**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

 

**FORM 10-Q**

 

 

 (Mark One)

 

 

**ý****                                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

** **

**FOR THEQUARTER ENDED MARCH 31, 2002**

** **

**or**

 

**o****                                ****TRANSITION REPORT PURSUANTTO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934.**

 

 

 

**COMMISSIONFILE NUMBER: 000-25077**

 

**SEACOAST FINANCIAL SERVICES CORPORATION**

(Exact Name of Registrantas 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 the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15 (d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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 May 15, 2002, the Company had 24,231,886 shares ofcommon stock outstanding.

 

----

 

**SEACOASTFINANCIAL SERVICES CORPORATION**

**INDEX**

 

 
|                                        |                                                                                                           |
|---------------------------------------------|----------------------------------------------------------------------------------------------------------------|
| **PART I -** **FINANCIAL INFORMATION** |
|                                        |                                                                                                           |
| Item 1.                                     | Financial Statements (unaudited)                                                                               |
|                                        |
|                                        | Consolidated Balance Sheets  at March 31, 2002 and December  31, 2001                                          |
|                                        |                                                                                                           |
|                                        | Consolidated  Statements of Income for the three months ended March 31, 2002 and 2001                          |
|                                        |                                                                                                           |
|                                        | Consolidated  Statements of Changes in Stockholders' Equity for the three months ended March 31, 2002 and 2001 |
|                                        |                                                                                                           |
|                                        | Consolidated  Statements of Cash Flows for the three months ended March 31, 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                                                    |
|                                        |                                                                                                           |
| **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**                              |                                                                                                           |
|                                             |                                                                                                                |  |

 

 

----

 

## **SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(Unaudited)**

**(Inthousands, except share amounts)**

 
|                                                                                              |   | **March 31,** |      | **December  31,****** |   |
|---------------------------------------------------------------------------------------------------|--------|---------------|-----------|-----------------------|--------|
|                                                                                              |   | **2002**      |      | **2001**              |   |
| **ASSETS**                                                                                        |   |          |      |                  |   |
| Cash and due  from banks                                                                          |   | $             | 101,973   |                  | $      | 87,834 |   |
| Federal funds  sold                                                                               |   | 40,617        |      | 92,899                |   |
| Short-term investments                                                                            |   | 10,000        |      | 10,000                |   |
| Total cash and  cash equivalents                                                                  |   | 152,590       |      | 190,733               |   |
| Investment  securities—                                                                      |   |          |      |                  |   |
| Available-for-sale,  at fair value                                                                |   | 480,426       |      | 405,788               |   |
| Held-to-maturity,  at amortized cost                                                              |   | 19,482        |      | 20,551                |   |
| Restricted  equity securities                                                                     |   | 41,667        |      | 40,837                |   |
| Loans  held-for-sale                                                                              |   | 18,456        |      | 19,675                |   |
| Loans, net (Note  3)                                                                              |   | 2,611,004     |      | 2,545,469             |   |
| Accrued interest  receivable                                                                      |   | 17,524        |      | 15.872                |   |
| Banking premises  and equipment, net                                                              |   | 50,902        |      | 51,294                |   |
| Other real  estate owned, net                                                                     |   | 308           |      | 427                   |   |
| Net deferred tax  asset                                                                           |   | 11,828        |      | 9,895                 |   |
| Goodwill (Note  2)                                                                                |   | 33,903        |      | 33,903                |   |
| Intangible  assets (Note 2)                                                                       |   | 2,162         |      | 2,370                 |   |
| Other assets                                                                                      |   | 10,160        |      | 10,653                |   |
| Total assets                                                                                      |   | $             | 3,450,412 |                  | $      | 3,347,467 |   |
| LIABILITIES AND  STOCKHOLDERS' EQUITY                                                             |   |          |      |                  |   |
| Deposits (Note  4)                                                                                |   | $             | 2,253,111 |                  | $      | 2,192,357 |   |
| Short-term  borrowings                                                                            |   | 46,508        |      | 34,584                |   |
| Federal Home  Loan Bank advances                                                                  |   | 809,042       |      | 786,917               |   |
| Other borrowings                                                                                  |   | 1,825         |      | 1,840                 |   |
| Mortgagors'  escrow payments                                                                      |   | 5,175         |      | 4,761                 |   |
| Accrued expenses  and other liabilities                                                           |   | 25,422        |      | 21,284                |   |
| Total  liabilities                                                                                |   | 3,141,083     |      | 3,041,743             |   |
| 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                                                                       |   | 153,370       |      | 153,216               |   |
| Retained  earnings                                                                                |   | 196,278       |      | 189,743               |   |
| Treasury stock,  at cost, 2,519,250 shares in 2002 and 2,439,000 shares in 2001                   |   | (29,712       | )         | (28,185               | )      |
| Accumulated  other comprehensive income                                                           |   | 1,529         |      | 3,531                 |   |
| Unearned  compensation — ESOP and restricted stock                                           |   | (12,123       | )         | (12,575               | )      |
| Shares held in  employee trust                                                                    |   | (281          | )         | (274                  | )      |
| Total  stockholders' equity                                                                       |   | 309,329       |      | 305,724               |   |
| Total liabilities  and stockholders' equity                                                       |   | $             | 3,450,412 |                  | $      | 3,347,467 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

 

1

----

 

 

## **SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**FORTHE THREE MONTHS ENDED MARCH 31, 2002 AND 2001**

**(Unaudited)**

**(Inthousands, except per share amounts)**

 
|                                                       |   | **2002** |   | **2001** |   |
|------------------------------------------------------------|--------|----------|--------|----------|--------|
| INTEREST AND  DIVIDEND INCOME:                             |   |     |   |     |   |
| Interest on  loans                                         |   | $        | 46,923 |     | $      | 47,212 |   |
| Interest and  dividends on investment securities           |   | 5,847    |   | 4,971    |   |
| Interest on  federal funds sold and short-term investments |   | 430      |   | 481      |   |
| Total interest  and dividend income                        |   | 53,200   |   | 52,664   |   |
|                                                       |   |     |   |     |   |
| INTEREST  EXPENSE:                                         |   |     |   |     |   |
| Interest on  deposits                                      |   | 13,724   |   | 19,267   |   |
| Interest on  borrowed funds                                |   | 10,681   |   | 9,464    |   |
| Total interest  expense                                    |   | 24,405   |   | 28,731   |   |
| Net interest  income                                       |   | 28,795   |   | 23,933   |   |
|                                                       |   |     |   |     |   |
| PROVISION FOR  LOAN LOSSES                                 |   | 1,535    |   | 1,400    |   |
| Net interest  income after provision for loan losses       |   | 27,260   |   | 22,533   |   |
|                                                       |   |     |   |     |   |
| NONINTEREST  INCOME:                                       |   |     |   |     |   |
| Deposit and  other banking fees                            |   | 2,172    |   | 1,843    |   |
| Loan servicing  fees, net                                  |   | 197      |   | 281      |   |
| Merchant card  fee income, net                             |   | 167      |   | 131      |   |
| Other loan fees                                            |   | 234      |   | 424      |   |
| Gain (loss) on  investment securities, net                 |   | 141      |   | (1       | )      |
| Gain on sales of  loans, net                               |   | 83       |   | 39       |   |
| Other income                                               |   | 211      |   | 347      |   |
| Total  noninterest income                                  |   | 3,205    |   | 3,064    |   |
|                                                       |   |     |   |     |   |
| NONINTEREST  EXPENSE:                                      |   |     |   |     |   |
| Salaries and  employee benefits                            |   | 9,413    |   | 7,999    |   |
| Occupancy and  equipment expenses                          |   | 2,171    |   | 2,156    |   |
| Data processing  expenses                                  |   | 1,700    |   | 1,585    |   |
| Marketing  expenses                                        |   | 473      |   | 619      |   |
| Professional  services expenses                            |   | 608      |   | 806      |   |
| Amortization of  goodwill and intangibles (Note 2)         |   | 208      |   | 736      |   |
| Other operating  expenses                                  |   | 2,316    |   | 1,906    |   |
| Total  noninterest expense                                 |   | 16,889   |   | 15,807   |   |
| Income before  provision for income taxes                  |   | 13,576   |   | 9,790    |   |
|                                                       |   |     |   |     |   |
| PROVISION FOR  INCOME TAXES                                |   | 4,702    |   | 3,059    |   |
| Net income                                                 |   | $        | 8,874  |     | $      | 6,731 |   |
|                                                       |   |     |   |     |   |
| Earnings per  share (Note 5):                              |   |     |   |     |   |
| Basic                                                      |   | $        | 0.39   |     | $      | 0.29 |   |
| Diluted                                                    |   | $        | 0.38   |     | $      | 0.28 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

 

2

----

 

**SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS' EQUITY**

**FOR THETHREE MONTHS ENDED MARCH 31, 2002 AND 2001**

**(Unaudited)**

**(Inthousands, 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 |   |
| Repurchase of common stock (Note 7)                                                                        |   | —                  |   | —                                       |   | —                       |   | (1,518                    | )       | —                                                           |   | —                                                        |   | —                                           |   | (1,518    | )      |
| Net income                                                                                                 |   | —                  |   | —                                       |   | 6,731                        |   | —                    |    | —                                                           |   | —                                                        |   | —                                           |   | 6,731     |   |
| Other comprehensive income — Change in unrealized loss onsecurities  available for sale, net of taxes |   | —                  |   | —                                       |   | —                       |   | —                    |    | 1,615                                                            |   | —                                                        |   | —                                           |   | 1,615     |   |
| Comprehensive income                                                                                       |   |                    |   |                                         |   |                         |   |                      |    |                                                             |   |                                                          |   |                                             |   | 8,346     |   |
| Cash dividends — $.08 per share                                                                       |   | —                  |   | —                                       |   | (1,912                       | )      | —                    |    | —                                                           |   | —                                                        |   | —                                           |   | (1,912    | )      |
| Amortization of unearned compensation                                                                      |   | —                  |   | 44                                           |   | —                       |   | —                    |    | —                                                           |   | 452                                                           |   | —                                           |   | 496       |   |
| Other                                                                                                      |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                                           |   | —                                                        |   | (52                                              | )      | (52       | )      |
|                                                                                                       |   |                    |   |                                         |   |                         |   |                      |    |                                                             |   |                                                          |   |                                             |   |      |   |
| Balance, March 31, 2001                                                                                    |   | $                       | 268    |                                         | $      | 152,839                      |   | $                         | 171,684 |                                                             | $      | (19,508                                                       | )      | $                                                | 2,406  |      | $      | (13,932 | ) | $ | (209 | ) | $ | 293,548 |   |
|                                                                                                       |   |                    |   |                                         |   |                         |   |                      |    |                                                             |   |                                                          |   |                                             |   |      |   |
| Balance, December 31, 2001                                                                                 |   | $                       | 268    |                                         | $      | 153,216                      |   | $                         | 189,743 |                                                             | $      | (28,185                                                       | )      | $                                                | 3,531  |      | $      | (12,575 | ) | $ | (274 | ) | $ | 305,724 |   |
| Exercise of Stock Options                                                                                  |   | —                  |   | 36                                           |   | —                       |   | 20                        |    | —                                                           |   | —                                                        |   | —                                           |   | 56        |   |
| Repurchase of common stock (Note 7)                                                                        |   | —                  |   | —                                       |   | —                       |   | (1,547                    | )       | —                                                           |   | —                                                        |   | —                                           |   | (1,547    | )      |
| Net income                                                                                                 |   | —                  |   | —                                       |   | 8,874                        |   | —                    |    | —                                                           |   | —                                                        |   | —                                           |   | 8,874     |   |
| Other comprehensive income — Change in unrealized gain onsecurities  available for sale, net of taxes |   | —                  |   | —                                       |   | —                       |   | —                    |    | (2,002                                                           | )      | —                                                        |   | —                                           |   | (2,002    | )      |
| Comprehensive income                                                                                       |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                                           |   | —                                                        |   | —                                           |   | 6,872     |   |
| Cash dividends — $.10 per share                                                                       |   | —                  |   | —                                       |   | (2,339                       | )      | —                    |    | —                                                           |   | —                                                        |   | —                                           |   | (2,339    | )      |
| Amortization of unearned compensation                                                                      |   | —                  |   | 118                                          |   | —                       |   | —                    |    | —                                                           |   | 452                                                           |   |                                             |   | 570       |   |
| Other                                                                                                      |   | —                  |   | —                                       |   | —                       |   | —                    |    | —                                                           |   | —                                                        |   | (7                                               | )      | (7        | )      |
|                                                                                                       |   |                    |   |                                         |   |                         |   |                      |    |                                                             |   |                                                          |   |                                             |   |      |   |
| Balance, March 31, 2002                                                                                    |   | $                       | 268    |                                         | $      | 153,370                      |   | $                         | 196,278 |                                                             | $      | (29,712                                                       | )      | $                                                | 1,529  |      | $      | (12,123 | ) | $ | (281 | ) | $ | 309,329 |   |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

 

3

----

 

**SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FORTHE THREE MONTHS ENDED MARCH 31, 2002 AND 2001**

**(Unaudited)**

**(InThousands)**

 
|                                                                                                  |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                                |   |     |   |     |   |
| Net income                                                                                            |   | $        | 8,874  |     | $      | 6,731 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities —              |   |     |   |     |   |
| Depreciation                                                                                          |   | 1,081    |   | 976      |   |
| Amortization and  accretion, net                                                                      |   | 650      |   | 742      |   |
| Goodwill and  intangibles amortization, net                                                           |   | 99       |   | 429      |   |
| Stock-based  compensation                                                                             |   | 570      |   | 496      |   |
| Provision for  loan losses                                                                            |   | 1,535    |   | 1,400    |   |
| (Gain) loss on  investment securities, net                                                            |   | (141     | )      | 1        |   |
| (Gain) loss on  sale of fixed assets                                                                  |   | 1        |   | (30      | )      |
| Other real  estate owned income                                                                       |   | —   |   | (47      | )      |
| Benefit for  prepaid taxes                                                                            |   | (433     | )      | (562     | )      |
| Originations of  loans held-for-sale                                                                  |   | (7,311   | )      | (10,845  | )      |
| Proceeds from  sales of loans originated for resale                                                   |   | 8,613    |   | 3,888    |   |
| Gain on sales of  loans, net                                                                          |   | (83      | )      | (39      | )      |
| Net increase in  accrued interest receivable                                                          |   | (1,652   | )      | (288     | )      |
| Net decrease in  other assets                                                                         |   | 493      |   | 499      |   |
| Net increase in  accrued expenses and other liabilities                                               |   | 4,109    |   | 3,498    |   |
| Net cash  provided by operating activities                                                            |   | 16,405   |   | 6,849    |   |
|                                                                                                  |   |     |   |     |   |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                                |   |     |   |     |   |
| Purchase of  securities classified as held to maturity                                                |   | (1,098   | )      | —   |   |
| Purchase of  securities classified as available-for-sale                                              |   | (113,385 | )      | (11,086  | )      |
| Purchase of  restricted equity securities                                                             |   | (830     | )      | (5,375   | )      |
| Proceeds from  sales, calls, paydowns and maturities of   securities classified as available-for-sale |   | 34,718   |   | 15,691   |   |
| Proceeds from  sales, calls, paydowns and maturities of   securities classified as held-to-maturity   |   | 2,134    |   | 6,127    |   |
| Purchase of  loans                                                                                    |   | —   |   | (1,300   | )      |
| Net increase in  loans                                                                                |   | (67,009  | )      | (88,846  | )      |
| Recoveries of  loans previously charged off                                                           |   | 181      |   | 137      |   |
| Proceeds from  sales of other real estate owned                                                       |   | 43       |   | 10       |   |
| Proceeds from  sales of fixed assets                                                                  |   | —   |   | 104      |   |
| Purchase of  premises and equipment                                                                   |   | (700     | )      | (1,682   | )      |
| Net cash used in  investing activities                                                                |   | (145,946 | )      | (86,220  | )      |
|                                                                                                       |        |          |        |          |        |  |  |

 

 

4

----

 
|                                                               |   | **2002** |    | **2001** |   |
|--------------------------------------------------------------------|--------|----------|---------|----------|--------|
| CASH FLOWS FROM  FINANCING ACTIVITIES:                             |   |     |    |     |   |
| Increase in NOW,  money market deposit and demand deposit accounts |   | $        | 44,330  |     | $      | 3,631 |   |
| Increase in  passbook and other savings accounts                   |   | 14,226   |    | 8,386    |   |
| Increase in  certificates of deposit                               |   | 2,213    |    | 8,977    |   |
| Advances from  Federal Home Loan Bank                              |   | 62,000   |    | 154,973  |   |
| Repayments of  Federal Home Loan Bank advances                     |   | (39,864  | )       | (49,237  | )      |
| Increase  (decrease) in short-term and other borrowings            |   | 11,909   |    | (3,589   | )      |
| Increase in  mortgagors' escrow payments                           |   | 414      |    | 1,305    |   |
| Repurchase of  common stock                                        |   | (1,547   | )       | (1,518   | )      |
| Cash dividends                                                     |   | (2,339   | )       | (1,912   | )      |
| Exercise of  stock options                                         |   | 56       |    | —   |   |
| Net cash  provided by financing activities                         |   | 91,398   |    | 121,016  |   |
|                                                               |   |     |    |     |   |
| Net (decrease)  increase in cash and cash equivalents              |   | (38,143  | )       | 41,645   |   |
| Cash and cash  equivalents, beginning of year                      |   | 190,733  |    | 107,513  |   |
| Cash and cash  equivalents, end of period                          |   | $        | 152,590 |     | $      | 149,158 |   |
|                                                               |   |     |    |     |   |
| Supplemental  disclosure of cash flow information:                 |   |     |    |     |   |
| Interest paid on  deposits and borrowed funds                      |   | $        | 24,378  |     | $      | 28,064 |   |
| Income taxes  paid                                                 |   | 1,175    |    | 758      |   |
|                                                               |   |     |    |     |   |
| Supplemental  disclosure of noncash transactions:                  |   |     |    |     |   |
| Transfers from  loans to other real estate owned                   |   | —   |    | 339      |   |
|                                                                    |        |          |         |          |        |  |  |  |  |  |

 

See accompanyingnotes to the unaudited consolidated financial statements.

 

 

5

----

 

**SEACOASTFINANCIAL SERVICES CORPORATION AND SUBSIDIARIES**

**NOTESTO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

**MARCH31, 2002 AND 2001**

 

 

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

 

##### **Basis of Presentation**

 

The unaudited consolidated financial statements of Seacoast FinancialServices Corporation and its wholly-owned subsidiaries, Compass Bank forSavings ("Compass"), Nantucket Bank and Lighthouse SecuritiesCorporation (collectively referred to herein as “the Company") presentedherein should be read in conjunction with the consolidated financial statementsof the Company as of and for the year ended December 31, 2001 included as partof its Form 10-K.

 

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

 

### **Summaryof Significant Accounting Policies**

 

The Company’s significant accounting policies are described in Note 1of the Notes to Consolidated Financial Statements included in its Form 10-K forthe year ended December 31, 2001 filed with the Securities and ExchangeCommission.  For interim reporting purposes,the Company follows the same significant accounting policies.  Certain reclassifications have been made toprior year balances to conform to the current year presentation.

 

 

 

6

----

 

**(2)  GOODWILL AND OTHERINTANGIBLE ASSETS**

 

        In June 2001, the FinancialAccounting Standards Board issued Statements of Financial Accounting StandardsNo. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”) which is effectivefor fiscal 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 acquired in a businesscombination, eliminates further amortization of goodwill, and requires periodicimpairment evaluations of goodwill using a fair value methodology prescribed inthe statement.  As a result of adoptingSFAS 142, the Company no longer amortizes the goodwill balance of $33.9million, which reduced goodwill amortization and increased net income by$606,000 in the first quarter of 2002. An initial impairment test is required to be performed by June 30, 2002and at least annually or more frequently as a result of an event or change incircumstances (e.g. recurring operating losses by the acquired entity) thatwould indicate an impairment adjustment may be necessary.  The Company expects to complete its initialimpairment test during the second quarter of 2002.  The Company does not expect to record an impairment charge uponcompletion of the initial impairment test. However, there can be no assurance that a material impairment chargewill not be recorded after the test is completed.

 

        Prior to adoption of SFAS142, goodwill was being amortized on a straight-line basis over 15 years.  For the three months ended March 31, 2001goodwill amortization expense was $606,000. Actual results of operations for the three-month period ended March 31,2002 and pro forma results of operations for the three-month period ended March31, 2001 as if SFAS 142 had been adopted as of January 1, 2001 are as follows:

 
|                                                    |   | **Three  Months Ending** |   |
|---------------------------------------------------------|--------|--------------------------|--------|
|                                                    |   | **March 31,  2002**      |   | **March 31,  2001** |   |
|                                                    |   | (In  thousands)          |   |
| Reported net income                                     |   | $                        | 8,874  |   | $ | 6,731 |   |
| Add:  Goodwill amortization,  net of tax           |   | —                   |   | 606 |   |
| Adjusted Net Income                                     |   | $                        | 8,874  |   | $ | 7,337 |   |
|                                                    |   |                     |   |   |   |
| Weighted average common shares outstanding — basic |   | 23,004,842               |   | 23,483,824 |   |
| Weighted average common and common stock                |   |                     |   |   |   |
| equivalent shares outstanding — diluted            |   | 23,524,716               |   | 23,734,187 |   |
|                                                    |   |                     |   |   |   |
| Basic earnings per share:                               |   |                     |   |   |   |
| Reported net income                                     |   | $                        | 0.39   |   | $ | 0.29 |   |
| Add: goodwill amortization, net of tax                  |   | —                   |   | 0.03 |   |
| Adjusted net income                                     |   | $                        | 0.39   |   | $ | 0.32 |   |
| Diluted earnings per share:                             |   |                     |   |   |   |
| Reported net income                                     |   | $                        | 0.38   |   | $ | 0.28 |   |
| Add:  goodwill amortization,  net of tax           |   | —                   |   | 0.03 |   |
| Adjusted net income                                     |   | $                        | 0.38   |   | $ | 0.31 |   |
|                                                         |        |                          |        |  |  |  |  |  |

 

 

7

----

 

**(3)   LOANS**

 

The loan portfolio consisted of the following:

 
|                             |   | **March 31,********2002** |      | **December  31,********2001** |   |
|----------------------------------|--------|---------------------------|-----------|-------------------------------|--------|
|                             |   | (In thousands)            |      |
| Real estate loans:               |   |                      |      |                          |   |
| Residential (one-to-four family) |   | $                         | 1,335,577 |                          | $      | 1,311,606 |   |
| Commercial                       |   | 336,315                   |      | 337,277                       |   |
| Construction                     |   | 113,133                   |      | 108,556                       |   |
| Home equity lines of credit      |   | 50,561                    |      | 45,709                        |   |
| Total real estate loans          |   | 1,835,586                 |      | 1,803,148                     |   |
| Commercial loans                 |   | 123,022                   |      | 115,562                       |   |
| Consumer loans:                  |   |                      |      |                          |   |
| Indirect auto loans              |   | 629,091                   |      | 601,884                       |   |
| Less-unearned discount           |   | 1,075                     |      | 1,651                         |   |
| Indirect auto loans, net         |   | 628,016                   |      | 600,233                       |   |
| Other                            |   | 54,712                    |      | 56,039                        |   |
| Total consumer loans, net        |   | 682,728                   |      | 656,272                       |   |
| Total loans                      |   | 2,641,336                 |      | 2,574,982                     |   |
| Less-allowance for loan losses   |   | 30,332                    |      | 29,513                        |   |
| Total loans, net                 |   | $                         | 2,611,004 |                          | $      | 2,545,469 |   |

 

Non-accrual loansamounted $12,194,000 and $13,408,000 at March 31, 2002 and  December 31, 2001, respectively.

 

**(4)   DEPOSITS**

 
| A summary of  deposit balances is as follows: |   | **March 31,  2002** |      | **December  31, 2001** |   |
|-----------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                          |   | (In thousands)      |      |
| Demand deposit accounts                       |   | $                   | 180,556   |                   | $      | 180,916 |   |
| NOW and money market deposit accounts         |   | 788,845             |      | 744,155                |   |
| Passbook and other savings accounts           |   | 289,389             |      | 275,163                |   |
| Total non-certificate accounts                |   | 1,258,790           |      | 1,200,234              |   |
|                                          |   |                |      |                   |   |
| Certificates of deposit —                |   |                |      |                   |   |
| Term certificates of $100,000 and over        |   | 268,324             |      | 268,326                |   |
| Term certificates less than $100,000          |   | 725,997             |      | 723,797                |   |
| Total certificates of deposit                 |   | 994,321             |      | 992,123                |   |
|                                          |   | $                   | 2,253,111 |                   | $      | 2,192,357 |   |

** **

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

 

**   **Basic EPS for the threemonths ended March 31, 2002 and 2001 was computed based on the weighted averagenumber of shares outstanding during the periods, which amounted to 23,004,842shares and 23,483,824 shares, respectively. Unallocated ESOP shares and unvested restricted stock awards are notconsidered outstanding for purposes of the computation of basic EPS.  Diluted EPS reflects the potential dilutionthat could occur if contracts to issue common stock were exercised and has beencomputed after giving consideration to the dilutive effect of stock options,stock awards and shares held in an employee trust.

 

 

8

----

 

**(6)****        ********BUSINESSSEGMENT INFORMATION**

 

        The Company has identified its reportable segment as“Community Banking” which consists of commercial and retail banking.  The Company operates under two operatingsegments which have similar economic characteristics, products and services, distributionchannels and 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 forinvestors.  There is no major customer,as defined, and the banks operate within a single geographic area (southeasternMassachusetts, including the islands of Martha’s Vineyard and Nantucket).

 

Non-reportable operating segments of the Company’s operations that 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.

 

Reportable segment specific information and reconciliation toconsolidated financial information as of March 31, 2002 and 2001 and for thethree-month periods then ended are as follows (in thousands):

 
| March 31, 2002            |   | **Community  Banking** |    | **Other** |   | **Other  Adjustments and Eliminations** |   | **Consolidated** |   |
|---------------------------|--------|------------------------|---------|-----------|--------|-----------------------------------------|--------|------------------|--------|
| Investment  securities    |   | $                      | 537,019 |      | $      | 4,556                                   |   | $                | — |   | $ | 541,575 |   |
| Net loans                 |   | 2,611,004              |    | 10,221    |   | (10,221                                 | )      | 2,611,004        |   |
| Total assets              |   | 3,445,388              |    | 309,727   |   | (304,703                                | )      | 3,450,412        |   |
| Total deposits            |   | 2,253,111              |    | —    |   | —                                  |   | 2,253,111        |   |
| Total borrowings          |   | 857,375                |    | —    |   | —                                  |   | 857,375          |   |
| Total liabilities         |   | 3,140,179              |    | 904       |   | —                                  |   | 3,141,083        |   |
| Net interest income       |   | 28,758                 |    | 236       |   | (199                                    | )      | 28,795           |   |
| Provision for loan losses |   | 1,535                  |    | —    |   | —                                  |   | 1,535            |   |
| Noninterest income        |   | 3,008                  |    | 197       |   | —                                  |   | 3,205            |   |
| Noninterest expense       |   | 16,640                 |    | 249       |   | —                                  |   | 16,889           |   |
| Net income                |   | $                      | 8,775   |      | $      | 8,874                                   |   | $                | (8,775 | ) | $ | 8,874 |   |
| March 31, 2001            |   |                   |    |      |   |                                    |   |             |   |
| Investment securities     |   | $                      | 301,239 |      | $      | 3,442                                   |   | $                | — |   | $ | 304,681 |   |
| Net loans                 |   | 2,447,215              |    | 10,509    |   | (10,509                                 | )      | 2,447,215        |   |
| Total assets              |   | 3,019,263              |    | 294,159   |   | (289,537                                | )      | 3,023,885        |   |
| Total deposits            |   | 2,010,609              |    | —    |   | —                                  |   | 2,010,609        |   |
| Total borrowings          |   | 692,402                |    | —    |   | —                                  |   | 692,402          |   |
| Total liabilities         |   | 2,729,693              |    | 668       |   | —                                  |   | 2,730,361        |   |
| Net interest income       |   | 23,900                 |    | 237       |   | (204                                    | )      | 23,933           |   |
| Provision for loan losses |   | 1,400                  |    | —    |   | —                                  |   | 1,400            |   |
| Noninterest income        |   | 3,024                  |    | 40        |   | —                                  |   | 3,064            |   |
| Noninterest expense       |   | 15,438                 |    | 369       |   | —                                  |   | 15,807           |   |
| Net income                |   | $                      | 6,793   |      | $      | 6,731                                   |   | $                | (6,793 | ) | $ | 6,731 |   |

 

 

9

----

 

 

**(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 1999and July 2000, the Board of Directors, with the approval of the Commissioner ofBanks, authorized the Company to repurchase up to an additional 1,231,900 and1,254,312 shares, respectively, in the open market.  The Board of Directors delegated to the discretion of seniormanagement the authority to determine the timing of the repurchase programs’commencement, the timing of subsequent repurchases and the prices at whichrepurchases will be made.

 

As of May 15, 2002, the Company had repurchased 3,121,500 shares of itscommon stock under these programs at a total cost of $36,922,133 of which3,109,000 shares at a cost of $36,657,883 had been repurchased as of March 31,2002.

 

 

**(8)   QUARTERLY CASH DIVIDEND**

 

On April 25, 2002, the Board of Directors voted for the payment of aquarterly cash dividend of $.10 per share. The dividend is payable on May 24, 2002 to stockholders of record on May10, 2002.

 

 

10

----

 

**Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

**Forward-Looking Statements**

This Form 10-Q contains certain “forward-looking statements” within themeaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.  When used in this report, the words or phrases,“will likely result,” “are expected to,” “will continue,” “is anticipated,”“estimate,” “believe,” or similar expressions are intended to identify suchforward-looking statements.  Actualevents could differ materially from those anticipated in the forward-lookingstatements.  Important factors thatmight cause such a difference include, among other things, general economicconditions, particularly the real estate market, in the Company’s primarymarket area, potential increases in the Company’s nonperforming assets (as wellas increases in the allowance for loan losses that might be necessary),concentrations of loans in a particular geographic area or with certain largeborrowers, changes in government regulation and supervision, includingincreased deposit insurance premiums or capital or reserve requirements,changes in interest rates, and increased competition and bank consolidations inthe Company’s market area.  These andother factors that might cause differences between actual and anticipatedresults, performance and achievements are discussed in greater detail in this Item2.

 

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

Total assets increased by $102.9 million from $3,347.5 million atDecember 31, 2001 to $3,450.4 million at March 31, 2002.  During the quarter ended March 31, 2002, theloan portfolio increased by $66.4 million, or 2.6%, which was fundedprincipally by deposit growth of $60.8 million and, to a lesser extent, FederalHome Loan Bank advances of $22.1 million and short-term borrowings of $11.9million.  During the quarter, the Company’sborrowings from the Federal Home Loan Bank (FHLB) exceeded its actual fundingneeds.  Management decided that becauserates from the Federal Home Loan Bank were attractive, it was strategicallyprudent to borrow these funds in anticipation of funding loan growth during theyear.  Short-term borrowings increaseddue to Nantucket Bank’s seasonal cash-flow requirements to fund commercialloans to Nantucket businesses and deposit outflows which normally occur duringthis period.  The average interest rateon FHLB advances taken during the first quarter of 2002 was 3.0%.  At March 31, 2002, these additional fundswere invested in investment securities.

 

 The increase in loans occurredprimarily in the residential mortgage, indirect auto and commercial loanportfolios.  From December 31, 2001 toMarch 31, 2002, residential mortgage loans increased by $24.0 million, or 1.8%,indirect auto loans (net of unearned discounts) increased by $27.8 million, or4.6% and commercial loans increased by $7.5 million, or 6.5%. The growth duringthe quarter ended March 31, 2002 is generally attributable to the improved andstable economic conditions which prevailed during this period.  Management decided (for Compass only) in thefirst quarter of 2002 to retain in portfolio all residential mortgage loanoriginations and has continued to emphasize the origination of indirect autoloans through its network of automobile dealers which has recently beenexpanded to include dealers in communities contiguous to the metropolitan Bostonarea.  The growth in commercial lendingwas primarily with existing customers to fund business expansion and seasonalborrowing needs.

 

Total deposits at March 31, 2002 were $2,253.1 million, an increase of$60.7 million, compared to $2,192.4 million at December 31, 2001.  Core deposit account balances increased by$58.6 million during the quarter.  Theincrease in core deposits during the quarter was generally attributable tonormal seasonal fluctuations and continued uncertainty in the stock market.  The slight growth in certificates ofdeposits was primarily the result of declining interest rates for this type ofproduct and consumers wanting to maintain a liquid position.

 

 The increase in stockholders’equity of $3.6 million to $309.3 million at March 31, 2002 resulted from thenet income of $8.9 million for the quarter ended March 31, 2002 which waspartially offset by cash dividends and stock repurchases totaling $3.9 million,and a decrease in the market value of investment securities of $2.0 million.  During 1999 and 2000, the Company announcedthree stock repurchase programs aggregating 3,486,212 shares.  As of May 15, 2002, 3,121,500 shares hadbeen repurchased leaving up to 364,712 shares for repurchase.  Management expects to fully repurchase theremaining shares under these programs during 2002.

 

**Comparison of Operating Results for the Quarters EndedMarch 31, 2002 and 2001**

*Interest Income.*  Interest income for the quarter ended March 31, 2002 was $53.2million, compared to $52.7 million for the quarter ended March 31, 2001, anincrease of $536,000, or 1.02%.  Theincrease in interest income resulted from growth in average interest-earningassets of $446.5 million, or 16.1%, partially offset by a decrease in theoverall yield on interest-earning assets of 99 basis points in the 2002period.  The principal areas of growthin average balances were related to investments (up $236.2 million, or 68.9%)and loans (up $210.3 million, or 8.7%). The funding growth in investment securities resulted from the sale ofmortgage loans and an increase in deposits and borrowings in excess of fundingloan requirements during the period. The increase in indirect auto loans resulted from the favorable interestrate environment and the continued emphasis of this lending product resultingfrom the expansion of participating dealers and locations.

 

 

11

----

 

*Interest Expense.*  Interest expense for the quarter ended March 31, 2002 was $24.4million compared to $28.7 million for the quarter ended March 31, 2001, adecrease of $4.3 million or 15.0%.  Thisdecrease resulted from a 1.26% decrease in the cost of all funds from 4.66% in2001 to 3.40% in 2002, partially offset by a higher average balance ofinterest-bearing liabilities (up $402.4 million, or 16.3%).  Average interest-bearing deposit balancesincreased $207.1 million, or 11.4%, during the quarter ended March 31, 2002compared to the same period in 2001.

 

Interest expense on borrowed funds increased $1.2 million in thequarter ended March 31, 2002 due to a $195.3 million increase in the averagebalance of such funds, partially offset by a decrease of 78 basis points in theaverage rate paid on borrowed funds to 5.07% in 2002 from 5.85% in 2001.

 

        The decrease in the overallcost of funds on interest-bearing liabilities are reflective of the aggressiveinterest rate reductions implemented by the Federal Reserve during the periodand the impact it has had on term deposits.

 

*Provision for Loan Losses.*  The Company provides for loan losses inorder to maintain the allowance for loan losses at a level that managementestimates is appropriate to absorb future charge-offs of loans deemeduncollectible.  In determining theappropriate level of the allowance for loan losses, management considers pastand anticipated loss experience, evaluations of real estate collateral,prevailing economic conditions, the nature and volume of the loan portfolio andthe levels of nonperforming and other classified loans.  The amount of the allowance is based onestimates and ultimate losses may vary from such estimates.  Management assesses the allowance for loanlosses on a quarterly basis and provides as necessary in order to maintain theadequacy of the allowance.  For a fulldiscussion on the Company’s allowance for loan losses policies see “Allowancefor Loan Losses” in the Company’s 2001 annual report on Form 10-K.

 

The Company provided $1.5 million for loan losses in the quarter endedMarch 31, 2002 compared to $1.4 million in the quarter ended March 31,2001.  The increase of $135,000 in 2002was primarily attributable to the growth in the loan portfolio.  The total allowance of $30.3 million atMarch 31, 2002 represented 1.15% of total loans compared to the same ratio of1.15% at December 31, 2001.  Theallowance for loan losses as a percentage of non-performing loans was 248.7%compared to 220.1% at December 31, 2001.

 

*Noninterest Income.*  Total noninterest income was $3.2 million for the quarter endedMarch 31, 2002 compared to $3.1 million in the same period of 2001, an increaseof $141,000.  This increase wasprimarily caused by increases on sales of investment securities, fees onchecking accounts and on other retail services on deposit accounts partiallyoffset by decreases in loan fees, loan servicing fees and other income.

 

*Noninterest Expense.*   Noninterest expense increased by $1.1 million or 6.8%, from$15.8 million for the quarter ended March 31, 2001 to $16.9 million for thequarter ended March 31, 2002.  This increasereflected increases in salaries and employee benefits ($1.4 million), occupancyand equipment ($15,000), data processing ($115,000), and other noninterestexpense ($410,000).  The increases innoninterest expenses were partically offset by decreases in marketing expenses($146,000), professional services ($198,000) and amortization of intangibles($528,000).

 

Salaries and employee benefits increased $1.4 million, or 17.7%, duringthe quarter ended March 31, 2002.  Thisincrease was the result of salary increases averaging 4.5%, the creation of theCredit Administration department, additions to staff in the Managed Assetsdepartment, an increase in commissions paid on loan refinancing activities, anincrease in sales incentive commissions paid on deposit gathering activitiesand other increases in staffing related to franchise expansion.

 

Data processing expenses increased $115,000, or 7.3%, during thequarter ended March 31, 2002 due primarily to volume-related services relatedto retail deposits and loans and increases due to ATM usage.  The increase on a comparative basis waspartially affected by a rate reduction given to the Company in 2001 from theservice provider of core data processing.

 

Marketing expenses decreased $146,000, or 23.6%, during the quarterended March 31, 2002.  This decrease wasprimarily attributable to a reduction in production costs for televisioncommercials and newspaper advertising, partially offset by increases inpromotions and other advertising media.

 

Professional services expenses decreased $198,000 or 24.6%, during thequarter ended March 31, 2002.  Thisdecrease was primarily the result of reductions in costs for tax services,consulting and legal fees associated with the start-up of Compass’s privatebanking initiative started in 2001.

 

 

12

----

 

 

     Amortization of goodwill andintangibles decreased $528,000, or 71.7%, during the quarter ending March 31,2002.  This decrease reflects primarilythe elimination of goodwill amortization (Note 2), partially offset by anincrease in the amortization of intangibles related to the acquisition ofdeposits from Charter Bank.

 

Other noninterest expense increased $410,000, or 21.5%, during thequarter ended March 31, 2002.  Thisincrease reflects primarily volume-related items such as printing, postage andtelephone costs.

 

*IncomeTaxes.* Theeffective tax rate for the quarter ended March 31, 2002 was 34.6% compared to31.2% in the same period in 2001.  Thisincrease from 2001 reflects the impact of the reduction in the provision forincome taxes of $479,000 recorded in the quarter ended March 31, 2001.  Exclusive of this non-recurring item, theeffective tax rate in 2001 was 36.1%. The decrease in 2002 reflects primarily the impact of nondeductiblegoodwill amortization in 2001.

 

**Liquidity and 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’sprimary sources of funds are deposits, borrowings, principal and interestpayments on outstanding loans and mortgage-backed securities, maturities ofinvestment securities and funds provided from operations.  While scheduled payments from the amortizationof loans and mortgage related securities and maturing investment securities arerelatively predictable sources of funds, deposit flows and loan prepayments aregreatly influenced by general interest rates and, in the case of deposits,other instruments available to the public such as mutual funds and annuities.

 

As voluntarymembers of the Federal Home Loan Bank of Boston (FHLB), Compass and NantucketBank are entitled to borrow an amount up to the value of its qualifiedcollateral that has not been pledged to others.  Qualified collateral generally consists of residential firstmortgage loans, U.S. Government and agency securities and funds on depositspecifically pledged to the FHLB.  AtMarch 31, 2002, Compass and Nantucket Bank had approximately $394.5 million and$46 million, respectively, in unused borrowing capacity that is contingent uponthe purchase of additional FHLB stock. Use of this borrowing capacity may also be impacted by regulatorycapital requirements.

 

Liquiditymanagement is both a daily and long-term function of business management.  The measure of a Bank’s liquidity is itsability to meet its cash commitments at all times with available cash or byconversion of other assets to cash at a reasonable price.  At March 31, 2002, the Company maintainedcash and due from banks, federal funds sold, short-term investments and debtsecurities maturing within one year of $235.6 million, or 6.83% of totalassets.  The Company invests excessfunds, if any, in federal funds sold which provides liquidity to meet lendingrequirements.

 

At March 31, 2002,The Company had commitments to originate loans, unused outstanding lines ofcredit, standby letters of credit and undisbursed proceeds of loans totaling$270.6 million.  The Company anticipatedthat it will have sufficient funds available to meet its current loancommitments.  Certificates of depositmaturing within one year from March 31, 2002 amounted to $750.3 million.  The Company expects that a significant portionof maturing certificate accounts will be retained at maturity.

 

The Company’s andthe Banks’ capital ratios at March 31, 2002 were as follows:

 
|                                    |   | **Seacoast Financial** |   | **Compass Bank** |   | **Nantucket** |   |
|-----------------------------------------|--------|------------------------|--------|------------------|--------|---------------|--------|
| Total Capital (to risk weighted assets) |   | 13.20                  | %      | 12.12            | %      | 16.26         | %      |
| Tier 1 Capital (to risk weighed assets) |   | 11.92                  |   | 10.86            |   | 14.99         |   |
| Tier 1 Capital (to average assets)      |   | 8.08                   |   | 7.34             |   | 9.62          |   |

 

These ratiosplaced the Company in excess of regulatory standards and the Banks in the “wellcapitalized” category as set forth by the FDIC.

 

 

13

----

 

**Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk**

 

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

 

 The principal strategies that the Companygenerally uses to manage interest rate risk include (i) emphasizing the originationand retention of adjustable-rate loans, origination of indirect auto loans(Compass only) which have relatively short maturities and origination of loanswith maturities at least partly matched with those of the deposits andborrowings funding the loans, ( ii ) investing in debt securities withrelatively short maturities and (iii) classifying a significant portion of itsinvestment portfolio as available for sale so as to provide sufficientflexibility in liquidity management.

 

The Company andthe 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 less than 5%.

 

In utilizing a 300basis point increase in rates in its simulation model, the full impact ofannual rate caps of 200 basis points common to most adjustable rate mortgageloan products is considered.  The rateshocks used assume an instantaneous and parallel change in interest rates andthat no strategies are implemented in response to the change in interestrates.  Prepayment speeds for loans arebased on published median dealer forecasts for each interest rate scenario.

 

As of March 31,2002, the Company’s estimated exposure as a percentage of estimated netinterest income for the next twelve and twenty-four month periods is asfollows:

 

|                                       |   | **Percentage Change in Estimated** |   |
|--------------------------------------------|--------|------------------------------------|--------|
|                                       |   | **Net Interest Income Over:**      |   |
|                                       |   | **12 months**                      |   | **24 months** |   |
| 300 basis point increase in rates          |   | (9.32                              | )%     | (8.78 | )% |
| 150 basis point decrease in rates (Note 1) |   | 1.07                               | %      | (0.36 | )% |
|                                            |        |                                    |        |  |  |  |  |  |

 

For each onepercentage point change in net interest income, the effect on net income wouldbe $819,000, assuming a 36% tax rate.

 

(1)   Due to the low interest rate environment ineffect at March 31, 2002 (the average Federal Fund overnight rates were tradingbelow 2%) the simulation model could only be rate shocked down 150 basispoints.

 

 

 

14

----

 

**PARTII - OTHER INFORMATION**

 

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

### 

 

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

 

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

 

Not applicable.

 

**Item3.  Defaults Upon Senior Securities**

 

Not applicable.

 

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

#### ** **

Not applicable.

 

###### **Item 5.  OtherInformation**

###### ** **

Not applicable.

 
| **Item 6.** | **Exhibits  and Reports on Form 8****-****K**                                                                                                                                                                                          |
|-------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |                                                                                                                                                                                                                                   |
| a.          | Exhibits:                                                                                                                                                                                                                              |
|        |                                                                                                                                                                                                                                   |
| 2.1         | Agreement and Plan of  Merger by and between Seacoast Financial Services Corporation and Home Port  Bancorp, Inc. date as of July 20, 2000++++++                                                                                       |
|        |                                                                                                                                                                                                                                   |
| 2.2         | Stock Option Agreement  between Home Port Bancorp, Inc. and Seacoast Financial Services Corporation  dated as of July 20, 2000++++++                                                                                                   |
|        |                                                                                                                                                                                                                                   |
| 3.1         | Articles of  Organization of Seacoast Financial Services Corporation+++                                                                                                                                                                |
|        |                                                                                                                                                                                                                                   |
| 3.2         | By-Laws of Seacoast  Financial Services Corporation+++                                                                                                                                                                                 |
|        |                                                                                                                                                                                                                                   |
| 4           | Specimen certificate  for the common stock of Seacoast Financial Services Corporation++                                                                                                                                                |
|        |                                                                                                                                                                                                                                   |
| 10.1*       | Form of Employment  Agreement by and among Seacoast Financial Services Corporation, Compass Bank  for Savings and Kevin G. Champagne+                                                                                                  |
|        |                                                                                                                                                                                                                                   |
| 10.2*       | Form of Employment  Agreement by and among Compass Bank for Savings, Seacoast Financial Services  Corporation and certain Officers of Compass Bank for Savings+                                                                        |
|        |                                                                                                                                                                                                                                   |
| 10.3*       | Form of Change in  Control Agreements by and among Seacoast Financial Services Corporation,  Compass Bank for Savings, Kevin G. Champagne and certain other Officers of  Compass Bank for Savings+                                     |
|        |                                                                                                                                                                                                                                   |
| 10.4*       | Form of Change in  Control Agreement by and among Seacoast Financial Services Corporation,  Compass Bank for Savings and certain Officers of Compass Bank for Savings+                                                                 |
|        |                                                                                                                                                                                                                                   |
| 10.5*       | Form of Executive  Salary Continuation Agreements made and entered into by and between Compass  Bank for Savings and Kevin G. Champagne, Arthur W. Short, John D. Kelleher  and Francis S. Mascianica and forms of amendments thereto+ |

 

 

15

----

 
| 10.6*  | Trust Agreement, made  as of December 18, 1992, by and between Compass Bank for Savings and Shawmut  Bank, N.A.+                                                                                                 |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                             |
| 10.7*  | Compass Bank for  Savings January 2000 Incentive Compensation Plan +++++                                                                                                                                         |
|   |                                                                                                                                                                                                             |
| 10.12* | Compass Bank for  Savings Executive Deferred Compensation Plan+                                                                                                                                                  |
|   |                                                                                                                                                                                                             |
| 10.13* | Rabbi Trust for Compass  Bank for Savings Executive Deferred Compensation Plan+                                                                                                                                  |
|   |                                                                                                                                                                                                             |
| 10.17* | Sandwich Co-operative  Bank 1992 Directors Deferred Compensation Plan+                                                                                                                                           |
|   |                                                                                                                                                                                                             |
| 10.20* | Seacoast Financial  Services Corporation 1999 Stock Incentive Plan++++                                                                                                                                           |
|   |                                                                                                                                                                                                             |
| 11     | A statement regarding  earnings per share is included in Item 1, Note 5, of this report.                                                                                                                         |
|   |                                                                                                                                                                                                             |
| b.     | Reports on Form 8-K: On  January 12, 2001, a Form 8-K was filed and on March 15, 2001 Amendment No. 1  to Form 8-K was filed, both in connection with the Company’s acquisition of  Home Port Bancorp, Inc. |
|   |                                                                                                                                                                                                             |
| 12     | Reports on Form S-3:  On April 16, 2002 a form S-3 was filed and  on May 9, 2002 Amendment No. 1 to                                                                                                         |
|   | Form S-3 was filed, both  in connection with the Company’s issuance of Cumulative Trust Preferred  Securities.                                                                                              |
|   |                                                                                                                                                                                                             |
| 13     | Report on Form 8-K:  On May 2, 2002 a form 8-K was filed in  connection with the Company’s first quarter financial results as of March 31,  2002.                                                      |

 

----

 
| *      | Management  compensatory plan or arrangement.                                                                                                                                                                                                                  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                           |
| +      | Incorporated by reference  to the Company’s Registration Statement on Form S-1 (333-52889), filed with  the Securities and Exchange Commission under the Company’s prior name, “The  1855 Bancorp”, on May 15, 1998.                       |
|   |                                                                                                                                                                                                                                                           |
| ++     | Incorporated by reference  to Amendment No. 1 to the Company’s Registration Statement on Form S-1  (333-52889), filed with the Securities and Exchange Commission under the  Company’s prior name, “The 1855 Bancorp”, on August 14, 1998. |
|   |                                                                                                                                                                                                                                                           |
| +++    | Incorporated by reference  to the Company’s Registration Statement on Form 8-A filed with the Securities  and Exchange Commission on November 18, 1998.                                                                                                   |
|   |                                                                                                                                                                                                                                                           |
| ++++   | Incorporated by reference  to the Company’s Proxy Statement on Schedule 14A filed with the Securities  and Exchange Commission on April 16, 1999.                                                                                                         |
|   |                                                                                                                                                                                                                                                           |
| +++++  | Incorporated by reference  to the Company’s Annual Report on Form 10-K filed with the Securities and  Exchange Commission on March 28, 2000.                                                                                                              |
|   |                                                                                                                                                                                                                                                           |
| ++++++ | Incorporated by reference  to the Company’s Current Report on Form 8-K filed with the SEC on August 3,  2000.                                                                                                                                             |

 

 

 

16

----

 

**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: May 15, 2002 | By  /s/ Kevin G. Champagne |   |
|               | Kevin G. Champagne |
|               | President and Chief  Executive Officer |
|               |
| Date: May 15, 2002 | By  /s/  Francis S. Mascianica, Jr. |   |
|               | Francis S. Mascianica, Jr. |
|               | Treasurer, as Principal |
|               | Financial and Accounting Officer |
|               |
|                    |  |  |  |  |  |  |

 

 

17

----