SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549 
 FORM 10-Q  (Mark
One)  ý
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
  SECURITIES EXCHANGE ACT OF 1934.FOR
  THE QUARTER ENDED JUNE 30, 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(Exact Name 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/AFormer Name,
  Former Address and Former Fiscal Year if Changed Since Last Report
  Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  YesýNoo  At August 14, 2002, the
Company had 23,962,026 shares of common stock outstanding. 
  
   SEACOAST
FINANCIAL SERVICES CORPORATION INDEX  PART I
  - FINANCIAL INFORMATIONItem 1.
  Financial Statements
  (Unaudited)Consolidated Balance Sheets
  at June 30, 2002 and December 31, 2001Consolidated
  Statements of Income for the three months and six months ended June 30, 2002
  and 2001Consolidated
  Statements of Changes in Stockholders Equity for the six months ended June
  30, 2002 and 2001Consolidated
  Statements of Cash Flows for the six months ended June 30, 2002 and 2001Notes
  to Unaudited Consolidated Financial StatementsItem
  2.
  Managements
  Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital
  ResourcesItem
  3.
  Quantitative
  and Qualitative Disclosures about Market RiskPART II - OTHER INFORMATIONItem 1.
  Legal ProceedingsItem
  2.
  Changes
  in Securities and Use of ProceedsItem 3.
  Defaults upon
  Senior SecuritiesItem
  4.
  Submission
  of Matters to a Vote of Security HoldersItem 5.
  Other InformationItem 6.
  Exhibits and
  Reports on Form 8KSIGNATURES  
   SEACOAST
FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In
thousands, except share amounts)  June 30,
  2002
  
  December
  31,
  2001(Unaudited)ASSETSCash
  and due from banks
  
  $
  120,347
  
  $
  87,834Federal
  funds sold
  
  111,891
  
  92,899Short-term
  investments
  
  10,000
  
  10,000Total
  cash and cash equivalents
  
  242,238
  
  190,733Investment
  securitiesAvailable-for-sale,
  at fair value
  
  452,193
  
  405,788Held-to-maturity,
  at amortized cost
  
  19,378
  
  20,551Restricted
  equity securities
  
  42,722
  
  40,837Loans
  held-for-sale
  
  4,960
  
  19,675Loans,
  net (Note 3)
  
  2,714,425
  
  2,545,469Accrued
  interest receivable
  
  18,477
  
  15,872Banking
  premises and equipment, net
  
  52,466
  
  51,294Other
  real estate owned, net
  
  415
  
  427Net
  deferred tax asset
  
  10,006
  
  9,895Goodwill
  (Note 2)
  
  33,903
  
  33,903Intangible
  assets (Note 2)
  
  1,960
  
  2,370Other
  assets
  
  9,829
  
  10,653Total
  assets
  
  $
  3,602,972
  
  $
  3,347,467LIABILITIES
  AND STOCKHOLDERS EQUITYDeposits
  (Note 4)
  
  $
  2,329,392
  
  $
  2,192,357Short-term
  borrowings
  
  44,802
  
  34,584Federal
  Home Loan Bank advances
  
  827,593
  
  786,917Other
  borrowings
  
  1,808
  
  1,840Mortgagors
  escrow payments
  
  3,334
  
  4,761Accrued
  expenses and other liabilities
  
  25,930
  
  21,284Total
  liabilities
  
  $
  3,232,859
  
  $
  3,041,743Guaranteed Preferred
  Beneficial Interests in our Junior Subordinated Deferrable Interest
  Debentures (Note 9)
  
  55,047
  
  COMMITMENTS
  AND CONTINGENCIESStockholders
  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
  
  268Additional
  paid-in capital
  
  153,633
  
  153,216Retained
  earnings
  
  203,233
  
  189,743Treasury
  stock, at cost, 2,764,910 shares in 2002 and 2,439,000 shares in 2001
  
  (35,493
  )
  (28,185
  )Accumulated
  other comprehensive income
  
  5,386
  
  3,531Unearned
  compensation - ESOP and restricted stock
  
  (11,671
  )
  (12,575
  )Shares
  held in employee trust
  
  (290
  )
  (274
  )Total
  stockholders equity
  
  315,066
  
  305,724Total
  liabilities and stockholders equity
  
  $
  3,602,972
  
  $
  3,347,467  See accompanying notes to
the unaudited consolidated financial statements.  1 
   SEACOAST
FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In
thousands, except per share amounts)  Three
  MonthsEnded
  June 30,
  
  Six Months
  Ended
  June 30,2002
  
  2001
  
  2002
  
  2001INTEREST
  AND DIVIDEND INCOMEInterest
  on loans
  
  $
  47,180
  
  $
  48,434
  
  $
  94,103
  
  $
  95,712Interest
  and dividends on investment securities
  
  6,551
  
  4,742
  
  12,398
  
  9,713Interest
  on federal funds sold and short-term investments
  
  305
  
  716
  
  735
  
  1,197Total
  interest and dividend income
  
  54,036
  
  53,892
  
  107,236
  
  106,622INTEREST
  EXPENSEInterest
  on deposits
  
  13,057
  
  18,507
  
  26,781
  
  37,774Interest
  on borrowed funds
  
  10,738
  
  10,242
  
  21,419
  
  19,706Total
  interest expense
  
  23,795
  
  28,749
  
  48,200
  
  57,480Net
  interest income
  
  30,241
  
  25,143
  
  59,036
  
  49,142PROVISION
  FOR LOAN LOSSES
  
  2,000
  
  1,475
  
  3,535
  
  2,875Net
  interest income after provision for loan losses
  
  28,241
  
  23,668
  
  55,501
  
  46,267NONINTEREST
  INCOMEDeposit
  and other banking fees
  
  2,461
  
  1,978
  
  4,633
  
  3,821Loan
  servicing fees, net
  
  235
  
  248
  
  432
  
  529Merchant
  card fee income, net
  
  334
  
  351
  
  501
  
  482Other
  loan fees
  
  334
  
  363
  
  568
  
  721Gain
  (loss) on investment securities, net
  
  (233
  )
  15
  
  (92
  )
  14Gain
  on sales of loans, net
  
  99
  
  182
  
  182
  
  221Other
  income
  
  391
  
  428
  
  602
  
  775Total
  non-interest income
  
  3,621
  
  3,565
  
  6,826
  
  6,563NONINTEREST
  EXPENSESalaries
  and employee benefits
  
  9,283
  
  8,051
  
  18,696
  
  16,051Occupancy
  and equipment expenses
  
  2,276
  
  2,213
  
  4,447
  
  4,368Data
  processing expenses
  
  1,800
  
  1,459
  
  3,500
  
  3,044Marketing
  expenses
  
  770
  
  913
  
  1,243
  
  1,532Professional
  services expenses
  
  623
  
  677
  
  1,231
  
  1,483Amortization
  of goodwill and intangibles (Note 2)
  
  206
  
  734
  
  414
  
  1,470Other
  operating expenses
  
  2,130
  
  2,020
  
  4,446
  
  3,926Total
  non-interest expense
  
  17,088
  
  16,067
  
  33,977
  
  31,874Minority
  interest expense (Note 9)
  
  407
  
  
  
  407
  
  Income
  before provision for income taxes
  
  14,367
  
  11,166
  
  27,943
  
  20,956PROVISION
  FOR INCOME TAXES
  
  5,083
  
  4,165
  
  9,785
  
  7,224Net
  income
  
  $
  9,284
  
  $
  7,001
  
  $
  18,158
  
  $
  13,732EARNINGS
  PER SHARE (Note 5):Basic
  
  $
  0.40
  
  $
  0.30
  
  $
  0.79
  
  $
  0.59Diluted
  
  $
  0.39
  
  $
  0.29
  
  $
  0.77
  
  $
  0.58  See accompanying notes to
the unaudited consolidated financial statements.  2 
   SEACOAST
FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS EQUITY FOR THE SIX MONTHS
ENDED JUNE 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
  /RestrictedStock
  
  Shares
  Held
  In
  Employee
  Trust
  
  TotalBalance,
  December 31, 2000
  
  $
  268
  
  $
  152,795
  
  $
  166,865
  
  $
  (17,990
  )
  $
  791
  
  $
  (14,384
  )
  $
  (157
  )
  $
  288,188Exercise
  of stock options
  
  
  
  18
  
  
  
  221
  
  
  
  
  
  
  
  239Repurchase
  of common stock (Note 7)
  
  
  
  
  
  
  
  (3,043
  )
  
  
  
  
  
  
  (3,043
  )Net
  income
  
  
  
  
  
  13,732
  
  
  
  
  
  
  
  
  
  13,732Other
  comprehensive incomeChange in unrealized gain on securities available
  for sale, net of taxes
  
  
  
  
  
  
  
  
  
  1,342
  
  
  
  
  
  1,342Comprehensive
  income
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  15,074Cash
  dividends - $.16 per share
  
  
  
  
  
  (3,824
  )
  
  
  
  
  
  
  
  
  (3,824
  )Amortization
  of unearned compensation
  
  
  
  104
  
  
  
  
  
  
  
  904
  
  
  
  1,008Other
  
  
  
  131
  
  
  
  
  
  
  
  
  
  (58
  )
  73Balance,
  June 30, 2001
  
  $
  268
  
  $
  153,048
  
  $
  176,773
  
  $
  (20,812
  )
  $
  2,133
  
  $
  (13,480
  )
  $
  (215
  )
  $
  297,715Balance,
  December 31, 2001
  
  $
  268
  
  $
  153,216
  
  $
  189,743
  
  $
  (28,185
  )
  $
  3,531
  
  $
  (12,575
  )
  $
  (274
  )
  $
  305,724Exercise
  of stock options
  
  
  
  139
  
  
  
  242
  
  
  
  
  
  
  
  381Repurchase
  of common stock (Note 7)
  
  
  
  
  
  
  
  (7,550
  )
  
  
  
  
  
  
  (7,550
  )Net
  income
  
  
  
  
  
  18,158
  
  
  
  
  
  
  
  
  
  18,158Other
  comprehensive incomeChange in unrealized gain on securities available
  for sale, net of taxes
  
  
  
  
  
  
  
  
  
  1,855
  
  
  
  
  
  1,855Comprehensive
  income
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  
  20,013Cash
  dividends - $.20 per share
  
  
  
  
  
  (4,668
  )
  
  
  
  
  
  
  
  
  (4,668
  )Amortization
  of unearned compensation
  
  
  
  285
  
  
  
  
  
  
  
  904
  
  
  
  1,189Other
  (Note 9)
  
  
  
  (7
  )
  
  
  
  
  
  
  
  
  (16
  )
  (23
  )Balance,
  June 30, 2002
  
  $
  268
  
  $
  153,633
  
  $
  203,233
  
  $
  (35,493
  )
  $
  5,386
  
  $
  (11,671
  )
  $
  (290
  )
  $
  315,066  See accompanying notes to
the unaudited consolidated financial statements.  3 
   SEACOAST
FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (Unaudited) (In
Thousands)  2002
  
  2001CASH
  FLOWS FROM OPERATING ACTIVITIES:Net
  income
  
  $
  18,158
  
  $
  13,732Adjustments
  to reconcile net income to net cash provided by operating activitiesDepreciation
  
  2,169
  
  1,992Amortization
  and accretion, net
  
  1,040
  
  1,418Purchase
  accounting amortization, net
  
  485
  
  (276
  )Stock-based
  compensation
  
  1,189
  
  1,008Provision
  for loan losses
  
  3,535
  
  2,875(Gain)
  loss on investment securities, net
  
  92
  
  (14
  )Other
  real estate owned losses (income)
  
  
  
  (47
  )Gain
  on sale of fixed assets
  
  (97
  )
  (103
  )Benefit
  for deferred taxes
  
  (1,105
  )
  (877
  )Originations
  of loans held-for-sale
  
  (4,616
  )
  (16,222
  )Proceeds
  from sales of loans originated for sale
  
  19,513
  
  15,750Gain
  on sales of loans, net
  
  (182
  )
  (221
  )Net
  increase in accrued interest receivable
  
  (2,605
  )
  (1,156
  )Net
  (increase) decrease in other assets
  
  824
  
  (100
  )Net
  increase in accrued expenses and other liabilities
  
  4,660
  
  675Net
  cash provided by operating activities
  
  43,060
  
  18,434CASH
  FLOWS FROM INVESTING ACTIVITIES:Purchase
  of securities classified as available-for-sale
  
  (129,993
  )
  (39,259
  )Purchase
  of securities classified as held-to-maturity
  
  (1,098
  )
  (1,038
  )Purchase
  of restricted equity securities
  
  (1,885
  )
  (9,039
  )Proceeds
  from sales, calls, paydowns and maturities of securities classified as
  available-for-sale
  
  85,303
  
  42,745Proceeds
  from calls, paydowns and maturities of securities classified as
  held-to-maturity
  
  2,200
  
  9,855Purchase
  of loans
  
  
  
  (1,300
  )Net
  increase in loans
  
  (172,847
  )
  (186,963
  )Recoveries
  of loans previously charged off
  
  278
  
  194Proceeds
  from sales of other real estate owned
  
  18
  
  23Proceeds
  from sales of fixed assets
  
  338
  
  262Purchase
  of premises and equipment
  
  (3,601
  )
  (3,191
  )Net
  cash used in investing activities
  
  (221,287
  )
  (187,711
  )  4 
   2002
  
  2001CASH
  FLOWS FROM FINANCING ACTIVITIES:Increase
  in NOW, money market deposit and demand deposit accounts
  
  $
  93,567
  
  $
  55,029Increase
  in passbook and other savings accounts
  
  30,353
  
  16,468Increase
  (decrease) in certificates of deposit
  
  13,145
  
  (11,294
  )Advances
  from Federal Home Loan Bank
  
  139,500
  
  305,946Repayments
  of Federal Home Loan Bank advances
  
  (98,802
  )
  (114,115
  )Increase
  (decrease) in short-term and other borrowings
  
  10,186
  
  (18
  )Decrease
  in mortgagors escrow payments
  
  (1,427
  )
  (266
  )Net
  proceeds issuance of junior subordinated deferrable interest debentures
  
  55,047
  
  Exercise
  of stock options
  
  381
  
  239Tax
  benefit of stock awards
  
  
  
  131Repurchase
  of common stock
  
  (7,550
  )
  (3,043
  )Cash
  dividends
  
  (4,668
  )
  (3,824
  )Net
  cash provided by financing activities
  
  229,732
  
  245,253Net
  increase in cash and cash equivalents
  
  51,505
  
  75,976Cash
  and cash equivalents, beginning of year
  
  190,733
  
  107,513Cash
  and cash equivalents, end of period
  
  $
  242,238
  
  $
  183,489Supplemental
  disclosure of cash flow information:Interest
  paid on deposits and borrowed funds
  
  $
  48,340
  
  $
  56,695Income
  taxes paid
  
  6,284
  
  9,443Supplemental
  disclosure of noncash transactions:Transfers
  from loans to other real estate owned
  
  82
  
  446Financed
  sales of other real estate owned
  
  76
  
    See accompanying
notes to the unaudited consolidated financial statements.  5 
   SEACOAST FINANCIAL SERVICES
CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS JUNE 30, 2002 AND 2001  (1)BASIS OF
PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES  Basis of Presentation  The unaudited consolidated financial statements of Seacoast Financial
Services Corporation and its wholly-owned subsidiaries, 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 herein should be read in conjunction with
the consolidated financial statements of the Company as of and for the year
ended December 31, 2001 included as part of its Form 10-K.  All intercompany accounts have been
eliminated in the consolidation.  In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of normal recurring adjustments)
and disclosures necessary for a fair presentation.  Management is required to make estimates and assumptions that
affect amounts reported in the financial statements.  Actual results could differ significantly from those estimates.  The results of operations for the three and
six month periods ended June 30, 2002 
and 2001 are not necessarily indicative of the results that may be
expected for the entire fiscal year.  Summary of Significant Accounting Policies  The Companys significant accounting policies are described in Note 1
of the Notes to Consolidated Financial Statements included in its Form 10-K for
the year ended December 31, 2001 filed with the Securities and Exchange
Commission.  For interim reporting
purposes, the Company follows the same significant accounting policies.  Reclassifications  Certain reclassifications have been made to the prior period financial
statements to conform to the 2002 presentation.  Such reclassifications have no effect on previously reported net
income.  (2)  GOODWILL AND OTHER INTANGIBLE ASSETS  In June 2001, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142) which is effective for fiscal years beginning
after December 15, 2001.  The Company
adopted SFAS 142 as of January 1, 2002. 
SFAS 142 addresses the method of identifying and measuring goodwill and
other intangible assets having indefinite lives acquired in a business
combination, eliminates further amortization of goodwill, and requires periodic
impairment evaluations of goodwill using a fair value methodology prescribed in
the statement.  As a result of adopting
SFAS 142, the Company no longer amortizes the goodwill balance of $33.9
million, which reduced goodwill amortization and increased net income by $606,000
in the second quarter of 2002.  An
initial impairment test was required to be performed by June 30, 2002 and
thereafter is required at least annually or more frequently as a result of an
event or change in circumstances (e.g. recurring operating losses by the
acquired entity) that would indicate an impairment adjustment may be
necessary.  The Company completed its
initial impairment test during the second quarter of 2002 and determined an
impairment charge is not required.  6 
   Prior to adoption of SFAS 142, goodwill was being amortized on a
straight-line basis over 15 years.  For
the three months and six months ended June 30, 2001 goodwill amortization
expense was $606,000 and $1,212,000, respectively.  Actual results of operations for the three and six month periods
ended June 30, 2002 and pro forma results of operations for the three month and
six month periods ended June 30, 2001 as if SFAS 142 had been adopted as of
January 1, 2001 are as follows:  Three
  Months Ending
  
  Six Months
  EndingJune 30,
  2002
  
  June 30,
  2001
  
  June 30,
  2002
  
  June 30,
  2001(In
  thousands)Reported net income
  
  $
  9,284
  
  $
  7,001
  
  $
  18,158
  
  $
  13,732Add: 
  Goodwill amortization, net of tax
  
  
  
  606
  
  
  
  1,212Adjusted net income
  
  $
  9,284
  
  $
  7,607
  
  $
  18,158
  
  $
  14,944Weighted average common shares o/s  basic
  
  22,913,994
  
  23,410,423
  
  22,996,819
  
  23,446,690Weighted average common and common stock
  Equivalent shares o/s  diluted
  
  23,545,425
  
  23,746,741
  
  23,577,139
  
  23,742,432Basic earnings per share:Reported net income
  
  $
  0.40
  
  $
  0.30
  
  $
  0.79
  
  $
  0.59Add: goodwill amortization, net of tax
  
  
  
  0.03
  
  
  
  0.05Adjusted net income
  
  $
  0.40
  
  $
  0.33
  
  $
  0.79
  
  $
  0.64Diluted earnings per share:Reported net income
  
  $
  0.39
  
  $
  0.29
  
  $
  0.77
  
  $
  0.58Add: 
  goodwill amortization, net of tax
  
  
  
  0.03
  
  
  
  0.05Adjusted net income
  
  $
  0.39
  
  $
  0.32
  
  $
  0.77
  
  $
  0.63  At June 30, 2002, the Company has $2.0 million in unamortized
identifiable intangible assets consisting of core deposit intangibles and other
intangibles.  Total amortization expense
associated with these intangibles assets for the six months ending June 30,
2002 and June 30, 2001 was $414,000 and $258,000, respectively.  The changes in the carrying of goodwill and other intangibles assets
for the six months ended June 30, 2002 are as follows:  Goodwill
  
  Core
  Deposit
  Intangibles
  
  Other
  Intangibles
  
  Total
  Intangibles(In
  thousands)Balance, December 31, 2001
  
  $
  33,903
  
  $
  2,263
  
  $
  107
  
  $
  36,273Recorded during the period
  
  
  
  
  
  4
  
  4Amortization expense
  
  
  
  (371
  )
  (43
  )
  (414
  )Impairment recognized
  
  
  
  
  
  
  
  Balance, June 30, 2002
  
  $
  33,903
  
  $
  1,892
  
  $
  68
  
  $
  35,863Estimated amortization expense:2002
  
  
  
  $
  724
  
  $
  90
  
  $
  8142003
  
  
  
  608
  
  14
  
  6222004
  
  
  
  314
  
  7
  
  3212005
  
  
  
  208
  
  
  
  2082006
  
  
  
  $
  166
  
  
  
  $
  166
  7 
   The
components of other intangibles assets follows:  June 30,
  2002Gross
  Carrying
  Amount
  
  Accumulated
  Amortization
  
  Net
  Carrying
  Amount(In
  thousands)Intangible assets:Core deposit intangibles
  
  $
  4,424
  
  $
  2,532
  
  $
  1,892Other intangibles
  
  220
  
  152
  
  68Total
  
  $
  4,644
  
  $
  2,684
  
  $
  1,960  (3)LOANS  The loan portfolio
consisted of the following: June 30,
  2002
  
  December
  31,
  2001(In
  thousands)Real
  estate loans:Residential
  (one-to-four family)
  
  $
  1,359,841
  
  $
  1,311,606Commercial
  
  345,382
  
  337,277Construction
  
  112,877
  
  108,556Home
  equity lines of credit
  
  59,519
  
  45,709Total
  real estate loans
  
  1,877,619
  
  1,803,148Commercial
  loans
  
  135,452
  
  115,562Consumer
  loans:Indirect
  auto loans
  
  680,832
  
  601,884Less-unearned
  discount
  
  670
  
  1,651Indirect
  auto loans, net
  
  680,162
  
  600,233Other
  
  52,823
  
  56,039Total
  consumer loans, net
  
  732,985
  
  656,272Total
  loans
  
  2,746,056
  
  2,574,982Less-allowance
  for loan losses
  
  31,631
  
  29,513$
  2,714,425
  
  $
  2,545,469  Non-accrual loans
amounted to $13,408,000 and $12,884,000 at December 31, 2001 and June 30, 2002,
respectively.  8 
   (4)   DEPOSITS  A summary of deposit balances is as follows:  June 30,
  2002
  
  December
  31,
  2001(In
  thousands)Demand deposit accounts
  
  $
  213,271
  
  $
  180,916NOW and money market deposit accounts
  
  805,366
  
  744,155Passbook and other savings accounts
  
  305,516
  
  275,163Total non-certificate accounts
  
  1,324,153
  
  1,200,234Certificates of deposit -Term certificates of $100,000 and over
  
  273,843
  
  268,326Term certificates less than $100,000
  
  731,396
  
  723,797Total certificates of deposit
  
  1,005,239
  
  992,123$
  2,329,392
  
  $
  2,192,357  (5)   EARNINGS
PER SHARE (EPS)  Basic EPS for the three months and six months ended June 30, 2002 and
2001 was computed based on the weighted average number of shares outstanding
during the periods using the following share balances:  2002
  
  2001Three months ended
  
  22,913,994
  
  23,410,423Six months ended
  
  22,996,819
  
  23,446,690  Unvested restricted stock awards and unallocated ESOP shares (except
for the pro rated shares to be allocated in 2002) are not considered
outstanding for purposes of the computation of basic EPS and have been excluded
from the shares presented above.  Diluted
EPS reflects the potential dilution that could occur if certain agreements to
issue common stock were exercised and has been computed after giving
consideration to the dilutive effect of the Companys stock options and
unvested restricted stock awards.  (6)   BUSINESS
SEGMENT INFORMATION  The community
banking business segment consists of commercial and retail banking.  Banking services are provided within the
framework of two full-service community banks which have similar economic
characteristics, products and services, distribution channels and regulatory
environments.  Accordingly,
disaggregated segment information for each bank is not presented.  The community-banking segment derives its
revenues from a wide range of banking services, including investing and lending
activities and acceptance of demand, savings and time deposits, merchant credit
card services as well as servicing loans for investors.  There is no major customer, as defined, and
the 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 do not have similar
characteristics to the community banking operations and do not meet the
quantitative thresholds requiring disclosure, are included in the Other
category in the disclosure of business segments below.  These non-reportable segments include the
Parent Company.  9 
   Reportable segment
specific information and reconciliation to consolidated financial information
as of June 30, 2002 and 2001and for the six-month periods then ended are as
follows (in thousands):  Community
  Banking
  
  Other
  
  Other
  Adjustments
  And Eliminations
  
  ConsolidatedJune 30, 2002Investment
  securities
  
  $
  511,283
  
  $
  3,010
  
  $
  
  
  $
  514,293Net
  loans
  
  2,714,425
  
  10,145
  
  (10,145
  )
  2,714,425Total
  assets
  
  3,599,513
  
  374,923
  
  (371,464
  )
  3,602,972Total
  deposits
  
  2,330,105
  
  
  
  (713
  )
  2,329,392Total
  borrowings
  
  874,203
  
  
  
  
  
  874,203Total
  liabilities
  
  3,232,279
  
  580
  
  
  
  3,232,859Net
  interest income
  
  58,966
  
  466
  
  (396
  )
  59,036Provision
  for loan losses
  
  3,535
  
  
  
  
  
  3,535Noninterest
  income
  
  5,463
  
  1,369
  
  (6
  )
  6,826Noninterest
  expense
  
  33,436
  
  541
  
  
  
  33,977Net
  income
  
  $
  17,668
  
  $
  18,158
  
  $
  (17,668
  )
  $
  18,158June
  30, 2001Investment
  securities
  
  $
  302,586
  
  $
  3,864
  
  $
  
  
  $
  306,450Net
  loans
  
  2,524,415
  
  10,439
  
  (10,439
  )
  2,524,415Total
  assets
  
  3,148,363
  
  298,523
  
  (294,252
  )
  3,152,634Total
  deposits
  
  2,050,902
  
  
  
  (1,099
  )
  2,049,803Total
  borrowings
  
  782,057
  
  
  
  
  
  782,057Total
  liabilities
  
  2,854,111
  
  808
  
  
  
  2,854,919Net
  interest income
  
  49,038
  
  511
  
  (407
  )
  49,142Provision
  for loan losses
  
  2,875
  
  
  
  
  
  2,875Noninterest
  income
  
  6,563
  
  
  
  
  
  6,563Noninterest
  expense
  
  31,150
  
  724
  
  
  
  31,874Net
  income
  
  $
  13,874
  
  $
  13,732
  
  $
  (13,874
  )
  $
  13,732  (7)STOCK REPURCHASE PROGRAMS  In July 1999, the Board of Directors authorized the Company to
repurchase up to 1,000,000 shares in the open market to meet the anticipated
needs of stock awards and stock options issued in connection with the 1999
Stock Incentive Plan.  In October 1999
and July 2000, the Board of Directors, with the approval of the Commissioner of
Banks, authorized the Company to repurchase up to an additional 1,231,900 and
1,254,312 shares, respectively, in the open market.  The Board of Directors delegated to the discretion of senior
management the authority to determine the timing of the repurchase programs
commencement, the timing of subsequent repurchases and the prices at which
repurchases will be made.  As of August 14, 2002, the Company had repurchased 3,406,860 shares of
its common stock under these programs at a total cost of  $43,315,848, of which 3,375,660 shares at a
cost of $42,661,345 had been repurchased as of June 30, 2002.  (8)QUARTERLY
CASH DIVIDEND  On July 25, 2002, the Board of Directors voted the payment of a
quarterly cash dividend of $.11 per share. 
The dividend is payable on August 23, 2002 to stockholders of record on
August 9, 2002.  10 
   (9)ISSUANCE OF
TRUST PREFERRED SECURITIES  As previously disclosed in the second quarter, 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 June 30, 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 corporate purposes, which may include the
repurchase of its common stock, the repayment of its debt, and investments in
or advances to its existing or future subsidiaries.  The Company may also use a portion of the net proceeds to fund
possible future acquisitions, although the Company does not presently have any
understandings with respect to any such future acquisitions.  Pending such uses, the Company has directed
the net proceeds to be invested into short-term marketable instruments.  At the end of the second quarter of June, 2002
a dividend of $407,000 was paid to the holders of the Trust Preferred representing
the pro rata amount from issue date to the first quarterly payment date.  In addition, the initial amortization
($7,000) of the underwriting cost over the life of the Trust Preferred
securities was also recorded against Paid-in Capital.  (10) COMMONWEALTH OF MASSACHUSETTS  DEPARTMENT OF
REVENUE  The Massachusetts Department of Revenue (DOR) has recently issued
Notices of Intent to Assess additional state excise taxes to several financial
institutions in the Commonwealth that have established real estate investment
trusts (REIT) in their corporate structures. 
The DOR contends that dividends received by the Banks from the REIT
subsidiaries are fully taxable in Massachusetts.  The Company believes that the Massachusetts statutes that
provides for the dividend received deduction equal to 95% of certain dividend
distributions applies to distributions that have been made by the REIT
subsidiaries to the Banks.  Seacoast
Financial Services Corporation has two 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 pertaining to two tax year filings (1999 & 2000) by N
Realty Corporation.  These notices
stipulated additional state excise taxes due of $1,517,000, plus interest and
penalties.  Compass Preferred Capital
Corporation has not yet received any notices of intent to assess from the DOR.  Since the DOR has already focused on tax
years 1999 & 2000, it would be difficult to assume that additional notices
are not forthcoming and that they may include more current tax year
filings.  Based upon this action,
management estimates that the impact in additional tax assessments for both
companies covering tax years 1999, 2000, 2001 and the first six months of 2002
would be $8.6 million (net of federal tax benefit) excluding interest and
penalties.  No provision has been made
in the Seacoast Financial Services Corporation financials at this time and the Company
intends to vigorously appeal any and all assessments received.  11 
   Item 2.    Managements
Discussion 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 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 such
forward-looking statements.  Actual
events could differ materially from those anticipated in the forward-looking
statements.  Important factors that
might cause such a difference include, among other things, general economic
conditions, particularly the real estate market, in the Companys primary
market area, potential increases in the Companys nonperforming assets (as well
as increases in the allowance for loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation, supervision, and legal
interpretations, including increased deposit insurance premiums or capital or
reserve requirements, changes in interest rates, and increased competition and
bank consolidations in the Companys market area.  These and other factors that might cause differences between
actual and anticipated results, performance and achievements are discussed in
greater detail in this Item 2.  Comparison
of Financial Condition at June 30, 2002 and December 31, 2001  Total assets
increased by $255.5 million from $3,347.5 million at December 31, 2001 to
$3,603.0 million at June 30, 2002. 
During the six months ended June 30, 2002, the loan portfolio increased
by $171.1 million, or 6.6%, which was funded principally by deposit growth of
$137.0 million and, to a lesser extent, Federal Home Loan Bank advances of  $40.7 million, and short-term borrowings of
$10.2 million.  During the six months
ended June 30, 2002, the Company continued to borrow from the Federal Home Loan
Bank (FHLB) because of the attractive borrowing rates offered during the
period.  Short-term borrowings increased
due to Nantucket Banks seasonal cash-flow requirements to fund commercial
loans to Nantucket businesses.  In
addition to funding loan growth, borrowings have provided the Company with
liquidity to meet unexpected deposit outflows. The weighted average interest
rate on FHLB advances taken during 2002 was 3.3%.  At June 30, 2002, any additional funds in excess of loan funding
requirements were invested in federal funds sold and short-term investments.  In addition, the Company issued trust
preferred securities during the period which raised $55.0 million.  These funds were invested primarily in
short-term investment securities.  Total investments
increased by $47.1 million, or 10.0% from $467.2 million at December 31, 2001
to $514.3 million at June 30, 2002.  The
excess of deposit growth and the recently completed trust preferred issuance
provided additional funding to increase the investment portfolio.  These funds were allocated into short term
US Treasury Obligations, Federal Agency bonds, and US Government
Mortgage-Backed securities.  During the
second quarter the Company sold out of an equity holding that resulted in a
gain of $1.2 million and also sold or redeemed bonds that provided a gain of
$287,000.  These gains were offset by
losses on sales of telecommunication bonds of $1.3 million and write-downs on
specific securities that were considered impaired in the amounts of $424,000.  The increase in
loans occurred primarily in the residential mortgage, indirect auto and
commercial loan portfolios.  From
December 31, 2001 to June 30, 2002, residential mortgage loans increased by
$48.2 million, or 3.7%, home equity lines of credit increased by $13.8 million,
or 30.2%, indirect auto loans (net of unearned discounts) increased by $79.9
million, or 13.3% and commercial loans increased by $19.9 million, or
17.2%.  The Company has continued to
retain all residential mortgage loan originations in portfolio (Compass only)
and has continued to emphasize the origination of indirect auto loans through
its network of automobile dealers which has been expanded to include dealers in
communities contiguous to the metropolitan Boston area and Southern New
Hampshire.  The growth in commercial
loans was primarily with existing customers to fund business expansion and
seasonal borrowing needs.  Total deposits at
June 30, 2002 were $2,329.4 million, an increase of $137.0 million, compared to
$2,192.4 million at December 31, 2001. 
Core deposit account balances increased by $123.9 million, or 10.3%,
during the first half of 2002.  The
growth in core deposits during this period was generally attributable to normal
seasonal fluctuations, uncertainty in the stock market as consumers seek safety
and less attractive rates being offered on term deposit products.  The increase in
stockholders equity of $9.3 million to $315.1 million at June 30, 2002
resulted from the net income of $18.2 million for the six months ended June 30,
2002 and an increase of $1.9 million in the market value of investment
securities available for sale, net of taxes, which were partially offset by
cash dividends and stock repurchases totaling $12.0 million.  During 1999 and 2000, the Company announced
three stock repurchase programs aggregating 3,486,212 shares.  As of August 14, 2002, 3,406,860 shares had
been repurchased leaving up to 79,352 shares for repurchase.  Management expects to repurchase the
remaining shares under these programs during 2002.  12 
   Comparison
of Operating Results for the Quarters Ended June 30, 2002 and 2001  Interest
Income.Interest income for the quarter ended June
30, 2002 was $54.0 million compared to $53.9 million for the quarter ended June
30, 2001, an increase of $144,000, or 
0.27%.  The increase in interest
income resulted from growth in average interest-earning assets of $412.7
million, or 14.3%, partially offset by a decrease in the overall yield on
interest-earning assets of 91 basis points in the 2002 period.  The principal areas of growth in average
balances were related to investments (up $229.3 million, or 61.9%), real estate
loans (up $95.2 million, or 5.4%) and indirect auto loans (up $93.4 million, or
16.7%).  The growth in investment
securities resulted primarily from an increase in deposits and borrowings in
excess of funding loan requirements during the period and the recently
completed sale of $57.5 million in trust preferred securities (Note 9).  Most of the real estate loan growth resulted
from increased originations and retention in portfolio of one-to-four family real
estate loans.  The increase in indirect
auto loans resulted from the favorable interest rate environment and continued
geographic expansion of the network of participating dealers.  Interest
Expense.Interest expense for the quarter ended June
30, 2002 was $23.8 million compared to $28.7 million for the quarter ended June
30, 2001, a decrease of $4.9 million or 17.2%. 
This decrease resulted from a 150 basis points decrease in the cost of
funds from 4.01% in 2001 to 2.51% in 2002, partially offset by a higher average
balance of interest-bearing liabilities (up $364.1 million, or 14.1%).  Average interest-bearing deposit balances
increased $228.7 million, or 12.4%, during the quarter ended June 30, 2002
compared to the same period in 2001.  Interest expense
on borrowed funds increased $496,000 in the quarter ended June 30, 2002 due to
a $135.5 million increase in the average balance of such funds, partially
offset by a 65 basis points decrease in the average rate paid on borrowed funds
to 4.97% in 2002 from 5.62% in 2001.  The decrease in
the yield on overall cost of funds on interest-bearing liabilities and the
reduction in yields on interest-earning assets are reflective of the continued
interest rate reductions implemented by the Federal Reserve during the period
and the affect it has had on term deposit rates.  Provision
for Loan Losses.The Company provides for loan losses in
order to maintain the allowance for loan losses at a level that management
estimates is appropriate to absorb inherent losses within the loan
portfolio.  In determining the
appropriate level of the allowance for loan losses, management considers past
and anticipated loss experience, evaluations of underlying collateral,
prevailing economic conditions, the nature and volume of the loan portfolio and
the levels of nonperforming and other classified loans.  The amount of the allowance is based on
estimates and ultimate losses may vary from such estimates.  Management assesses the allowance for loan
losses on a quarterly basis and provides for loan losses monthly in order to
maintain the adequacy of the allowance. 
For a full discussion on the Companys allowance for loan losses
policies see Allowance for Loan Losses in the Companys 2001 annual report on
Form 10-K.  The Company provided $2.0 million for loan losses in the quarter ended
June 30, 2002 compared to $1.5 million in the quarter ended June 30, 2001.  The increase of $525,000 in 2002 was
primarily attributable to risks associated in the growth of the loan
portfolio.  The total allowance of $31.6
million at June 30, 2002 represented 1.15% of total loans compared to the same
ratio of 1.15% at December 31, 2001.  At
June 30, 2002, the allowance for loan losses as a percentage of non-performing
loans was 245.5% compared to 220.1% at December 31, 2001.  Non-performing assets were $14.1 million at
June 30, 2002, compared to $14.5 million at December 31, 2001, a decrease of
$378,000 or 2.6%.  Noninterest
Income.Total noninterest income was $3.62 million
for the quarter ended June 30, 2002 compared to $3.56 million in the same
period of 2001, an increase of  $56,000,
or 1.6%.  This increase was principally
caused by checking account related income, ATM/Debit card usage, and fees on
other retail services and deposit accounts, partially offset by losses on
investment securities, decreases on the sale of loans, and other income.  Noninterest
Expense.Noninterest expense increased by $1.0
million or 6.4%, from $16.1 million for the quarter ended June 30, 2001 to
$17.1 million for the quarter ended June 30, 2002.  This increase reflected increases in salaries and employee
benefits ($1.2 million), occupancy and equipment ($63,000), data processing
($341,000), and other noninterest expense ($110,000).  The increases in noninterest expense were partially offset by
decreases in marketing ($143,000), professional services ($54,000) and
amortization of goodwill and intangibles ($528,000).  Salaries and
employee benefits increased $1.2 million, or 15.3%, during the quarter ended
June 30, 2002.  This increase was the
result of payroll increases averaging 4.5%, additions to staff in the Credit
Administration and Retail Banking departments, an increase in sales incentive
commissions paid on deposit gathering activities and other additions to staff related
to company growth supplemented by increases in employee benefits.  13 
   Occupancy and
equipment expenses increased $63,000 or 2.8%, during the quarter ended June 30,
2002.  This increase was primarily due
to an increase in depreciation expenses related to branch expansion and utility
costs.  Data processing
expenses increased $341,000, or 23.4%, during the quarter ended June 30, 2002
due primarily to core processing activities which are volume-related such as
item processing and ATM usage.  In
addition there were increases in electronic bill paying and ATM core processing
expenses.  The increase on a comparative
basis was partially affected by a rate reduction given to the Company in 2001
from the service provider of core data processing.  Marketing expenses
decreased $143,000 or 15.7%, during the quarter ended June 30, 2002.  This decrease was primarily a result of
decreased spending in television advertising and related production costs
during the same period in 2001, offset by increases in other media expenses and
direct marketing.  Professional
services expenses decreased $54,000 or 8.0%, during the quarter ended June 30,
2002.  This decrease was primarily the
result of reductions in costs associated with the start-up of private banking
in 2001 partially offset by an increase in professional services related to
loan activities.  Amortization of
goodwill and intangibles decreased $528,000, or 71.9%, during the quarter
ending June 30, 2002.  This decrease reflects
primarily the elimination of goodwill amortization (Note 2), partially offset
by an increase in the amortization of intangibles related to the acquisition of
deposits from Charter Bank.  Other noninterest expense increased $110,000, or 5.4% during the
quarter ended June 30, 2002.  This
increase reflects primarily volume-related items such as printing, supplies,
telephone costs and losses on sale of fixed assets.  Minority
Interest Expense.
On May 31, 2002, the Company, through a subsidiary trust (Seacoast Capital
Trust I) issued 2,300,000 shares of 8.50% Trust Preferred Securities (Note
9).  At the end of the second quarter of
June, 2002 a dividend of $407,000 was paid to the holders of these Trust
Preferred representing the pro rata amount from issue date to the first
quarterly payment date.  Income
Taxes.The
effective tax rate for the quarter ended June 30, 2002 was 35.4% compared to
37.3% in the same period in 2001.  This
decrease in 2002 primarily reflects the impact of nondeductible goodwill amortization
in 2001.  Comparison
of Operating Results for the Six Months Ended June 30, 2002 and 2001  Interest
Income.Interest income for the six months ended
June 30, 2002 was $107.2 million, compared to $106.6 million for the six months
ended June 30, 2001, an increase of $614,000, or 0.58%. The increase in
interest income resulted from growth in average interest-earning assets of
$429.6 million, or 15.2%, partially offset by a decrease in the overall yield
on interest-earning assets of 95 basis points in the 2002 period.  The principal areas of growth in average
balances were related to investments (up $232.7 million, or 65.2%), real estate
loans (up $109 million, or 6.2%) and indirect auto loans (up $86 million, or
15.7%).  The growth in investments securities
resulted primarily from an increase in deposits and borrowings in excess of the
funding loan requirements during the period as well as the recently completed
sale of $57.5 million in trust preferred securities (Note 9).  Most of the real estate loan growth resulted
from increased origination and retention in portfolio of one-to-four family
real estate loans.  The increase in
indirect auto loans resulted from the favorable interest rate environment and
continued geographic expansion of the network of participating dealers.  Interest
Expense.Interest expense for the six months ended
June 30, 2002 was $48.2 million compared to $57.5 million for the six months
ended June 30, 2001, a decrease of $9.3 million or 16.1%.  This decrease resulted from a 124 basis
points decrease in the cost of funds from 4.56% in 2001 to 3.32% in 2002, and a
higher average balance of lower interest-bearing deposits (up $239.7 million,
or 29.3%).  In addition the average
balance of higher interest bearing term deposits decreased ($21.8 million, or
2.15%), from June 30, 2001 to June 30, 2002 further reducing the cost of funds.  Interest expense
on borrowed funds increased $1.7 million in the six months ended June 30, 2002
to $21.4 million due to a $165.2 million increase in the average balance of
such funds, partially offset by a 71 basis points decrease in the average rate
paid on borrowed funds to 5.02% in the 2002 period.  The decrease in
the cost of funds in 2002 reflects what we believe is a current consumer bias
to preserve principal and remain liquid. 
We believe that the current low interest rate environment, the concern
with the continued decline in the stock market, coupled with the current slow
growth in our economy, has induced consumers to seek insured deposit alternatives
that provide a safe haven for their investable funds.  Material increases in the average balances of non-time deposits
reflect this positioning.   From June
30, 2001 to June 30, 2002 the average balance of non-time deposits increased
from $819.5 million to $1,059.2 million while the cost associated with these
accounts decreased 32 basis  14 
   points.  In addition, with the expectation that the
Federal Open Market Committee will not be inclined to immediately initiate a
series of rapid rate increases, we believe that the interest of consumers
looking to invest into longer maturing investments will remain
indifferent.  Management believes that
under these conditions, the net interest margin should continue to improve
during the remainder of the year.  Provision
for Loan Losses.The Company provided $3.5 million for loan
losses in the six months ended June 30, 2002 compared to $2.9 million in the
comparable prior year period.  The
increase of $660,000 in 2002 was primarily attributable to the growth in the
loan portfolio.  Non-Interest
Income.Total
non-interest income was $6.83 million for the six months ended June 30, 2002
compared to $6.56 million in the same period of 2001, an increase of $270,000
or 4.1%.  This increase was principally
caused by increases in checking account related income, ATM/Debit card usage,
and fees on other retail services and deposit accounts offset by losses on
investment securities, decreases on the sale of loans and other income.  Noninterest
Expense.Noninterest expense increased by $2.1 million, or 6.6%, from $31.9 million for
the six months ended June 30, 2001 to $34.0 million for the six months ended
June 30, 2002.  This increase reflected
increases in salaries and employee benefits ($2.6 million), data processing
($456,000), and other noninterest expense ($520,000).  The increases in noninterest expense were partially offset by
decreases in marketing ($289,000), professional services ($252,000) and
amortization of goodwill and intangibles ($1.1 million).  Salaries and
employee benefits increased $2.6 million or 16.5%, during the six months ended
June 30, 2002.  This increase was
partially the result of salary increases averaging 4.5%, coupled with additions
to staff in Credit Administration, Retail Banking and the Managed Assets
department, an increase in commissions paid on loan refinancing activities, an
increase in sales incentive commissions paid on deposit gathering activities
and other additions to staff related to company growth supplemented by
increases in employee benefits.  Data processing
expenses increased $456,000, or 14.9%, during the six months ended June 30,
2002 due primarily to core processing activities which are volume-related such
as item processing, loan and deposit account activity and ATM/Debit card
usage.  The increase on a comparative
basis was partially affected by a rate reduction given to the Company in 2001
from the service provider of core data processing.  Marketing expenses
decreased $289,000, or 18.9%, during the six months ended June 30, 2002.  This decrease was attributable to a
reduction in production costs for television commercials, partially offset by
increases in promotions, print advertising and direct marketing.  Professional
services expenses decreased $252,000, or 17%, during the six months ended June
30, 2002.  This decrease primarily
reflects non-recurring consulting and legal fees associated with the start-up
of Compasss private banking initiative incurred in the first six 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 and intangible decreased $1.1 million, or 71.8%, during the six months
ended June 30, 2002.  This decrease is
attributed to the elimination of goodwill amortization (Note 2) offset by an
increase in the amortization of intangibles associated with the acquisition of
deposits from Charter Bank.  Other noninterest
expense increased $520,000, or 13.2%, during the six months ended June 30,
2002.  This increase reflects primarily
volume-related items such as printing, postage, supplies, telephone costs and
losses on sale of fixed assets.  Income
Taxes.The
effective tax rate for the six months ended June 30, 2002 was 35.0% compared to
34.5% in the same period in 2001.  This
increase from 2001 reflects 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 impact of a recent tax court decision on the deductibility of
merger-related costs incurred in connection with the acquisition of Sandwich
Bancorp, Inc. in 1998.  Based on the
analysis the provision for income taxes was reduced by $479,000.  Exclusive of this non-recurring item, the
effective tax rate in 2001 was 36.8%. 
The decrease in 2002 reflects primarily the impact of non-deductible
goodwill 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s primary sources of funds are deposits,
borrowings, principal and interest payments on outstanding loans and mortgage-backed
securities, maturities of investment securities and funds  15 
   provided from
operations.  While scheduled payments
from the amortization of loans and mortgage related securities and maturing
investment securities are relatively predictable sources of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates
and, in the case of deposits, other instruments available to the public such as
mutual funds and annuities.  As voluntary
members of the Federal Home Loan Bank of Boston (FHLB), Compass and NantucketBank are entitled to borrow an amount up
to the value of their qualified collateral that has not been pledged to others.
Qualified
collateral generally consists of residential first mortgage loans, U.S.
Government and agency securities and funds on deposit at the FHLB.  At June 30, 2002, Compass and Nantucket Bank
had approximately $492.5 million and $34.8 million, respectively, in unused
borrowing capacity that is contingent upon the purchase of additional FHLB
stock.  Use of this borrowing capacity
may also be impacted by regulatory capital requirements.  Liquidity
management is both a daily and long-term function of business management.  The measure of a banks liquidity is its
ability to meet its cash commitments at all times with available cash or by
conversion of other assets to cash at a reasonable price.  At June 30, 2002, the Company maintained
cash and due from banks, federal funds sold and debt securities maturing within
one year of $308.6 million, or 8.57% of total assets.  The Company invests excess funds, if any, in federal funds sold
which provide liquidity to meet lending requirements.  At June 30, 2002,
the Company had commitments to originate loans, unused outstanding lines of
credit, standby letters of credit and undisbursed proceeds of loans totaling
$253.2 million.  The Company anticipates
that it will have sufficient funds available to meet its current loan commitments.  Certificates of deposit maturing within one
year from June 30, 2002 amounted to $730.8 million.  The Company expects that a significant portion of maturing
certificate accounts will be retained as deposits at maturity.  The Companys and
the Banks capital ratios at June 30, 2002 were as follows:  Seacoast
  Financial
  
  Compass
  
  NantucketTotal
  Capital (to risk weighted assets)
  
  15.06
  %
  11.79
  %
  15.03
  %Tier
  1 Capital (to risk weighted assets)
  
  13.77
  
  10.53
  
  13.76Tier
  1 Capital (to average assets)
  
  9.52
  
  7.28
  
  9.39  These ratios
placed the Company in excess of regulatory standards and the Banks in the
"well capitalized" category as set forth by the FDIC.  Item 3.  Quantitative and Qualitative Disclosures about Market Risk  The chief market
risk factor affecting the financial condition and operating results of the
Company is interest rate risk.  This
risk is managed by periodic evaluation of the interest risk inherent in certain
balance sheet accounts, determination of the level of risk considered
appropriate given capital and liquidity requirements, business strategy,
performance objectives and operating environment and maintenance of such risks
within guidelines approved by the Board of Directors.  Through such management, the Company seeks to reduce the vulnerability
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 risk and reviewing with
its Board of Directors on a quarterly basis its activities and strategies, the
effect of those strategies on operating results, the Banks interest rate risk
position and the effect changes in interest rates would have on net interest
income. The extent of movement of interest rates is an uncertainty that could
have a negative impact on earnings.  The principal
strategies that the Company generally uses to manage interest rate risk include
(i) emphasizing the origination and retention of adjustable-rate loans,
origination of indirect auto loans (Compass only) which have relatively short
maturities and origination of loans with maturities at least partly matched
with those of the deposits and borrowings funding the loans, (ii) investing in
debt securities with relatively short maturities and (iii) classifying a significant
portion of its investment portfolio as available for sale so as to provide
sufficient flexibility in liquidity management.  The Company and the Banks quantify their interest rate risk exposure
using a sophisticated simulation model. 
Simulation analysis is used to measure the exposure of net interest
income to changes in interest rates over a specified time horizon.  Simulation analysis involves projecting
future interest income and expense under various rate scenarios.  Internal guidelines on interest rate risk
specify that for every 100 basis points immediate shift in interest rates, the
estimated net interest income over the next 12 months should decline by no more
than 5%.  16 
   In utilizing a 300
basis point increase in rates in its simulation model, the full impact of
annual rate caps of 200 basis points common to most adjustable rate mortgage
loan products is considered.  The rate
shocks used assume an instantaneous and parallel change in interest rates and
that no strategies are implemented in response to the change in interest
rates.  Prepayment speeds for loans are
based on published median dealer forecasts for each interest rate scenario.  As of June 30,
2002, the Companys estimated exposure as a percentage of estimated net
interest income for the next twelve and twenty-four month periods is as
follows:  Percentage Change in Estimated
  Net Interest Income Over:12 Months
  
  24 Months300
  basis point increase in rates
  
  (6.72
  )%
  (6.22
  )%150
  basis point decrease in rates (1)
  
  (0.26
  )%
  (1.24
  )%  Based on the
scenario above, net income would be adversely affected (within internal
guidelines) in both the twelve and twenty-four month periods.  For each one percent change in net interest
income, the effect on net income would be $841,000 assuming a 35% tax rate.  
 (1)
  
  Due to the low interest
  rate environment in effect at June 30, 2002 (the average Federal Fund
  overnight rates were trading below 2%) the simulation model could only be
  rate shocked down 150 basis points.  17 
   PART II - OTHER INFORMATION  Item 1.  Legal Proceedings  The Company is not
involved in any pending legal proceedings other than those involved in the
ordinary course of business.  Management
believes that the resolution of these matters will not materially affect its
business or the consolidated financial condition of the Company.  Item 2.  Changes in Securities and Use of Proceeds  Not applicable.  Item 3.  Defaults Upon Senior Securities  None.  Item 4. 
Submission of Matters to A Vote of Security Holders  The Company held
its annual meeting of stockholders on May 16, 2002 at which time the five
nominees for director, as set forth in the proxy materials for the meeting,
were elected with the following votes cast:  For
  
  WithheldKevin
  G. Champagne
  
  16,930,212
  
  2,205,605Mary
  F. Hebditch
  
  19,011,291
  
  124,526Philip
  W. Read
  
  19,009,550
  
  126,267Carl
  Ribeiro
  
  19,021,000
  
  114,817Gerald
  H. Silvia
  
  19,023,275
  
  112,542  Item 5.  Other
Information  Certification Under Sarbanes-Oxley Act  Our Chief Executive Officer and Chief Financial Officer have furnished
to the SEC the certification with respect to this Report that is required by
Section 906 of the Sarbanes-Oxley Act of 2002.  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+++4.1
  Specimen certificate
  for the common stock of Seacoast Financial Services Corporation++4.2
  Form of 8.50% Junior
  Subordinated Debenture of Seacoast Financial Services Corporation4.3
  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.+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).11
  A statement regarding
  earnings per share is included in Item 1, Note 5, of this report.b.
  Reports on Form 8-KReport on Form
  8-K was filed on May 16, 2002, regarding a change in the Companys certifying
  independent auditors from Arthur Andersen LLP to KPMG LLP.Report on Form
  8-K was filed on May 2, 2002, regarding the Companys announcement of its
  financial results of operations for the quarter ended 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, AThe 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, AThe 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.  18 
   SIGNATURES  Pursuant to the
requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.  Seacoast
  Financial Services Corporation(Registrant)Date: August 14, 2002
  By
  /s/ Kevin G. ChampagneKevin G. ChampagnePresident and Chief
  ExecutiveOfficerDate: August 14, 2002
  By
  /s/ Francis S. Mascianica, Jr.Francis S. Mascianica,
  Jr.Treasurer, as Principal
  Financial and
  Accounting Officer  19