercompany accountsand transactions have been eliminated in the consolidation.

 

In the opinion of management, theaccompanying unaudited financial statements reflect all adjustments (consistingof normal recurring adjustments) and disclosures necessary for a fairpresentation.  Management is required tomake estimates and assumptions that affect amounts reported in the financialstatements.  Actual results could differsignificantly from those estimates.  Theresults of operations for the three and nine month periods ended September 30,2002  and 2001 are not necessarilyindicative of the results that may be expected for the entire fiscal year.

 

### **Summary ofSignificant Accounting Policies**

 

The Company's significant accounting policiesare described in Note 1 of the Notes to Consolidated Financial Statementsincluded in its Form 10-K for the year ended December 31, 2001 filed with theSecurities and Exchange Commission.  Forinterim reporting purposes, the Company follows the same significant accountingpolicies.

 

**Reclassifications**

** **

Certain reclassifications have been made tothe prior period financial statements to conform to the 2002 presentation.  Such reclassifications have no effect onpreviously reported net income.

** **

**(2)****  GOODWILL AND OTHER INTANGIBLEASSETS**

 

In June 2001, the Financial AccountingStandards Board issued Statements of Financial Accounting Standards No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”) which is effective forfiscal years beginning after December 15, 2001.  The Company adopted SFAS 142 as of January 1, 2002.  SFAS 142 addresses the method of identifyingand measuring goodwill and other intangible assets having indefinite livesacquired in a business combination, eliminates further amortization ofgoodwill, and requires periodic impairment evaluations of goodwill using a fairvalue methodology prescribed in the statement. As a result of adopting SFAS 142, the Company no longer amortizes thegoodwill balance of $33.9 million, which reduced goodwill amortization andincreased net income by $606,000 in the third quarter of 2002.  An initial impairment test was required tobe performed by June 30, 2002 and thereafter is required at least annually ormore frequently as a result of an event or change in circumstances (e.g.recurring operating losses by the acquired entity) that would indicate animpairment adjustment may be necessary. The Company completed its initial impairment test during the secondquarter of 2002 and determined an impairment charge is not required.

 

5

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Prior to adoption of SFAS 142, goodwill wasbeing amortized on a straight-line basis over 15 years.  For the three months and nine months endedSeptember 30, 2001 goodwill amortization expense was $606,000 and $1,818,000,respectively.  Actual results ofoperations for the three and nine month periods ended September 30, 2002 andpro forma results of operations for the three month and nine month periodsended September 30, 2001 as if SFAS 142 had been adopted as of January 1, 2001are as follows:

 
|                                            |   | **Three  Months Ending** |   | **Nine  Months Ending** |   |
|-------------------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                            |   | **September  30, 2002**  |   | **September  30, 2001** |   | **September  30, 2002** |   | **September  30, 2001** |   |
|                                            |   | **(In  thousands)**      |   |
| Reported net income                             |   | $                        | 9,258  |                    | $      | 8,034 |   | $ | 27,416 |   | $ | 21,766 |   |
| Add:   Goodwill amortization               |   | —                   |   | 606                     |   | — |   | 1,818 |   |
| Adjusted net income                             |   | $                        | 9,258  |                    | $      | 8,640 |   | $ | 27,416 |   | $ | 23,584 |   |
|                                            |   |                     |   |                    |   |   |   |   |   |
| Weighted average common shares o/s – basic |   | 22,794,126               |   | 23,417,024              |   | 22,938,080 |   | 23,436,616 |   |
| Weighted average common and common stock        |   |                     |   |                    |   |   |   |   |   |
| Equivalent shares o/s – diluted            |   | 23,336,069               |   | 23,772,139              |   | 23,496,084 |   | 23,752,556 |   |
|                                            |   |                     |   |                    |   |   |   |   |   |
| Basic earnings per share:                       |   |                     |   |                    |   |   |   |   |   |
| Reported net income                             |   | $                        | 0.41   |                    | $      | 0.34 |   | $ | 1.20 |   | $ | 0.93 |   |
| Add: goodwill amortization                      |   | —                   |   | .03                     |   | — |   | .08 |   |
|                                            |   |                     |   |                    |   |   |   |   |   |
|                                            |   |                     |   |                    |   |   |   |   |   |
| Adjusted net income                             |   | $                        | 0.41   |                    | $      | 0.37 |   | $ | 1.20 |   | $ | 1.01 |   |
| Diluted earnings per share:                     |   |                     |   |                    |   |   |   |   |   |
| Reported net income                             |   | $                        | 0.40   |                    | $      | 0.34 |   | $ | 1.17 |   | $ | 0.92 |   |
| Add:   goodwill amortization               |   | —                   |   | .03                     |   | — |   | .08 |   |
|                                            |   |                     |   |                    |   |   |   |   |   |
| Adjusted net income                             |   | $                        | 0.40   |                    | $      | 0.37 |   | $ | 1.17 |   | $ | 1.00 |   |

** **

At September 30, 2002, the Company has $1.8million in unamortized identifiable intangible assets consisting of coredeposit intangibles and other intangibles. Total amortization expense associated with these intangibles assets forthe nine months ending September 30, 2002 and 2001 was $618,000 and $385,000,respectively.

 

The changes in the carrying of goodwill andother intangibles assets for the nine months ended September 30, 2002 are asfollows:

 
|                        |   | **Goodwill**        |   | **Core  Deposit  Intangibles** |   | **Other  Intangibles** |   | **Total  Intangibles** |   |
|-----------------------------|--------|---------------------|--------|--------------------------------|--------|------------------------|--------|------------------------|--------|
|                        |   | **(In  thousands)** |   |
| Balance, December 31, 2001  |   | $                   | 33,903 |                           | $      | 2,263                  |   | $                      | 107    |   | $ | 36,273 |   |
|                        |   |                |   |                           |   |                   |   |                   |   |
| Recorded during the period  |   | —              |   | —                         |   | —                 |   | —                 |   |
|                        |   |                |   |                           |   |                   |   |                   |   |
| Amortization expense        |   | —              |   | (553                           | )      | (65                    | )      | (618                   | )      |
|                        |   |                |   |                           |   |                   |   |                   |   |
| Impairment recognized       |   | —              |   | —                         |   | —                 |   | —                 |   |
|                        |   |                |   |                           |   |                   |   |                   |   |
| Balance, September 30, 2002 |   | $                   | 33,903 |                           | $      | 1,710                  |   | $                      | 42     |   | $ | 35,655 |   |

 
| Estimated amortization expense: |   |   |   |   |   |   |   |   |   |
|---------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| 2002                            |   | — |   | $      | 724    |   | $      | 84     |   | $ | 808 |   |
| 2003                            |   | — |   | 608    |   | 17     |   | 625    |   |
| 2004                            |   | — |   | 314    |   | 7      |   | 321    |   |
| 2005                            |   | — |   | 208    |   | — |   | 208    |   |
| 2006                            |   | — |   | 166    |   | — |   | 166    |   |
|                                 |        |        |        |        |        |        |        |        |        |  |  |  |

 

6

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The components of other intangibles assetsfollows:

 
|                     |   | **September  30, 2002**     |   |
|--------------------------|--------|-----------------------------|--------|
|                     |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Carrying  Amount** |   |
|                     |   | **(In  thousands)**         |   |
| Intangible assets:       |   |                        |   |   |   |   |   |
| Core deposit intangibles |   | $                           | 4,424  |   | $ | 2,714 |   | $ | 1,710 |   |
| Other intangibles        |   | 220                         |   | 178 |   | 42 |   |
| Total                    |   | $                           | 4,644  |   | $ | 2,892 |   | $ | 1,752 |   |

 

**(3)****        ****    ****LOANS**

 

The loan portfolio consisted of the following:

 
|                             |   | **September  30,  2002** |      | **December  31,  2001** |   |
|----------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                             |   | **(In  thousands)**      |      |
| Real estate loans:               |   |                     |      |                    |   |
| Residential (one-to-four family) |   | $                        | 1,419,554 |                    | $      | 1,311,606 |   |
| Commercial                       |   | 353,402                  |      | 337,277                 |   |
| Construction                     |   | 114,175                  |      | 108,556                 |   |
| Home equity lines of credit      |   | 65,353                   |      | 45,709                  |   |
| Total real estate loans          |   | 1,952,484                |      | 1,803,148               |   |
| Commercial loans                 |   | 121,029                  |      | 115,562                 |   |
| Consumer loans:                  |   |                     |      |                    |   |
| Indirect auto loans              |   | 752,844                  |      | 601,884                 |   |
| Less-unearned discount           |   | 389                      |      | 1,651                   |   |
| Indirect auto loans, net         |   | 752,455                  |      | 600,233                 |   |
| Other                            |   | 49,454                   |      | 56,039                  |   |
| Total consumer loans, net        |   | 801,909                  |      | 656,272                 |   |
| Total loans                      |   | 2,875,422                |      | 2,574,982               |   |
| Less-allowance for loan losses   |   | 33,141                   |      | 29,513                  |   |
|                             |   | $                        | 2,842,281 |                    | $      | 2,545,469 |   |

 

Non-accrual loans amounted to $11,137,000 and $13,408,000 at September30, 2002 and December 31, 2001, respectively.

 

7

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**(4)   DEPOSITS**

 

A summary of deposit balances is as follows:

 
|                                   |   | **September  30,  2002** |      | **December  31,  2001** |   |
|----------------------------------------|--------|--------------------------|-----------|-------------------------|--------|
|                                   |   | **(In  thousands)**      |      |
| Demand deposit accounts                |   | $                        | 234,002   |                    | $      | 180,916 |   |
| NOW and money market deposit accounts  |   | 861,823                  |      | 744,155                 |   |
| Passbook and other savings accounts    |   | 311,769                  |      | 275,163                 |   |
| Total non-certificate accounts         |   | 1,407,594                |      | 1,200,234               |   |
|                                   |   |                     |      |                    |   |
| Certificates of deposit -              |   |                     |      |                    |   |
| Term certificates of $100,000 and over |   | 289,401                  |      | 268,326                 |   |
| Term certificates less than $100,000   |   | 736,550                  |      | 723,797                 |   |
| Total certificates of deposit          |   | 1,025,951                |      | 992,123                 |   |
|                                   |   | $                        | 2,433,545 |                    | $      | 2,192,357 |   |

** **

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

 

Basic EPS for the three months and ninemonths ended September 30, 2002 and 2001 was computed based on the weightedaverage number of shares outstanding during the periods using the followingshare balances:

 
|               |   | **2002**   |   | **2001**   |   |
|--------------------|--------|------------|--------|------------|--------|
| Three months ended |   | 22,794,126 |   | 23,417,024 |   |
| Nine months ended  |   | 22,938,080 |   | 23,436,616 |   |

 

Unvested restricted stock awards andunallocated ESOP shares (except for the pro rated shares to be allocated in2002) are not considered outstanding for purposes of the computation of basicEPS and have been excluded from the shares presented above.  Diluted EPS reflects the potential dilutionthat could occur if certain agreements to issue common stock were exercised andhas been computed after giving consideration to the dilutive effect of theCompany’s stock options and unvested restricted stock awards.

 

**(6)****         BUSINESS SEGMENTINFORMATION**

 

The community banking business segment consists of commercial andretail banking.  Banking services areprovided within the framework of two full-service community banks which havesimilar economic characteristics, products and services, distribution channelsand regulatory environments. Accordingly, disaggregated segment information for each bank is notpresented.  The community-bankingsegment derives its revenues from a wide range of banking services, includinginvesting and lending activities and acceptance of demand, savings and timedeposits, merchant credit card 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-reportable operating segments of the Company's operations which donot have similar characteristics to the community banking operations and do notmeet the quantitative thresholds requiring disclosure, are included in theOther category in the disclosure of business segments below.  These non-reportable segments include theParent Company.

 

8

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Reportable segment specific information and reconciliation toconsolidated financial information as of September 30, 2002 and 2001 and forthe nine-month periods then ended are as follows (in thousands):

 
|                      |   | **Community  Banking** |    | **Other** |   | **Other  Adjustments  And Eliminations** |   | **Consolidated** |    |
|---------------------------|--------|------------------------|---------|-----------|--------|------------------------------------------|--------|------------------|---------|
| September 30, 2002        |   |                   |    |      |   |                                     |   |             |    |
| Investment securities     |   | $                      | 485,308 |      | $      | 2,874                                    |   | $                | —  |   | $ | 488,182 |   |
| Net loans                 |   | 2,830,111              |    | 22,238    |   | (10,068                                  | )      | 2,842,281        |    |
| Total assets              |   | 3,704,369              |    | 381,340   |   | (363,001                                 | )      | 3,722,708        |    |
| Total deposits            |   | 2,433,545              |    | —    |   | —                                   |   | 2,433,545        |    |
| Total borrowings          |   | 875,777                |    | —    |   | —                                   |   | 875,777          |    |
| Total liabilities         |   | 3,345,630              |    | 457       |   | —                                   |   | 3,346,087        |    |
| Net interest income       |   | 89,856                 |    | 804       |   | (592                                     | )      | 90,068           |    |
| Provision for loan losses |   | 5,385                  |    | —    |   | —                                   |   | 5,385            |    |
| Noninterest income        |   | 9,009                  |    | 1,374     |   | —                                   |   | 10,383           |    |
| Noninterest expense       |   | 48,784                 |    | 2,433     |   | —                                   |   | 51,217           |    |
| Net income                |   | $                      | 27,598  |      | $      | 27,416                                   |   | $                | (27,598 | ) | $ | 27,416 |   |
|                      |   |                   |    |      |   |                                     |   |             |    |
| September 30, 2001        |   |                   |    |      |   |                                     |   |             |    |
| Investment securities     |   | $                      | 397,748 |      | $      | 3,851                                    |   | $                | —  |   | $ | 401,599 |   |
| Net loans                 |   | 2,557,603              |    | 10,368    |   | (10,368                                  | )      | 2,557,603        |    |
| Total assets              |   | 3,331,667              |    | 304,838   |   | (300,579                                 | )      | 3,335,926        |    |
| Total deposits            |   | 2,182,845              |    | —    |   | —                                   |   | 2,182,845        |    |
| Total borrowings          |   | 821,340                |    | —    |   | —                                   |   | 821,340          |    |
| Total liabilities         |   | 3,031,088              |    | 814       |   | —                                   |   | 3,031,902        |    |
| Net interest income       |   | 75,294                 |    | 746       |   | (609                                     | )      | 75,431           |    |
| Provision for loan losses |   | 4,425                  |    | —    |   | —                                   |   | 4,425            |    |
| Noninterest income        |   | 10,249                 |    | —    |   | —                                   |   | 10,249           |    |
| Noninterest expense       |   | 46,893                 |    | 972       |   | —                                   |   | 47,865           |    |
| Net income                |   | $                      | 21,925  |      | $      | 21,766                                   |   | $                | (21,925 | ) | $ | 21,766 |   |

 

**(7)****  ****STOCK REPURCHASE PROGRAMS**

 

In July 1999, the Board of Directors authorized the Company torepurchase up to 1,000,000 shares in the open market to meet the anticipatedneeds of stock awards and stock options issued in connection with the 1999Stock Incentive Plan.  In October 1999,July 2000, and September 2002 the Board of Directors authorized the Company torepurchase up to an additional 1,231,900, 1,254,312, and 1,194,284 shares,respectively, in the open market.  TheBoard of Directors delegated to the discretion of senior management theauthority to determine the timing of the repurchase programs' commencement, thetiming of subsequent repurchases and the prices at which repurchases will bemade.

 

As of November14, 2002, the Company had repurchased 3,544,712 shares of its common stockunder these programs at a total cost of $46,394,422, of which 3,486,212 shares at a cost of $45,076,448 had beenrepurchased as of September 30, 2002.

 

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

 

On October 24,2002, the Board of Directors voted the payment of a quarterly cash dividend of$.11 per share.  The dividend is payableon November 22, 2002 to stockholders of record on November 8, 2002.

 

9

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** **

**(9)****   ISSUANCE OF TRUST PREFERREDSECURITIES**

** **

As previously disclosed in the secondquarter, the Company, through a subsidiary trust (Seacoast Capital Trust I)issued 2,300,000 shares of 8.50% Trust Preferred Securities, $25.00 face value,due June 30, 2032 but callable at the option of the Company on or after June30, 2007.  This issuance raised$57,500,000 in gross proceeds and net of underwriting costs provided$55,040,000 in additional Tier 1 capital. The Company intends to use these net proceeds for general corporatepurposes, which may include the repurchase of its common stock, the repaymentof its debt, and investments in or advances to its existing or futuresubsidiaries.  The Company may also usea portion of the net proceeds to fund possible future acquisitions, althoughthe Company does not presently have any understandings with respect to any suchfuture acquisitions.  Pending such uses,the Company has directed the net proceeds to be invested into short-termmarketable securities and first mortgage real estate loans.  In the third quarter 2002 a quarterlydividend of $1.2 million was paid to the holders of the Trust Preferredrepresenting the quarterly payment due. In addition, the quarterly amortization ($21,000) of the underwritingcost over the life of the Trust Preferred Securities was also recorded againstPaid-in Capital.

 

**(10)  COMMONWEALTH OF MASSACHUSETTS– DEPARTMENT OF REVENUE**

** **

TheMassachusetts Department of Revenue (“DOR”) has recently issued Assessments foradditional state excise taxes to several financial institutions in theCommonwealth that have established real estate investment trusts (“REIT”) intheir corporate structures.  The DORcontends that dividends received by the Banks from the REIT subsidiaries arefully taxable in Massachusetts.  TheCompany believes that the Massachusetts statutes that provides for the dividendreceived deduction equal to 95% of certain dividend distributions applies todistributions that have been made by the REIT subsidiaries to the Banks.  Seacoast Financial Services Corporation hastwo REIT subsidiaries, Compass Preferred Capital Corporation (under Compass)and N Realty Corporation (under Nantucket Bank).  Both subsidiaries were formed in 1998.  The Company has recently received notices from the DOR pertainingto two tax year filings (1999 & 2000) by N Realty Corporation and CompassPreferred Capital Corporation.  Thesenotices stipulated additional state excise taxes due of $4,467,000, plusinterest.  Since the DOR has alreadyfocused on tax years 1999 & 2000, it would be difficult to assume thatadditional notices are not forthcoming and that they may include more currenttax year filings.  Based upon thisaction, management estimates that the impact in additional tax assessments forboth companies covering tax years 1999, 2000, 2001 and the first nine months of2002 would be $9.4 million (net of federal tax benefit) excludinginterest.  No provision has been made inthe Seacoast Financial Services Corporation financials at this time and theCompany is vigorously appealing any and all assessments received.

 

10

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

 

**Forward-Looking Statements**

 

This Form 10-Q contains certain "forward-looking statements"within the meaning of Section 27A of the Securities Act of 1933 and Section 21Eof the Securities Exchange Act of 1934. When used in this report, the words or phrases, "will  likely result," "are expectedto," "will continue," "is anticipated,""estimate," "believe," or similar expressions are intendedto identify such forward-looking statements. Actual events could differ materially from those anticipated in  the forward-looking statements.  Important factors that might cause such adifference include, among other 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,supervision, and legal interpretations, including increased deposit insurancepremiums or capital or reserve requirements, changes in interest rates, andincreased competition and bank consolidations in the Company's marketarea.  These and other factors thatmight cause differences between actual and anticipated results, performance andachievements are discussed in greater detail in this section.

 

**Comparison of Financial Condition at September 30,2002 and December 31, 2001**

 

Total assets increased by $375.2 million from $3,347.5 million atDecember 31, 2001 to $3,722.7 million at September 30, 2002.  During the nine months ended September 30,2002, the loan portfolio increased by $300.4 million, or 11.7%, which wasfunded principally by deposit growth of $241.1 million and, to a lesser extent,Federal Home Loan Bank advances of $43.4 million, and short-term borrowings of $9.1 million.  During the nine months ended September 30,2002, the Company continued to borrow from the Federal Home Loan Bank (FHLB)because of the attractive borrowing rates offered during the period.  In addition to funding loan growth,borrowings have provided the Company with liquidity to increase the investmentportfolio. The weighted average interest rate on FHLB advances taken during2002 was 3.2%.  At September 30, 2002, anyadditional funds in excess of loan funding requirements were invested infederal funds sold and investment securities. In addition, the Company issued trust preferred securities during theperiod which raised $55.0 million which have been invested primarily inshort-term marketable securities and first mortgage real estate loans.

 

Total investments increasedby $21.0 million, or 4.5%  from $467.2million at December 31, 2001 to $488.2 million at September 30, 2002.  The excess of deposit growth and therecently completed trust preferred issuance provided additional funding toincrease the investment portfolio. These funds were allocated into short-term US Treasury Obligations,Federal Agency bonds, and US Government Mortgage-Backed securities.  During the nine months ended September 30,2002 the Company sold equity holdings that resulted in a gain of $1.4 millionand also sold or redeemed bonds that provided a gain of $548,000.  These gains were offset by losses on salesof corporate bonds of $1.3 million and write-downs on specific securities thatwere considered impaired in the amounts of $811,000.

 

The increase in loans occurred primarily in the residential mortgage,indirect auto, home equity, and commercial real estate loan portfolios.  From December 31, 2001 to September 30,2002, residential mortgage loans increased by $107.9 million, or 8.2%, homeequity lines of credit increased by $19.6 million, or 43.0%, indirect autoloans (net of unearned discounts) increased by $152.2 million, or 25.4% and commercialreal estate loans increased by $16.1 million, or 4.8%.  The Company has continued to retain allresidential mortgage loan originations in portfolio (Compass only) and hascontinued to emphasize the origination of indirect auto loans through its networkof automobile dealers which has been expanded to include dealers in communitiescontiguous to the metropolitan Boston area and Southern New Hampshire.  The growth in commercial real estate loanswas primarily with existing customers.

 

Total non-performing assets were $12.2 million at September 30, 2002,or 0.33% of total assets, compared to $14.5 million at December 31, 2001, or0.43% of total assets, a decrease of $2.3 million or 16.0%.  Total non-performing assets consists ofnonaccrual loans, troubled debt restructured loans, property acquired throughforeclosure (OREO), deed in lieu of foreclosure, or through repossessions.

 

Total non-performing loans were $11.1 million at September 30, 2002, or0.39% of total loans, as compared to $13.4 million at December 31, 2001, or0.52% of total loans, a decrease of $2.3 million or 16.9%.  Non-performing loans consists of nonaccrualloans that are past due 90 days or more and trouble debt restructured loansregardless of payment status. Nonaccrual loans also include loans that are considered to be possiblyimpaired.  Impaired loans are assigned anumerical risk rating based on evaluations performed by Lending Officers andsubsequently approved at the Executive level. Management reviews and evaluates impaired loans on a quarterly basis andadjusts the risk ratings on impaired loans accordingly and determines theappropriate reserve or charge-off.

 

11

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The major riskrating categories are identified as substandard, doubtful and loss as definedby bank regulations.  A loan that isassigned a risk rating of substandard usually has unacceptable business credit,repayment is in jeopardy, loan is inadequately protected by the paying capacityof the obligor or by the pledged collateral and a loss may be incurred ifdeficiencies are not corrected.  A loanassigned a risk rating of doubtful usually means that full payment has becomequestionable and that serious problems exist and collection in full is highlyimprobable requiring the loan to be administered by special assetspersonnel.  A loan risk rated as lossusually means that the loan has become uncollectible and an expected lossshould be recognized even though a partial recovery may occur in the future.

 

At September30, 2002, there were $12.6 million of loans classified as substandard, $3.7million classified as doubtful, and no loans classified as loss.  Included in the $12.6 million of substandardloans were $8.9 million of performing loans and in the $3.7 million of doubtfulloans none were performing loans.  AtDecember 31, 2001 there were $10.9 million of loans classified as substandard,$2.6 million classified as doubtful and no loans classified as loss.  Included in the $10.9 million of substandardloans were $6.9 million of performing loans and in the $2.6 million of doubtfulloans none were performing.

 

The followingis an analysis of the allowance for loan losses:

 
|                                       |   | **Three  Months** |   | **Nine  Months** |   |
|--------------------------------------------|--------|-------------------|--------|------------------|--------|
| **Periods ended September 30,**            |   | **2002**          |   | **2001**         |   | **2002** |   | **2001** |   |
| Balance at beginning of period             |   | $                 | 31,631 |             | $      | 27,251 |   | $ | 29,513 |   | $ | 25,081 |   |
| Provision charged to expense               |   | 1,850             |   | 1,550            |   | 5,385 |   | 4,425 |   |
| Recoveries of loans previously charged off |   | 540               |   | 264              |   | 818 |   | 457 |   |
| Loans charged off                          |   | (880              | )      | (328             | )      | (2,575 | ) | (1,226 | ) |
| Balance at end of period                   |   | $                 | 33,141 |             | $      | 28,737 |   | $ | 33,141 |   | $ | 28,737 |   |

 

Total deposits at September 30, 2002 were $2,433.5 million, an increaseof $241.1 million, compared to $2,192.4 million at December 31, 2001.  Core deposit account balances increased by$207.4 million, or 17.3%, during nine months ended September 30, 2002.  The growth in core deposits during thisperiod was generally attributable to seasonal fluctuations, uncertainty in thestock market as consumers seek safety, less attractive rates being offered onterm deposit products, and consumers basically maintaining a highly liquidposition.

 

The increase in stockholders' equity of $15.9 million to $321.6 millionat September 30, 2002 resulted from the net income of $27.4 million for thenine months ended September 30, 2002 and an increase of $3.5 million in themarket value of investment securities available for sale, net of taxes, whichwere partially offset by cash dividends and stock repurchases totaling $17.2million.  During 1999, 2000, and 2002 theCompany announced three stock repurchase programs aggregating 3,680,496shares.  As of November 14, 2002,2,544,712 shares had been repurchased leaving up to 1,135,784 shares forrepurchase.  Management expects torepurchase the remaining shares under these programs during the remainder of2002 and throughout 2003.

 

**Comparison of Operating Results for the Quarters EndedSeptember 30, 2002 and 2001**

** **

*Interest Income.* Interest income for the quarter ended September 30, 2002 was $55.1million compared to $55.3 million for the quarter ended September 30, 2001, adecrease of $279,000, or  0.50%.  The decrease in interest income resultedfrom a decrease in the overall yield on interest-earning assets of 88 basispoints, partially offset by an increase in average interest-earning assets of$411.5 million, or 13.4%, in the 2002 period. The principal areas of growth in average balances were related toinvestments (up $196.7 million, or 41.4%), real estate loans (up $86.1 million,or 4.7%) and indirect auto loans (up $137.8 million, or 23.5%).  The growth in investment securities resultedprimarily from an increase in deposits and borrowings in excess of funding loanrequirements during the period and the recently completed sale of $57.5 millionin trust preferred securities (Note 9). Most of the real estate loan growth resulted from increased originationsand retention in portfolio of one-to-four family real estate loans.  The increase in indirect auto loans resultedfrom the favorable interest rate environment and continued geographic expansionof the network of participating dealers.

 

*Interest Expense.* Interest expense for the quarter ended September 30, 2002 was $24.0million compared to $29.0 million for the quarter ended September 30, 2001, adecrease of $5.0 million or 17.3%.  Thisdecrease resulted from a 110 basis points decrease in the cost of funds from4.26% in 2001 to 3.16% in 2002, partially offset by a higher average balance ofinterest-bearing liabilities (up $312.3 million, or 11.4%).  Average interest-bearing deposit balancesincreased $230.4 million, or 11.9%, during the quarter ended September 30, 2002compared to the same period in 2001.

 

12

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Interest expense on borrowed funds increased $15,000 in the quarterended September 30, 2002 primarily as the result of an increase in the averagebalance of such funds of $81.9 million, or 10.3% during the period, offset by adecrease of 51 basis points in the average rate paid on borrowed funds to 4.95%in 2002 from 5.46% in 2001.

 

The decrease in the yield onoverall cost of funds on interest-bearing liabilities and the reduction inyields on interest-earning assets are reflective of the continued interest ratereductions implemented by the Federal Reserve during the period and the affectit has had on long-term deposit rates.

* *

*Provision for Loan Losses.*  TheCompany provides for loan losses in order to maintain the allowance for loanlosses at a level that management estimates is appropriate to absorb inherentlosses within the loan portfolio.  Indetermining the appropriate level of the allowance for loan losses, managementconsiders past and anticipated loss experience, evaluations of underlyingcollateral, prevailing economic conditions, the nature and volume of the loanportfolio and the levels of nonperforming and other classified loans.  The amount of the allowance is based onnumerous judgments, risk rating of loans and ultimate losses may vary from suchestimates.  Management assesses theallowance for loan losses on a quarterly basis and provides for loan lossesmonthly in order to maintain the adequacy of the allowance.  For a full discussion on the Company’sallowance for loan losses policies see “Allowance for Loan Losses” in theCompany’s 2001 annual report on Form 10-K.

 

The Companyprovided $1.9 million for loan losses in the quarter ended September 30, 2002compared to $1.6 million in the quarter ended September 30, 2001.  The increase of $300,000 in 2002 wasprimarily attributable to risks associated in the growth in the loanportfolio.  The total allowance of $33.1million at September 30, 2002 represented 1.15% of total loans compared to thesame ratio of 1.15% at December 31, 2001. At September 30, 2002, the allowance for loan losses as a percentage ofnon-performing loans was 297.6% compared to 220.1% at December 31, 2001.

 

*Noninterest Income.* Total noninterest income was $3.6 million for the quarter endedSeptember 30, 2002 compared to $3.7 million in the same period of 2001, adecrease of $129,000, or 3.5%.  Thisdecrease was principally caused by a curtailment loss of $446,000 related tothe freezing of the defined benefit plan at Nantucket Bank and write-downs onspecific securities that were considered impaired in the amount of$71,000.  In addition, loan fees andgain on sale of loans were lower.  Thesereductions were partially offset with increases in deposit related fees andother loan fees.

* *

*Noninterest Expense.*  Noninterest expense increased by $1.2 million or 7.8%, from $16.0 millionfor the quarter ended September 30, 2001 to $17.2 million for the quarter endedSeptember 30, 2002.  This increasereflected increases in salaries and employee benefits ($1.1 million), occupancyand equipment ($234,000), data processing ($558,000), marketing expenses($86,000), and other noninterest expense ($1,000).  The increases in noninterest expenses were partially offset bydecreases in professional services ($193,000) and amortization of goodwill andintangibles ($528,000).

 

Salaries and employee benefitsincreased $1.1 million, or 13.3%, during the quarter ended September 30,2002.  This increase was the result ofpayroll increases averaging 4.5%, additions to staff in the CreditAdministration and Retail Banking departments, and other additions to staffrelated to Company growth, branch expansion, supplemented by increases inemployee benefits.

 

Occupancy and equipmentexpenses increased $234,000 or 11.1%, during the quarter ended September 30,2002.  This increase was primarily dueto an increase in depreciation expenses related to branch expansion andmaintenance costs.

 

Data processing expensesincreased $558,000, or 35.6%, during the quarter ended September 30, 2002 dueprimarily to core processing activities which are volume-related such as itemprocessing and ATM usage and an increase in the  number of loan and retail deposit accounts.  In addition there were increases inelectronic bill paying and ATM/Debit Card processing expenses.  Also, data communication line and softwaremaintenance expenses increased due to the anticipated conversion of the coreprocessing functions to another service bureau scheduled for 2003.  The increase on a comparative basis waspartially affected by a rate reduction given to the Company in 2001 from thecurrent service provider of core data processing.

 

Marketing expenses increased$86,000 or 12.9%, during the quarter ended September 30, 2002.  Thisincrease was primarily the result of an increase in advertising service fees paidto outside agencies, increased spending on newspaper and direct mailadvertising during the period, offset by decreases in other media expenses andproduction costs related to television advertising.

 

13

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Professional servicesexpenses decreased $193,000 or  26.8%,during the quarter ended September 30, 2002. This decrease was primarily the result of reductions in costs associatedwith the start-up of private banking and corporate consulting in 2001 partiallyoffset by an increase in professional services related to loan activities.

 

Amortizationof goodwill and intangibles decreased $528,000, or 72.1%, during the quarterending September 30, 2002.  Thisdecrease reflects primarily the elimination of goodwill amortization (Note 2),partially offset by an increase in the amortization of intangibles related tothe acquisition of deposits from Chart Bank (formerly known as Charter Bank).

 

Othernoninterest expense increased $1,000, or 0.1% during the quarter ended September 30, 2002.  This increase reflects primarilyvolume-related items such as printing, supplies, telephone costs partiallyoffset by decreases in repossession expenses and office supplies.

 

*Minority Interest Expense*. On May 31, 2002, the Company, through asubsidiary trust (Seacoast Capital Trust I) issued 2,300,000 shares of 8.50%Trust Preferred Securities (Note 9).  Inthe third quarter of  2002 a quarterlydividend of $1.2 million was paid to the holders of these Trust PreferredSecurities.

 

*Income Taxes.* The effective tax rate for the quarter endedSeptember 30, 2002 was 35.2% compared to 35.4% in  the same period in 2001. This decrease in 2002 primarily reflects the impact of nondeductiblegoodwill amortization in 2001, partially offset by an increase in the provisionfor state income taxes in 2002.

** **

**Comparison of Operating Results for the Nine MonthsEnded September 30, 2002 and 2001**

** **

*Interest Income.* Interest income for the nine months ended September 30, 2002 was $162.3million, compared to $162.0 million for the nine months ended September 30,2001, an increase of $334,000, or 0.21%. The increase in interest incomeresulted from growth in average interest-earning assets of $423.5 million, or14.5%, offset by a decrease in the overall yield on interest-earning assets of93 basis points in the 2002 period.  Theprincipal areas of growth in average balances were related to investments (up$220.6 million, or 55.6%), real estate loans (up $101.2 million, or 5.7%) andindirect auto loans (up $103.5 million, or 18.5%).  The growth in investment securities resulted primarily from anincrease in deposits and borrowings in excess of the funding loan requirementsduring the period as well as the recently completed sale of $57.5 million intrust preferred securities (Note 9). Most of the real estate loan growth resulted from increased originationand retention in portfolio of one-to-four family real estate loans.  The increase in indirect auto loans resultedfrom the favorable interest rate environment and continued geographic expansionof the network of participating dealers.

 

*Interest Expense.* Interest expense for the nine months ended September 30, 2002 was $72.2million compared to $86.5 million for the nine months ended September 30, 2001,a decrease of $14.3 million or 16.5%. This decrease resulted from a 119 basis points decrease in the cost offunds from 4.45% in 2001 to 3.26% in 2002, and a higher average balance oflower interest-bearing deposits (up $233.8 million, or 27.3%).  In addition the average balance of higherinterest bearing term deposits decreased ($11.7 million, or 1.2%), fromSeptember 30, 2001 to September 30, 2002 further reducing the cost of funds.

 

Interest expense on borrowedfunds increased $1.7 million in the nine months ended September 30, 2002 to$32.3 million due to a $137.1 million increase in the average balance of suchfunds, partially offset by a 62 basis points decrease in the average rate paidon borrowed funds to 5.00% in the 2002 period from 5.62% in the same periodlast year.

 

The decrease in the cost of funds in 2002 reflects what we believe is acurrent consumer bias to preserve principal, remain liquid and deposit fundsinto non-time deposit accounts.  Webelieve that the current low interest rate environment, stock marketvolatility, along with the slow growth in our economy, has induced consumers toseek insured deposit accounts that provide a safe haven for their investablefunds.  Material increases in theaverage balances of non-time deposits reflect this positioning.   From September 30, 2001 to September 30,2002 the average balance of non-time deposits increased from $855.0 million to$1,088.8 million while the cost associated with these accounts decreased 38basis points from 1.85% in 2001 to 1.47% in 2002.  In addition, with the expectation that the Federal Reserve’s OpenMarket Committee will not be inclined to immediately initiate a series ofinterest rate increases, we continue to believe that the interest of consumerslooking to invest into term-deposit accounts will remain indifferent.  Management believes that under theseconditions, the net interest margin should continue to improve during theremainder of the year.

 

*Provision for Loan Losses.*  TheCompany provided $5.4 million for loan losses in the nine months endedSeptember 30, 2002 compared to $4.4 million in the comparable prior yearperiod.  The increase of $960,000 in2002 was primarily attributable to the growth in the loan portfolio.

 

14

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*Noninterest Income.* Total noninterest income was $10.4 millionfor the nine months ended September 30, 2002 compared to $10.2 million in thesame period of 2001, an increase of $134,000 or 1.3%.  This increase was principally caused by increases in checkingaccount related income ($249,000), ATM/Debit card usage ($377,000), and fees onother retail services and deposit accounts($566,000), offset by losses oninvestment securities ($234,000), decreases on the sale of loans ($123,000),loan servicing fees ($247,000) and the curtailment loss related to the definedbenefit pension plan at Nantucket Bank ($446,000).

 

*Noninterest Expense.* Noninterest expense increased by $3.4million, or 7.0%, from $47.8 million for the nine months ended September 30,2001 to $51.2 million for the nine months ended September 30, 2002.  This increase reflected increases insalaries and employee benefits ($3.7 million), occupancy and equipment expenses($313,000), data processing ($1.0 million), and other noninterest expense ($521,000).  The increases in noninterest expense werepartially offset by decreases in marketing ($203,000), professional services($445,000) and amortization of goodwill and intangibles ($1.6 million).

 

Salaries and employee benefits increased $3.7 million or 15.4%, duringthe nine months ended September 30, 2002. This increase was partially the result of salary increases averaging4.5%, coupled with additions to staff in Credit Administration, Retail Bankingand the Managed Assets departments, an increase in commissions paid on loanrefinancing activities, an increase in sales incentive commissions paid ondeposit gathering activities and other additions to staff related to companygrowth supplemented by increases in employee benefits.

 

Occupancy and equipmentexpenses increased $313,000 or 4.8% during the nine months ended September 30,2002.  The increase was primarily theresult of branch expansion and the related expenses to operate them during theperiod.

 

Data processing expenses increased $1.0 million , or 22.0%, during thenine months ended September 30, 2002 due primarily to core processingactivities which are volume-related such as item processing, loan and depositaccount activity, ATM and electronic bill payment processing and data linecommunication expenses.  The increase ona comparative basis was partially affected by a rate reduction given to theCompany in 2001 from the current service provider of core data processing.

 

Marketing expenses decreased $203,000, or 9.2%, during the nine monthsended September 30, 2002.  This decreasewas attributable to a reduction in production costs for television commercials,partially offset by increases in promotions, print advertising, directmarketing and service fees to outside agencies.

 

Professional services expenses decreased $445,000, or 20.2%, during thenine months ended September 30, 2002. This decrease primarily reflects non-recurring consulting and legal feesassociated with the start-up of Compass's private banking initiative incurredin the first nine months of 2001, certain non-recurring costs for tax services,and other consulting services, partially offset  by increases in internal and external audit fees.

 

Amortization of goodwill andintangible decreased $1.6 million, or 71.9%, during the nine months endedSeptember 30, 2002.  This decrease isattributed to the elimination of goodwill amortization (Note 2) offset by anincrease in the amortization of intangibles associated with the acquisition ofdeposits from Chart Bank (formerly known as Charter Bank).

 

Other noninterest expense increased $521,000, or 8.8%, during the ninemonths ended September 30, 2002.  Thisincrease reflects primarily volume-related items such as printing, postage,supplies, telephone and money transportation costs and losses on sale of fixedassets.

 

*Income Taxes.* The effective tax rate for the nine monthsended September 30, 2002 was 35.1% compared to 34.8% in the same period in2001.  This increase from 2001 primarilyreflects the impact of the reduction in the provision for income taxes of$479,000 recorded in the first quarter of 2001.  In 2001, the Company completed an analysis addressing the impactof a recent tax court decision on the deductibility of merger-related costsincurred in connection with the acquisition of Sandwich Bancorp, Inc. in1998.  Based on the analysis, theprovision for income taxes was reduced by $479,000.  Exclusive of this non-recurring item, the effective tax rate in2001 was 36.2%.  The decrease in 2002reflects primarily the impact of non-deductible goodwill amortization in 2001.

 

**Liquidityand Capital Resources**

 

Liquidity,represented by cash and cash equivalents and debt securities is a productof the Company's operating,investing, and financing activities. The Company's primary sources of funds are deposits, borrowings, principaland interest payments on outstanding loans and mortgage-backed securities,maturities of investment securities and funds provided from operations.  While scheduled payments from theamortization of loans and mortgage related securities and maturing investmentsecurities are relatively predictable sources of funds, deposit flows and loanprepayments are

 

15

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greatly influenced by general interest ratesand, in the case of deposits, other instruments available to the public such asmutual funds and annuities.

 

As voluntary members of the Federal Home Loan Bank of Boston (FHLB),Compass and Nantucket****Bank areentitled to borrow an amount up to the value of their qualified collateral thathas not been pledged to others. ** **Qualified collateral generallyconsists of residential first mortgage loans, U.S. Government and agencysecurities and funds on deposit at the FHLB. At September 30, 2002, Compass and Nantucket Bank had approximately$498.5 million and $43.6 million, respectively, in unused borrowing capacitythat is contingent upon the purchase of additional FHLB stock.  Use of this borrowing capacity may also beimpacted by regulatory capital requirements.

 

Liquidity management is both a daily and long-term function of businessmanagement.  The measure of a bank'sliquidity is its ability to meet its cash commitments at all times withavailable cash or by conversion of other assets to cash at a reasonable price.  At September 30, 2002, the Companymaintained cash and due from banks, federal funds sold and debt securitiesmaturing within one year of $328.4 million, or 8.82% of total assets.  The Company invests excess funds, if any, infederal funds sold which provide liquidity to meet lending requirements.

 

At September 30, 2002, the Company had commitments to originate loans,unused outstanding lines of credit, standby letters of credit and undisbursedproceeds of loans totaling $361.1 million. The Company anticipates that it will have sufficient funds available tomeet its current loan commitments. Certificates of deposit maturing within one year from September 30, 2002amounted to $739.8 million.  The Companyexpects that a significant portion of maturing certificate accounts will beretained as deposits at maturity.

 

The Company's and the Banks' capital ratios at September 30, 2002 wereas follows:

** **
|                                     |   | **Seacoast  Financial** |   | **Compass** |   | **Nantucket** |   |
|------------------------------------------|--------|-------------------------|--------|-------------|--------|---------------|--------|
| Total Capital (to risk weighted assets)  |   | 14.68                   | %      | 11.59       | %      | 14.43         | %      |
| Tier 1 Capital (to risk weighted assets) |   | 13.40                   |   | 10.33       |   | 13.17         |   |
| Tier 1 Capital (to average assets)       |   | 9.17                    |   | 7.09        |   | 9.52          |   |

** **

These ratios placed the Company in excess of regulatory standards andthe Banks in the "well capitalized" category as set forth by theFDIC.

 

**Recent Accounting Developments**

** **

In August2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets.”  This Statementsupersedes FASB Statement No. 121, “Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be Disposed Of, “ and the accounting andreporting provisions of APB Opinion No. 30, “Reporting the Results ofOperations — Reporting the Effects of Disposal of a Segment of a Business, andExtraordinary, Unusual and Infrequently Occurring Events and Transactions.”  This Statement established a singleaccounting model to be used for long-lived assets to be disposed of by sale,whether previously held and used or newly acquired, broadened the presentationof discontinued operations to include more disposal transactions, and resolvessignificant implementation issues related to SFAS No. 121.  The provisions of this statement areeffective for financial statements issued for fiscal years beginning afterDecember 15, 2001 and interim periods within those fiscal years.  The provisions of this statement are to beapplied prospectively.  The adoption ofthis pronouncement did not have a material impact on the Company’s financialstatements.

 

In April 2002, the FASBissued SFAS No. 145, “Rescission of FASB Statements No. 4, and 64, Amendment ofFASB Statement No. 13, and Technical Corrections.  This Statement rescinds SFAS No. 4, Reporting Gains and Lossesform Extinguishments of Debt, SFAS No. 64, Extinguishments of Debt Made toSatisfy Sinking-Fund Requirements.  Inaddition, this statement amends SFAS No. 13, accounting for Leases, toeliminate an inconsistency between the required accounting for sale-leasebacktransactions and the required accounting for certain lease modifications thathave economic effects that are similar to sale leaseback transactions.  This Statement also amends other existingauthoritative pronouncement to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions.  The adoption of this pronouncementdid not have a material impact on the Company’s financial statements.

** **

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

** **

The principlemarket risk factor affecting the financial condition and operating results ofthe Company is interest rate risk.  Thisrisk is managed by periodic evaluation of the interest risk inherent in certainbalance sheet accounts,

 

16

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determination of the level ofrisk considered 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 its activitiesand strategies, the effect of those strategies on operating results, the Bank'sinterest rate risk position and the effect changes in interest rates would haveon net interest income. The extent of movement of interest rates is anuncertainty that could have a negative impact on earnings.

 

The principal strategiesthat the Company generally uses to manage interest rate risk include (i)emphasizing the origination and retention of adjustable and fixed-rate loans,origination of indirect auto loans (Compass only) which have relatively shortmaturities and origination of loans with maturities at least partly matchedwith those of thedeposits and borrowings funding the loans, (ii) investing in debt securitieswith relatively short maturities and (iii) classifying a significant portion ofits investment portfolio as available for sale so as to provide sufficientflexibility in liquidity management.

 

The Companyand the Banks quantify their interest rate risk exposure using a sophisticatedsimulation model.  Simulation analysisis used to measure the exposure of net interest income to changes in interestrates over a specified time horizon. Simulation analysis involves projecting future interest income andexpense under various rate scenarios. Internal guidelines on interest rate risk specify that for every 100basis points immediate shift in interest rates, the estimated net interestincome over the next 12 months should decline by no more than 5%.

 

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

 

As of September 30, 2002,the Company's estimated exposure as a percentage of estimated net interestincome for the next twelve and twenty-four month periods is as follows:

 
|                                  |   | **Percentage Change in Estimated** |   |
|---------------------------------------|--------|------------------------------------|--------|
|                                  |   | **Net Interest Income Over:**      |   |
|                                  |   | **12 Months**                      |   | **24 Months** |   |
| 300 basis point increase in rates     |   | (10.37                             | )%     | (9.76 | )% |
| 150 basis point decrease in rates (1) |   | (0.07                              | )%     | (2.29 | )% |

 

Based on thescenario 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 $830,000 assuming a 35% tax rate.

 

----

(1)      Due to thelow interest rate environment in effect at September 30, 2002 (the averageFederal Fund overnight rates were trading below 2%) the simulation model couldonly be rate shocked down 150 basis points.

 

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

 

Disclosurecontrols and procedures.  Within 90 days before filing this report, weevaluated the effectiveness of the design and operation of our disclosurecontrols and procedures.  Our disclosure controls and procedures are thecontrols and other procedures that we designed to ensure that we record,process, summarize and report in a timely manner the information we mustdisclose in reports that we file with or submit to the SEC.  Kevin G.Champagne, our President and Chief Executive Officer, and Francis S.Mascianica, Jr., our Treasurer and Chief Financial Officer, supervised andparticipated in this evaluation.  Based on this evaluation, Mr. Champagneand Mr. Mascianica concluded that, as of the date of their evaluation, ourdisclosure controls and procedures were effective.

 

Internalcontrols.  Since the date of theevaluation described above, there have not been any significant changes in ourinternal accounting controls or in other factors that could significantlyaffect those controls.

 

17

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

** **

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

 

The Company is not involved in any pending legal proceedings other thanthose involved 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.

 

**Item 2.  Changes in Securities and Use ofProceeds**

 

Not applicable.

 

**Item3.  Defaults Upon Senior Securities**

 

None

 

#### **Item 4. Submission of Matters to aVote of Security Holders**

#### ** **

None

 

###### **Item 5.  Other Information**

 

**CertificationUnder Sarbanes-Oxley Act**

** **

Our ChiefExecutive Officer and Chief Financial Officer have furnished to the SEC thecertification with respect to this Report that is required by Section 906 ofthe Sarbanes-Oxley Act of 2002.

** **
| **Item 6.** |   | **Exhibits  and Reports on Form 8-****K**                                                                                                                                                                                              |
|-------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                                                                                                   |
| a.          |   | Exhibits:                                                                                                                                                                                                                              |
|        |   |                                                                                                                                                                                                                                   |
| 3.1         |   | Articles of Organization  of Seacoast Financial Services Corporation+++                                                                                                                                                                |
|        |   |                                                                                                                                                                                                                                   |
| 3.2         |   | By-Laws of Seacoast  Financial Services Corporation+++                                                                                                                                                                                 |
|        |   |                                                                                                                                                                                                                                   |
| 4.1         |   | Specimen certificate for  the common stock of Seacoast Financial Services Corporation++                                                                                                                                                |
|        |   |                                                                                                                                                                                                                                   |
| 4.2         |   | Form of 8.50% Junior  Subordinated Debenture of Seacoast Financial Services Corporation+++++++                                                                                                                                         |
|        |   |                                                                                                                                                                                                                                   |
| 4.3         |   | Form of Preferred Security  of Seacoast Capital Trust I (incorporated by reference to Exhibit D to  Exhibit 10.23 hereof)                                                                                                              |
|        |   |                                                                                                                                                                                                                                   |
| 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.+                                                                                                                       |

 

 

18

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| 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++++                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.21   |   | Junior Subordinated  Indenture dated May 31, 2002 between the Seacoast Financial Services  Corporation and State Street Bank and Trust Company.+++++++                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.22   |   | Trust Agreement of  Seacoast Capital Trust I and Certificate of Trust dated April 9, 2002.+++++++                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.23   |   | Amended and Restated Trust  Agreement of Seacoast Capital Trust I dated May 31, 2002 among Seacoast  Financial Services Corporation, State Street Bank and Trust Company,  Christiana Bank and Trust Company, the Administrative Trustees named therein  and the Several Holders of the Trust Securities.+++++++ |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.24   |   | Guarantee Agreement dated  May 31, 2002 between Seacoast Financial Services Corporation and State Street  Bank and Trust Company.+++++++                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.25   |   | Agreement as to Expenses  and Liabilities dated May 31, 2002 between Seacoast Financial Services  Corporation and Seacoast Capital Trust I (incorporated by reference to  Exhibit C to Exhibit 10.23 hereof).+++++++                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 10.26** |   | Data Service Agreement  with FISERV                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                             |
| 11      |   | A statement regarding  earnings per share is included in Item 1, Note 5, of this report.                                                                                                                                                                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                             |
| b.      |   | Reports on Form 8-K                                                                                                                                                                                                                                                                                              |

 

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* Management compensatory plan or arrangement.

 

** Certain portions of this Exhibit have been omitted pursuant to arequest for confidential treatment filed with the Securities and ExchangeCommission.

 

+ Incorporated by reference to the Company's Registration Statement onForm S-1 (333-52889), filed with the Securities and Exchange Commission underthe Company's prior name,"The 1855 Bancorp", on May 15, 1998.

 

++ Incorporated by reference to Amendment No. 1 to the Company'sRegistration Statement on Form S-1 (333-52889), filed with the Securities andExchange Commission under the Company's prior name, "The 1855Bancorp", on August 14, 1998.

 

+++ Incorporated by reference to the Company's Registration Statementon Form 8-A filed with the Securities and Exchange Commission on November 18,1998.

 

++++ Incorporated by reference to the Company's Proxy Statement onSchedule 14A filed with the Securities and Exchange Commission on April 16,1999.

 

+++++ Incorporated by reference to the Company's Annual Report on Form10-K filed with the Securities and Exchange Commission on March 28, 2000.

 

++++++ Incorporated by reference to theCompany's Current Report on Form 8-K filed with the SEC on August 3, 2000.

 

+++++++ Incorporated by reference to theCompany's Quarterly Report on Form 10-Q for the second quarter of 2002, filedwith the Securities and Exchange Commission on August 14, 2002.

 

19

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**SIGNATURES**

 

 

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

 

 
|                    |         | Seacoast  Financial Services Corporation                               |
|-------------------------|--------------|------------------------------------------------------------------------|
|                    | (Registrant) |
|                    |         |
|                    |         |
| Date: November 14, 2002 | By           | /s/ Kevin G. Champagne                                                 |
|                    |         |   Kevin G.  Champagne                                        |
|                    |         |   President and  Chief Executive Officer                     |
|                    |         |                                                                   |
|                    |         |                                                                   |
| Date: November 14, 2002 | By           | /s/ Francis S. Mascianica,  Jr.                                        |
|                    |         |   Francis S.  Mascianica, Jr.                                |
|                    |         |   Treasurer,  as Principal Financial and  Accounting Officer |
|                         |              |                                                                        |  |

 

20

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**CERTIFICATIONS**

 

 

I, Kevin G. Champagne, certify that:

 

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

 

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

 

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

 

4.     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

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

 

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

 

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

 

5.     The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a)        all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)       any fraud, whether or not material, thatinvolves management or other employees who have a significant role in theregistrant’s internal controls; and

 

6.     The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 
| Date:                                  | November 14,  2002 |   |   |   |   |   |
|----------------------------------------|--------------------|--------|--------|--------|--------|--------|
|                                   |               |   |   |   |   |
|                                   |               |   |   |   |   |
| /s/ Kevin G. Champagne                 |               |   |   |   |   |
| Kevin G. Champagne                     |               |   |   |   |   |
| President and Chief  Executive Officer |               |   |   |   |   |

 

21

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**CERTIFICATIONS**

** **

 

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

 

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

 

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

 

3.     Based on my knowledge, thefinancial statements, and other financial information included in thisquarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.     The registrant’s other certifying officersand I are responsible for establishing and maintaining disclosure controls andprocedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for theregistrant and we have:

 

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

 

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

 

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

 

5.     The registrant’s othercertifying officers and I have disclosed, based on our most recent evaluation,to the registrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a)        all significant deficiencies in the design oroperation of internal controls which could adversely affect the registrant’sability to record, process, summarize and report financial data and haveidentified for the registrant’s auditors any material weaknesses in internalcontrols; and

 

b)       any fraud, whether or not material, that involvesmanagement or other employees who have a significant role in the registrant’sinternal controls; and

 

6.     The registrant’s other certifying officersand I have indicated in this quarterly report whether or not there weresignificant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

 
| Date:                                  | November 14, 2002 |   |   |   |   |   |   |
|----------------------------------------|-------------------|--------|--------|--------|--------|--------|--------|
|                                   |              |   |   |   |   |   |
|                                   |              |   |   |   |   |   |
| /s/ Francis S. Mascianica,  Jr.        |              |   |   |   |   |   |
| Francis S. Mascianica, Jr.             |              |   |   |   |   |   |
| Treasurer and Chief  Financial Officer |              |   |   |   |   |   |

 

22

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