<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------------
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED MARCH 31, 1999
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 000-25077
SEACOAST FINANCIAL SERVICES CORPORATION
---------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-1659040
----------------------- ---------------------------------
(State of Incorporation) (IRS Employer Identification No.)
791 Purchase Street, New Bedford, Massachusetts 02740
- ----------------------------------------------- ----------
(Address of Principal Executive Offices) (Zip Code)
(508) 984-6000
-------------------------------
(Registrant's Telephone Number)
N/A
-------------------------------------------------------------------------------
Former Name, Former Address and Former Fiscal Year if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ------
At May 12, 1999, the Company had 26,758,134 shares of common stock outstanding.
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 1999 1
and December 31, 1998
Consolidated Statements of Income for the three months 2
ended March 31, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity 3
for the three months ended March 31, 1999 and 1998
Consolidated Statements of Cash Flows for the three months ended 4
March 31, 1999 and 1998
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Liquidity and Capital Resources 13
Impact of The Year 2000 Issue 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 19
EXHIBIT 10.7 - Compass Bank for Savings 1999 Incentive Compensation Plan
EXHIBIT 27 - Financial Data Schedule
</TABLE>
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- --------------
<S> <C> <C>
ASSETS:
Cash and due from banks .................................................. $ 52,125 $ 54,006
Federal funds sold ....................................................... 106 47,413
----------- -----------
Total cash and cash equivalents ........................................ 52,231 101,419
Other short-term investments ............................................. -- 31,119
Investment securities--
Available-for-sale, at fair value ...................................... 277,053 294,527
Held-to-maturity, at amortized cost .................................... 12,693 12,693
Restricted equity securities ........................................... 9,355 9,035
Loans held-for-sale ...................................................... -- --
Loans, net (Note 4) ...................................................... 1,495,762 1,388,140
Accrued interest receivable .............................................. 9,573 8,523
Banking premises and equipment, net (Note 3) ............................. 20,797 19,743
Other real estate owned .................................................. 939 1,391
Net deferred tax asset ................................................... 11,342 10,715
Other assets ............................................................. 10,655 10,775
----------- -----------
Total assets ......................................................... $ 1,900,400 $ 1,888,080
----------- -----------
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Note 5) ........................................................ $ 1,489,061 $ 1,497,215
Short-term borrowings .................................................... 13,758 12,835
Federal Home Loan Bank advances .......................................... 98,500 83,951
Other borrowings ......................................................... 1,972 1,987
Mortgagors' escrow payments .............................................. 4,154 3,411
Accrued expenses and other liabilities ................................... 16,432 17,169
----------- -----------
Total liabilities .................................................... 1,623,877 1,616,568
----------- -----------
COMMITMENTS AND CONTINGENCIES
Stockholders' equity:
Preferred stock, par value $.01 per share; authorized 10,000,000 shares;
none issued .......................................................... -- --
Common stock, par value $.01 per share; authorized 100,000,000 shares;
26,758,134 shares issued and outstanding ............................. 268 268
Additional paid-in capital ............................................. 152,936 152,936
Retained earnings ...................................................... 132,880 127,263
Accumulated other comprehensive income ................................. 1,591 2,337
Unearned ESOP compensation ............................................. (11,013) (11,153)
Shares held in employee trust .......................................... (139) (139)
----------- -----------
Total stockholders' equity ........................................... 276,523 271,512
----------- -----------
Total liabilities and stockholders' equity ........................... $ 1,900,400 $ 1,888,080
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-1-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<TABLE>
<CAPTION>
1999 1998
--------- --------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME:
Interest on loans ....................................... $27,876 $25,044
Interest and dividends on investments securities ........ 4,537 4,859
Interest on federal funds sold and short-term investments 313 453
------- -------
Total interest and dividend income .................... 32,726 30,356
------- -------
INTEREST EXPENSE:
Interest on deposits .................................... 13,413 13,494
Interest on borrowed funds .............................. 1,439 1,903
------- -------
Total interest expense ................................ 14,852 15,397
------- -------
Net interest income ................................... 17,874 14,959
PROVISION FOR LOAN LOSSES .................................. 225 240
------- -------
Net interest income after provision
for loan losses ..................................... 17,649 14,719
------- -------
NONINTEREST INCOME:
Deposit and other banking fees .......................... 1,188 1,239
Loan servicing fees, net ................................ 169 201
Card fee income, net .................................... 90 98
Other loan fees ......................................... 123 191
Gain on sales of investment securities, net ............. 37 11
Gain on sales of loans, net ............................. 74 324
Other income ............................................ 181 220
------- -------
Total noninterest income .............................. 1,862 2,284
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits .......................... 5,299 5,231
Occupancy and equipment expenses ........................ 1,508 1,219
Data processing expenses ................................ 1,161 776
Marketing expenses ...................................... 527 491
Professional services expenses .......................... 234 286
Other operating expenses ................................ 1,875 1,713
------- -------
Total noninterest expense ............................. 10,604 9,716
------- -------
Income before provision for income taxes .............. 8,907 7,287
PROVISION FOR INCOME TAXES ................................. 3,290 2,892
------- -------
Net income ............................................ $ 5,617 $ 4,395
------- -------
------- -------
Net income per share-diluted (Note 6) ............ $ 0.22 N/A
------- -------
------- -------
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-2-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Additional Accumulated Other
Common Paid-In Retained Comprehensive
Stock Capital Surplus Earnings Income
----------- ----------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997.................................... $ -- $ -- $140,642 $ -- $1,822
Net income.................................................... -- -- 4,395 -- --
Other comprehensive income -- Change in unrealized gain
on securities available for sale, net of taxes................ -- -- -- -- 624
Comprehensive income.....................................
Transactions with stockholders of acquired entity............. -- -- (649) -- --
Change in intercorporate investment........................... -- -- (4,254) -- (788)
------- ---------- ------------ ------------- --------
Balance, March 31, 1998....................................... $ -- $ -- $ 140,134 $ -- $1,658
------- ---------- ------------ ------------- --------
------- ---------- ------------ ------------- --------
Balance, December 31, 1998.................................... $ 268 $152,936 $ -- $127,263 $2,337
Net income.................................................... -- -- -- 5,617 --
Other comprehensive income -- Change in unrealized gain
on securities available for sale, net of taxes................ -- -- -- -- (746)
Comprehensive income.....................................
Amortization of unearned ESOP compensation.................... -- -- -- -- --
------- ---------- ------------ ------------- --------
Balance, March 31, 1999....................................... $ 268 $ 152,936 $ -- $ 132,880 $ 1,591
------- ---------- ------------ ------------- --------
------- ---------- ------------ ------------- --------
</TABLE>
<TABLE>
<CAPTION>
ESOP Shares Held
Unearned in Employee
Compensation Trust Total
- --------------- ------------- ------------
<S> <C> <C> <C>
Balance, December 31, 1997.................................... $ -- $ -- $142,464
Net income.................................................... -- -- 4,395
Other comprehensive income -- Change in unrealized gain
on securities available for sale, net of taxes................ -- -- 624
----------
Comprehensive income..................................... 5,019
Transactions with stockholders of acquired entity............. -- -- (649)
Change in intercorporate investment........................... -- -- (5,042)
----------- ------- ----------
Balance, March 31, 1998....................................... $ -- $ -- $141,792
----------- ------- ----------
----------- ------- ----------
Balance, December 31, 1998.................................... $ (11,153) $ (139) $271,512
Net income.................................................... -- -- 5,617
Other comprehensive income -- Change in unrealized gain
on securities available for sale, net of taxes................ -- -- (746)
----------
Comprehensive income..................................... 4,871
Amortization of unearned ESOP compensation.................... 140 -- 140
----------- ------- ----------
Balance, March 31, 1999....................................... $ (11,013) $ (139) $ 276,523
----------- ------- ----------
----------- ------- ----------
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-3-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ............................................... $ 5,617 $ 4,395
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation ............................................. 613 637
Amortization and accretion, net .......................... 382 274
Provision for loan losses ................................ 225 240
Gain on sale of investment securities, net ............... (37) (11)
Other real estate owned losses (income) .................. (102) (17)
Provision for deferred (prepaid) taxes ................... (92) 559
Originations of loans held-for-sale ...................... (3,488) (54,869)
Proceeds from sales of loans originated for resale ....... 3,562 41,596
Gain on sales of loans, net .............................. (74) (324)
Net (increase) decrease in accrued interest receivable ... (1,050) 256
Net (increase) decrease in other assets .................. (428) 1,768
Net increase (decrease) in accrued expenses
and other liabilities .................................. (965) 730
--------- ---------
Net cash provided by (used in) operating activities 4,163 (4,766)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments, net .................... 31,119 (2,019)
Purchase of securities classified as available-for-sale .. (15,985) (21,642)
Purchase of securities classified as held-to-maturity .... -- (430)
Proceeds from sales, calls, paydowns and maturities of
securities classified as available-for-sale ............ 32,417 50,383
Proceeds from paydowns, maturities and calls of securities
classified as held-to-maturity ......................... -- 2,150
Purchase of loans ........................................ -- (1,586)
Net increase in loans .................................... (107,460) (21,341)
Recoveries of loans previously charged off ............... 129 176
Proceeds from sales of other real estate owned ........... 38 673
Purchase of premises and equipment ....................... (1,667) (802)
--------- ---------
Net cash provided by (used in) investing activities (61,409) 5,562
--------- ---------
</TABLE>
-4-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in NOW, money market deposit and
demand deposit accounts ............................ $ (7,489) $ 13,266
Increase in passbook and other
savings accounts ................................... 7,317 5,302
Increase (decrease) in term certificates ............. (7,982) 7,977
Advances from Federal Home Loan Bank ................. 16,503 26,000
Repayments of Federal Home Loan Bank advances ........ (1,954) (18,821)
Increase (decrease) in short-term and other borrowings 920 (1,687)
Increase in mortgagors' escrow payments .............. 743 663
Transactions with stockholders of acquired entity, net -- (649)
Payment of merger and stock offering costs ........... -- (979)
--------- ---------
Net cash provided by financing activities ...... 8,058 31,072
--------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................. (49,188) 31,868
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR .................................... 101,419 50,394
--------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD ........................................ $ 52,231 $ 82,262
--------- ---------
--------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid on deposits and borrowed funds ....... $ 14,843 $ 15,438
Income taxes paid .................................. 3,340 1,744
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfers from loans to other real estate owned .... 104 1,172
</TABLE>
See accompanying notes to the unaudited consolidated financial statements.
-5-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) BASIS OF PRESENTATION
The unaudited consolidated financial statements of Seacoast Financial
Services Corporation (the "Company"), and its wholly-owned subsidiaries, Compass
Bank for Savings ("Compass" or "the Bank") and Lighthouse Securities Corporation
presented herein should be read in conjunction with the consolidated financial
statements of the Company as of and for the year ended October 31, 1998 included
as part of its Form 10-K. A change in the Company's fiscal year end from October
31 to December 31 was voted by the Board of Directors on January 28, 1999.
On November 20, 1998, the Company completed its conversion from a mutual
bank holding company to a stock holding company with the issuance of 14,000,000
shares of common stock in an initial public offering. On December 4, 1998, the
Company completed its acquisition of Sandwich Bancorp, Inc. (Sandwich) in a
stock-for-stock exchange accounted for as a pooling of interests. The
accompanying financial statements have been restated to combine the assets,
liabilities, equity and results of operations of Sandwich as if the merger had
occurred as of December 31, 1997 as required by the pooling of interests method
of accounting.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation. Management is required to make estimates and
assumptions that affect amounts reported in the financial statements. Actual
results could differ significantly from those estimates.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its Form 10-K filed
with the Securities and Exchange Commission. For interim reporting purposes, the
Company follows the same significant accounting policies.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive income
with all other components referred to in the aggregate as other comprehensive
income. At March 31, 1999, the Company's other comprehensive income consisted of
unrealized gains on securities classified as available for sale, net of taxes.
The Company has presented its components of comprehensive income as part of its
statements of changes in stockholders' equity and, as required by SFAS No. 130,
has restated the prior period financial statements for comparative purposes.
Included in net income for the three months ended March 31, 1999 and 1998 are
gains on the sale of investment securities, net of taxes, of $23,000 and $7,000,
respectively, that had previously been classified with other comprehensive
income.
Effective November 1, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". In the opinion of
management, the Company functions as a single reportable operating unit and,
accordingly, the presentation of disaggregated information about segments of a
business enterprise is not applicable.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity.
-6-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(2) CONVERSION AND MERGER
The Company completed its mutual-to-stock conversion and the initial public
offering of common stock on November 20, 1998, whereby a total of 14,000,000
shares were sold at a purchase price of $10 per share. An Employee Stock
Ownership Plan (ESOP) set up by Compass acquired 8%, or 1,120,000, of the shares
issued, which was funded by a loan from the Company. Net proceeds of the
Conversion were $121,371,000 excluding the sale of ESOP shares, which were
internally funded.
On December 4, 1998, the Company completed its acquisition of Sandwich.
Pursuant to the Amended and Restated Affiliation and Merger Agreement, each
share of common stock of Sandwich (other than 90,000 shares held by the Company
and the Bank and other than fractional shares) was converted into and became
exchangeable for 6.385 shares of the Company's common stock. The exchange ratio
was determined using a formula based on the Company's stock trading price
between the date of the Conversion and the closing of the acquisition. A total
of 12,758,134 shares were issued in connection with the acquisition.
The Company has identified and separately classified those costs
attributable to the merger. These costs encompass both costs directly
identifiable to the merger, such as professional fees for investment bankers,
attorneys and accountants, and contractual severance pay as well as costs
incurred by Sandwich and the Bank that result from the merger and do not
generally benefit the on-going activities of the banks. Merger-related costs
consist of the following items (in thousands):
<TABLE>
<S> <C>
Professional fees ................................. $2,692
Severance pay ..................................... 2,555
Asset write-offs .................................. 143
Contractual obligations ........................... 406
Shareholder meeting (including printing costs) .... 283
Customer service (including checkbook replacements) 662
Other ............................................. 72
------
$6,813
------
------
</TABLE>
These costs were expensed in the two month period ended December 31, 1998.
NEW CORPORATE HEADQUARTERS
On December 1, 1998, the Bank closed on its acquisition of several parcels
of land in downtown New Bedford, Massachusetts to be used for the development of
the Company's and the Bank's corporate headquarters and main banking office. The
Bank purchased the land from the New Bedford Redevelopment Authority and an
optionholder for $550,000. In connection with this transaction, the Bank agreed
to donate one of its downtown New Bedford buildings to the City at the time it
takes occupancy of its proposed new corporate headquarters. In February 1999,
the Bank selected a general contractor for construction. Based on preliminary
estimates by its architectural consultants, it expects to expend approximately
$20 million in the construction of the building and the purchase of land,
furniture, fixtures and equipment. At the completion of the project, which is
estimated to be in 2000, all Bank personnel, except retail branch personnel, are
expected to be located in this building.
As part of this transaction, the Bank entered into a Tax Increment
Financing Agreement with the City of New Bedford. This agreement provides a
reduction in future property taxes to the Bank in return for its investment,
through this project, in downtown New Bedford. The tax incentives extend over a
twenty year period and are scheduled to produce an estimated $1.2 million in
property tax reductions. This agreement is conditional and requires the Bank to
retain and create permanent jobs in the City.
-7-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(3) NEW CORPORATE HEADQUARTERS (CONTINUED)
The Bank's plan to construct a new corporate headquarters will result in the
ultimate disposal of its existing corporate offices. One location is currently
being marketed for sale. Two other buildings will continue to be utilized until
the Bank relocates to its new corporate headquarters (one of which will be
donated to the City of New Bedford at that time). Based on estimates of the fair
value of these buildings and the benefits associated with their continuing
utilization through the estimated date of relocation, the Bank recorded a
write-down of $1,967,000 in December 1998.
(4) LOANS
Compass's loan portfolio consisted of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
---------- -----------
<S> <C> <C>
Real estate loans:
Residential (one-to-four family) $ 768,993 $ 697,031
Commercial ..................... 204,907 201,636
Home equity lines of credit .... 24,187 25,984
Construction ................... 71,657 66,373
---------- ----------
Total real estate loans ...... 1,069,744 991,024
---------- ----------
Commercial loans .................. 66,272 58,829
---------- ----------
Consumer loans:
Indirect auto loans ............ 373,870 358,101
Other .......................... 33,552 33,494
---------- ----------
Total consumer loans ........... 407,422 391,595
Less-Unearned discount ......... 31,611 37,394
---------- ----------
Total consumer loans, net .... 375,811 354,201
---------- ----------
Total loans .................. 1,511,827 1,404,054
Less-Allowance for loan losses .... 16,065 15,914
---------- ----------
Total loans, net ............. $1,495,762 $1,388,140
---------- ----------
---------- ----------
</TABLE>
Nonaccrual loans amounted to $5,841,000 and $5,782,000 at December 31, 1998
and March 31, 1999, respectively.
Through December 1998, the majority of the Bank's indirect auto loans were
written as discounted installment loans. The precomputed interest on such loans
is accounted for as unearned discount and recognized in income on a level yield
basis. Beginning in January 1999, all indirect auto loans are originated as
simple interest loans. Accordingly, the balance of unearned discount will
decline significantly over the next few years as the pre-1999 indirect auto
loans are repaid.
-8-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(5) DEPOSITS
A summary of deposit balances is as follows:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
----------- ----------
(In thousands)
<S> <C> <C>
Demand deposit accounts ................. $ 104,503 $ 116,104
NOW and money market deposit accounts ... 434,432 430,320
Passbook and other savings accounts ..... 212,778 205,461
---------- ----------
Total noncertificate accounts ...... 751,713 751,885
---------- ----------
Term certificates-
Term certificates of $100,000 and over 154,172 154,589
Term certificates less than $100,000 . 583,176 590,741
---------- ----------
Total term certificate accounts .... 737,348 745,330
---------- ----------
Total deposits ....................... $1,489,061 $1,497,215
---------- ----------
---------- ----------
</TABLE>
(6) EARNINGS PER SHARE
Earnings per share for the three months ended March 31, 1998 is not
presented as the Company did not convert from a mutual to a stock form of
ownership until November 1998.
Earnings per share for the three months ended March 31, 1999 was computed
based on the weighted average number of shares outstanding during the period,
which amounted to 25,646,690 shares. Unallocated ESOP shares are not considered
outstanding for purposes of the computation of earnings per share. There is only
an insignificant difference in the number of shares used in computing basic and
diluted earnings per share and, accordingly, such per share amounts do not
differ.
(7) STOCK INCENTIVE PLAN
In March 1999, the Company's Board of Directors voted to adopt the 1999
Stock Incentive Plan (the Stock Incentive Plan) for officers, employees and
directors of Compass and the Company. The Stock Incentive Plan will be presented
to the stockholders for their approval at the annual meeting to be held on May
20, 1999. A vote of two-thirds of all outstanding shares of common stock is
required to approve the Stock Incentive Plan. If approved, the Stock Incentive
Plan will be administered by a committee consisting of those members of the
Compensation Committee of the Company's Board of Directors who qualify as
"outside directors".
The maximum number of shares of common stock issuable as a result of awards
under the Stock Incentive Plan shall be 1,960,000, which equals 14% of the
number of shares issued in connection with the Company's conversion from mutual
to stock form (subject to adjustment upon the occurrence of a stock dividend,
stock split or similar change in capitalization affecting the Company's common
stock). Of this number, up to 560,000 shares would be issuable in connection
with "conditioned stock awards". A conditioned stock award is an award entitling
the recipient to acquire,
-9-
<PAGE>
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
(7) STOCK INCENTIVE PLAN (CONTINUED)
at no cost or for a purchase price to be determined by the Compensation
Committee, shares of common stock subject to restrictions and conditions
determined at the date of grant. Conditions may be based on continuing
employment and/or achievement of performance goals. The remaining 1,400,000
shares issuable in connection with the Stock Incentive Plan may be either
incentive stock options (as defined in the Internal Revenue Code) or options
that do not so qualify (non-qualified options).
Incentive stock options shall have an exercise price that is not less than
the fair market value at the date of grant and shall not be exercisable more
than ten years after the date of grant. All incentive stock options and
non-qualified options shall vest and become exercisable based on the
determination of the Compensation Committee. Payment of the exercise price for
option shares may be made 1) by cash or check, (2) with the consent of the
Compensation Committee, by delivery of shares of common stock, (3) with the
consent of the Compensation Committee, by reducing the number of option shares
otherwise issuable upon exercise of the option or (4) by other means acceptable
to the Compensation Committee, including any combination of the foregoing. At
the discretion of the Compensation Committee, options may include a so-called
"reload" feature whereby an optionee exercising an option by delivery of shares
of common stock would automatically be granted an additional option at the fair
market value of stock when such additional option is granted equal to the number
of shares so delivered.
The Stock Incentive Plan also provides for the issuance of unrestricted
stock awards, performance share awards and stock appreciation rights (SARs).
SARs may be granted, at the discretion of the Compensation Committee, in
conjunction with the grant of a stock option, subsequent to and in conjunction
with the grant on a non-qualified option or alone and are deemed to be exercised
on the last day of their term, if not otherwise exercised by the holder,
provided that the fair value of the common stock subject to the SAR exceeds the
exercise price on such date. The amount paid upon exercise may be in additional
stock or, in the discretion of the Compensation Committee, in cash.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events could differ materially from
those anticipated in the forward-looking statements. Important factors that
might cause such a difference include, among other things, general economic
conditions, particularly the real estate market, in the Company's primary market
area, potential increases in the Company's non-performing assets (as well as
increases in the allowance for loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation and supervision, including increased
deposit insurance premiums or capital or reserve requirements, the so-called
Year 2000 issue, changes in interest rates, and increased competition and bank
consolidations in the Company's market area.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 1999 AND DECEMBER 31, 1998
Total assets increased by $12.3 million from $1,888.1 million at December
31, 1998 to $1,900.4 million at March 31, 1999. During the quarter ended March
31, 1999, Compass increased its loan portfolio by $107.8 million, or 7.7%, which
was funded by liquid assets, principally federal funds sold and other short-term
investments, remaining from the proceeds of the November 1998 stock offering and
by additional Federal Home Loan Bank advances of $14.5 million.
The increase in loans occurred primarily in the residential mortgage,
indirect auto and commercial loan portfolios. From December 31, 1998 to March
31, 1999, residential mortgage loans increased by $72.0 million, or 10.3%,
indirect auto loans (net of unearned discounts) increased by $21.6 million, or
6.7% and commercial loans increased by $7.4 million, or 12.7%. The growth during
the quarter ended March 31, 1999 is generally attributable to the favorable
interest rate environment and economic conditions which prevailed during this
period and, more specifically, is due to the previously disclosed temporary
change in practice by Compass to retain in portfolio all fixed rate residential
mortgage loan originations. As a result, residential mortgage loan sales
declined from $41.3 million in the quarter ended March 31, 1998 to $3.5 million
in the quarter ended March 31, 1999. The growth in residential mortgage loans
was also aided by a program begun in August 1998 to fund adjustable rate
mortgages originated by loan correspondents. During the quarter ended March 31,
1999, $38.0 million of such loans were funded. The Company has continued to
emphasize the origination of indirect auto loans through its network of
automobile dealers causing the growth in this portfolio.
Total deposits at March 31, 1999 were $1,489.1 million, a decrease of $8.1
million, compared to $1,497.2 million at December 31, 1998. This decrease was
due to a reduction of approximately 1% in the balance of certificates of
deposit. Core deposit account balances were unchanged during the quarter. The
modest change in deposits during the quarter is generally attributable to normal
seasonal fluctuations, particularly in the Martha's Vineyard market and is not
believed to reflect any adverse regional or bank-specific trends which are
expected to continue. Total borrowed funds were $114.2 million at March 31, 1999
compared to $98.8 million at December 31, 1998, an increase of $15.4 million, or
15.6%. During the quarter ended March 31, 1999, Compass increased its net
borrowings from the Federal Home Loan Bank by $14.5 million in order to fund
loan growth. New borrowings during the quarter have maturities ranging from 6
months to two years and a weighted average interest rate of 5.14%. Management
believes that it will continue to expand its Federal Home Loan Bank borrowings
during the remainder of 1999 to partially fund anticipated loan growth.
The increase in stockholders' equity of $5.0 million to $276.5 million at
March 31, 1999 resulted from the net income of $5.6 million for the quarter
ended March 31, 1999 which was partially offset by a decline in the unrealized
gain on securities available for sale.
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED MARCH 31, 1999 AND 1998
Net income was $5.6 million, or $.22 per diluted share, for the quarter
ended March 31, 1999 compared to net income of $4.4 million for the comparable
period in 1998. The 1999 results, as compared to 1998, include an increase of
$2.9 million, or 19.5%, in net interest income, a decrease of $422,000, or
18.5%, in non-interest income and an increase of $888,000, or 9.1%, in
non-interest expense. The Company's effective tax rate declined to 36.9% in 1999
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<PAGE>
from 39.7% in the comparable 1998 period.
INTEREST INCOME. Interest income for the quarter ended March 31, 1999 was
$32.7 million, compared to $30.4 million for the quarter ended March 31, 1998,
an increase of $2.3 million, or 7.6%. All of the increase in interest income
resulted from growth in average interest-earning assets of $198.6 million, or
12.5%, as the overall yield on interest-earning assets declined by 32 basis
points in the 1999 period. The principal areas of growth in average balances
were related to real estate loans (up $111.1 million, or 12.4%) and indirect
auto loans (up $108.9 million, or 49.0%). Most of the real estate loan growth
resulted from increased originations and retention in portfolio of one-to-four
family real estate loans. The increase in indirect auto loans resulted from an
improved economic environment within Compass's local markets and the continued
emphasis of this area of lending.
The net proceeds of the November 1998 stock offering of $121.4 million had
a positive impact on the Company's interest income and, in particular, its net
interest income. Of the increase of $2.3 million in interest income,
approximately $1.6 million is attributable to the earnings on the use of the net
proceeds of the stock offering during the quarter ended March 31, 1999.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 1999 was
$14.9 million compared to $15.4 million for the quarter ended March 31, 1998, a
decrease of $545,000 or 3.5%. This decrease resulted from a 36 basis points
decline in the cost of all funds from 4.39% in 1998 to 4.03% in 1999, partially
offset by a higher average balance of interest-bearing liabilities (up $71.5
million, or 5.1%). Average interest-bearing deposit balances increased $97.5
million, or 7.6%, during the quarter ended March 31, 1999 compared to the same
period in 1998.
Interest expense on borrowed funds decreased $464,000, or 24.4%, in the
quarter ended March 31, 1999 due to a $26.0 million, or 20.7%, decrease in the
average balance of such funds and a 28 basis point reduction in the average rate
paid on borrowed funds to 5.78% in the 1999 period compared to 6.06% in the 1998
period.
PROVISION FOR LOAN LOSSES. Compass provides for loan losses in order to
maintain the allowance for loan losses at a level that management estimates is
appropriate to absorb future charge-offs of loans deemed uncollectible. In
determining the appropriate level of the allowance for loan losses, management
considers past and anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume and type of
lending and the levels of nonperforming and other classified loans. The amount
of the allowance is based on estimates and ultimate losses may vary from such
estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly in order to maintain the adequacy of
the allowance.
Compass provided $225,000 for loan losses in the quarter ended March 31,
1999 compared to $240,000 in the quarter ended March 31, 1998. The provision was
primarily attributable to the growth in the loan portfolio.
NON-INTEREST INCOME. Total non-interest income was $1.9 million for the
quarter ended March 31, 1999 compared to $2.3 million in the same period of
1998, a decrease of $422,000. Gains on the sale of loans declined by $250,000
during the quarter ended March 31, 1999 as compared to the comparable period in
1998 as a result of the temporary change in practice, initiated by the Bank in
November 1998, whereby fixed rate residential mortgage loans with terms of 15
years or longer are not being sold in the secondary mortgage market. This change
resulted from the Sandwich acquisition and the stock offering and their impact
on the sensitivity of the balance sheet to changes in interest rates along with
the relative attractiveness of the yield and expected duration of such mortgage
loans. While the Company expects to return to selling longer-term fixed rate
residential mortgage loans later in 1999, until it does so, the Company expects
to experience a decline in its gains on the sale of loans.
Other non-interest income decreased by $172,000 during the quarter ended
March 31, 1999 compared to the comparable 1998 period. The principal items
causing this decline were the waiver of the monthly deposit fee for customers of
the former Sandwich Bank for February 1999 due to the conversion of accounts to
Compass's computer system and the growing impact of the amortization of mortgage
servicing rights which resulted from application of SFAS No. 125 by Compass in
1996 and which reduces loan servicing fee income.
NON-INTEREST EXPENSE. Non-interest expense increased by $888,000, or 9.1%,
from $9.7 million for the quarter ended March 31, 1998 to $10.6 million for the
quarter ended March 31, 1999. Of this increase, $68,000 related to
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<PAGE>
salaries and employee benefits, which rose 1.3% to $5.3 million for the quarter
ended March 31, 1999. With overall salary levels increasing by approximately 4%
in 1999, and given additional costs attributable to the ESOP established in
November 1998, the increase in salaries and employee benefits has been partially
offset by other factors in the 1999 period, principally a reduction in the bonus
accrual and elimination of certain executive and director benefits at the former
Sandwich Bank.
Occupancy and equipment expenses increased $289,000, or 23.7%, to $1.5
million for the quarter ended March 31, 1999. This increase was due to an
increase in maintenance costs and rent expense attributable to relocation of the
Bank's Operations and Consumer Lending Departments, the opening of a new branch
in Plymouth as well as an upgraded branch in Westport and weather-related
maintenance costs.
Marketing expenses increased $36,000, or 7.3%, to $527,000 for the quarter
ended March 31, 1999. This increase was primarily attributable to the
continuation of an image campaign begun in December 1998, and related production
and advertising costs, to introduce Compass to each community on Cape Cod where
Sandwich had a branch office.
Data processing expenses increased $385,000, or 49.6%, to $1.2 million for
the quarter ended March 31, 1999. This increase was due to a number of factors
such as new services, including laser printing and Internet services, the
installation of additional communication lines and related network changes,
outsourcing of cash letter processing, Y2K compliance costs and volume-related
core processing costs due to increases in loans and deposits.
Other non-interest expenses increased $123,000, or 7.2%, for the quarter
ended March 31, 1999. This increase is due primarily to certain nonrecurring
costs associated with the merger with Sandwich as well as additional costs
associated with being a publicly-owned company.
INCOME TAXES. The effective tax rate for the quarter ended March 31, 1999
was 36.9% compared to 39.7% in the same period in 1998. This reduction in
overall tax rate is due to greater utilization of non-bank subsidiaries that are
taxed at lower rates for state tax purposes and an increase in federal low
income housing tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Compass's liquidity, represented by cash and cash equivalents and debt
securities, is a product of its operating, investing, and financing activities.
The Bank's primary sources of funds are deposits, borrowings, principal and
interest payments on outstanding loans, mortgage-backed securities and
collateralized mortgage obligations, maturities of investment securities and
funds provided from operations. While scheduled payments from the amortization
of loans and mortgage related securities and maturing investment securities are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates. Compass invests excess funds, if
any, in federal funds sold and other short-term investments which provide
liquidity to meet lending requirements.
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 March 31,1999, the Company maintained cash and
due from banks, short-term investments and debt securities (other than mortgage
related securities) maturing within one year of $93.3 million, or 4.9% of total
assets.
The Company's "Tier One" capital measured 21.3% of risk-weighted assets at
March 31, 1999. Total capital, including the "Tier Two" allowance for loan
losses, was 22.6% of risk-weighted assets. The leverage capital ratio was 14.4%.
These ratios placed the Company in the "well-capitalized" category according to
regulatory standards.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue (commonly referred to as "Y2K") is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. The Y2K issue, which is common to most corporations,
including banks, concerns the inability of information systems, primarily (but
not exclusively) computer software programs, to properly recognize and process
date-sensitive information as the Year 2000 approaches and beyond. The following
constitutes the Company's Y2K readiness disclosure under the Year 2000
Information and Readiness
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<PAGE>
Disclosure Act.
Since Compass's information systems functions are either outsourced to
service bureaus or processed in-house using programs developed by third-party
vendors, the direct effort to correct Y2K issues will be undertaken largely by
third parties and will therefore not be totally within Compass's direct control.
Compass expects to bring its mission critical operating systems into compliance
with Y2K requirements through the installation of updated or replacement
programs developed by third parties.
Compass began addressing the Y2K issue in the Fall of 1996 when it formed a
Y2K Project Team comprised of financial, operations, information systems,
internal audit, compliance, lending, corporate services, loan servicing and
retail personnel. A formal Y2K Action Plan was developed by the Y2K Project Team
and approved by the Board of Directors in 1997. The Board of Directors receives
quarterly Year 2000 status reports on all mission critical systems and related
testing details. During 1998, Compass engaged an outside consultant to assist in
providing limited Y2K assurance. Notwithstanding this engagement, Compass
retains responsibility for Y2K issues, plans and compliance efforts.
The Y2K Project Team has completed an assessment, identified mission
critical systems, and created a formal tracking system identifying all third
party vendors and their Y2K compliant version of all bank installed systems.
Mission critical systems include hardware, software, program interfaces,
operating systems as well as other mechanical or computer-generated requirements
that are beyond Compass's main central processing system and network. Based upon
the results of the assessment, Compass has established internal time frames to
upgrade or replace its existing hardware and software systems. Compass has added
to the Information Systems staff in the first quarter of 1999. The Bank will
utilize internal and, if necessary, external resources to test the software and
systems for Year 2000 modifications. Compass has completed approximately 95% of
the planned upgrade to its 34 retail branches with new Y2K compliant hardware
and branch teller platform software. Additionally, Compass has replaced other
specific hardware and software that had been identified as non-compliant
according to schedule and is 90% complete. Currently, approximately 90% of
Compass's information technology infrastructure has been determined to be Year
2000 ready and is deployed for use.
Compass's plan to resolve the Y2K issue was developed along the five phase
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997 which consisted
of (i) awareness; (ii) assessment; (iii) renovation; (iv) validation; and
(v) implementation. The awareness phase has been completed. The Y2K assessment
was completed and monitoring of service bureau and vendor progress is ongoing.
Renovation of third party systems that were identified as non-compliant have
been substantially upgraded or replaced by the compliant version by March 31,
1999. All non critical software applications affected by the millennium have
been identified. It is expected that these applications will be upgraded and Y2K
compliant by June 30, 1999. The Y2K Project Team has developed and implemented
test plans of all mission critical systems. Compass conducted a successful test
of its key transaction processing system with its service bureau in the fourth
quarter of 1998. In addition, Compass and its outside consultant have reviewed
documentation of its service bureaus' test results during the first quarter of
1999 and found the results of the tests to be acceptable. Compass is in the
process of developing its Y2K contingency plan incorporating certain elements of
its bankwide Disaster Recovery Plan. Also, Compass is working with its service
bureau to create a remote branch Mobile Recovery Unit, located in Framingham,
Massachusetts or possibly develop a paper- based, batch entry system to be used
in the event of a catastrophic telecommunications or power failure. The remote
branch Mobile Recovery Unit or paper-based, batch entry system would be created
at an off premise site that is capable of creating its own emergency power for
extended periods of time. Key documents would then be delivered to the remote
branch which is capable of transmitting data to Compass's service bureau. Both
locations also have emergency power to continue processing customer account
activity. The Compass contingency plan is scheduled to be completed by June 30,
1999 in accordance with the recently issued Interagency Regulatory Statement on
Contingency Planning. Contingency plans will be initiated if a vendor misses its
target date or is not considered Y2K compliant by June 30, 1999.
The chief components of Compass's expense related to the Y2K issue are
currently believed to be the replacement of personal computer equipment and the
purchase or upgrade of third-party software. External maintenance and internal
modification costs will be expensed as incurred. Costs of new hardware and
software will be capitalized and depreciated in accordance with Compass
policies. Management expects to expend in the range of $900,000 to $1.0
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<PAGE>
million on its Year 2000 readiness efforts. Through March 31, 1999, Compass had
expended approximately $825,000. Costs of the Y2K project are based on current
estimates and actual results could vary significantly from such estimates once
detailed testing is completed. If the resolution plan is unsuccessful, it may
have a material, adverse effect on Compass's future operating results and
financial condition.
Recognizing the importance of customer awareness, Compass has completed
three mailings of Y2K information to all customers with statement accounts.
Also, letters have been sent to major commercial loan customers and automobile
dealerships informing them of the Year 2000 Issue and how it can impact
businesses. An overall assessment of the Y2K readiness of Compass's commercial
loan customers was completed in October 1998, with an overall assessment of low
to medium risk. The Bank will continue to monitor its large commercial loan
relationships through account officers contact programs. Also, new and renewed
commercial credits greater than $100,000 include a Y2K analysis as part of the
normal underwriting decision process.
The Company acquired Sandwich on December 4, 1998. Data system conversions
were completed in February 1999. Year 2000 team leaders have incorporated into
their Y2K planning the integration of all of Sandwich's hardware and software
systems into those of Compass. Compass foresees no material Y2K complications
from the acquisition and plans to complete the Year 2000 project no later than
June 30, 1999.
To date, Compass has not identified any system which presents a material
risk of not being Year 2000 ready in a timely fashion or for which a suitable
alternative cannot be implemented. However, as Compass progresses with its Year
2000 project, it may identify systems which do present a material risk of Year
2000 disruption. Such disruption could include, among other things, the
inability to process and underwrite loan applications, to credit deposits and
withdrawals from customer accounts, to credit loan payments or track
delinquencies, to properly reconcile and record daily activity or to engage in
normal banking activities. Additionally, if Compass's commercial customers are
not Year 2000 compliant and suffer adverse effects on their operations, their
ability to meet their obligations to the Bank could be adversely affected. The
failure of Compass to identify systems which require Year 2000 hardware and
software upgrades that are critical to the Bank's operations or the failure of
the Bank or others with which the Bank does business to become Year 2000 ready
in a timely manner could have a material adverse impact on the Bank's financial
condition and results of operations. Moreover, to the extent that the risks
posed by the Year 2000 problem are pervasive in data processing and transmission
and communications services worldwide, the Bank cannot predict with any
certainty that its operations will remain materially unaffected after January 1,
2000 or on dates preceding this date at which time post-January 1, 2000 dates
become significant within the Bank's systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting the financial condition and
operating results of the Company is interest rate risk. This risk is managed by
periodic evaluation of the interest risk inherent in certain balance sheet
accounts, determination of the level of risk considered appropriate given
Compass's capital and liquidity requirements, business strategy, performance
objectives and operating environment and maintenance of such risks within
guidelines approved by the Board. Through such management, Compass seeks to
reduce the vulnerability of its net earnings to changes in interest rates.
Compass's Asset/Liability Committee, comprised of senior management, is
responsible for managing interest rate risk and reviewing with the Board of
Directors on a quarterly basis its activities and strategies, the effect of
those strategies on Compass's and the Company's operating results, Compass's
interest rate risk position and the effect changes in interest rates would have
on Compass's net interest income. The extent of movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Company.
The principal strategies the Company and Compass generally use to manage
interest rate risk include (i) emphasizing the origination and retention of
adjustable-rate loans, origination of indirect auto loans which have relatively
short maturities and origination of loans with maturities at least partly
matched with those of the deposits and borrowings funding the loans, (ii)
investing in debt securities with relatively short maturities and (iii)
classifying a significant portion of its investment portfolio as available for
sale so as to provide sufficient flexibility in liquidity management.
The Company quantifies its interest-rate risk exposure using a
sophisticated simulation model. Simulation analysis is used to measure the
exposure of net interest income to changes in interest rates over a specified
time horizon.
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<PAGE>
Simulation analysis involves projecting future interest income and expense under
various rate scenarios. Compass's internal guidelines on interest rate risk
specify that for every 100 basis points immediate shift in interest rates, its
estimated net interest income over the next 12 months should decline by less
than 5%.
In utilizing a 300 basis point increase in rates in its simulation model,
the full impact of annual rate caps of 200 basis points common to most
adjustable rate mortgage loan products is considered. The rate shocks used
assume an instantaneous and parallel change in interest rates. Prepayment speeds
for loans are based on published median dealer forecasts for each interest rate
scenario.
As of March 31, 1999, the Company's estimated exposure as a percentage of
estimated net interest income for the next twelve and twenty-four month periods
is as follows:
<TABLE>
<CAPTION>
PERCENTAGE CHANGE IN ESTIMATED
NET INTEREST INCOME OVER:
----------------------------------------
12 MONTHS 24 MONTHS
----------------------------------------
<S> <C> <C>
300 basis point increase in rates (9.44%) (5.01%)
200 basis point decrease in rates (0.88%) (5.63%)
</TABLE>
Based on the scenario above, net income would be adversely affected (within
Compass's internal guidelines) in both the twelve and twenty-four month periods.
For each one percentage point change in net interest income, the effect on net
income would be $463,000, assuming a 40% tax rate.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Compass are 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 their
business or the consolidated financial condition of the Company and Compass.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Articles of Organization of Seacoast Financial Services
Corporation****
3.2 By-Laws of Seacoast Financial Services Corporation****
4 Specimen certificate for the common stock of Seacoast Financial
Services Corporation***
10.1* Form of Employment Agreement by and among Seacoast Financial Services
Corporation, Compass Bank for Savings and Kevin G. Champagne**
10.2* Form of Employment Agreement by and among Compass Bank for Savings,
Seacoast Financial Services Corporation and certain Officers of
Compass Bank for Savings**
10.3* Form of Change in Control Agreements by and among Seacoast Financial
Services Corporation, Compass Bank for Savings, Kevin G. Champagne and
certain other Officers of Compass Bank for Savings**
10.4* Form of Change in Control Agreement by and among Seacoast Financial
Services Corporation, Compass Bank for Savings and certain Officers of
Compass Bank for Savings**
10.5* Form of Executive Salary Continuation Agreements made and entered into
by and between Compass Bank for Savings and Kevin G. Champagne, Arthur
W. Short, John D. Kelleher and Francis S. Mascianica and forms of
amendments thereto**
10.6* Trust Agreement, made as of December 18, 1992 by and between Compass
Bank for Savings and Shawmut Bank, N.A.**
10.7* Compass Bank for Savings 1999 Incentive Compensation Plan
10.8 Amended and Restated Affiliation and Merger Agreement dated at of
March 23, 1998 by and among Seacoast Financial Services Corporation,
Compass Bank for Savings, Sandwich Bancorp, Inc. and the Sandwich
Co-operative Bank**
10.9 Stock Option Agreement dated as of March 23, 1998 by and between
Sandwich Bancorp, Inc. and Seacoast Financial Services Corporation**
10.10 Form of Voting Agreements between Seacoast Financial Services
Corporation and the Directors of Sandwich Bancorp, Inc.**
10.11 Form of Affiliates Agreements between Seacoast Financial Services
Corporation and certain affiliates of Sandwich Bancorp, Inc.**
10.12* Compass Bank for Savings Executive Deferred Compensation Plan**
10.13* Rabbi Trust for Compass Bank for Savings Executive Deferred
Compensation Plan**
10.14(a)* Employment Agreements dated July 18, 1994 by and between Sandwich
Co-operative Bank and Frederic D. Legate, Dana S. Briggs and George L.
Larson***
10.14(b)* 1998 Amendment of Employment Agreements dated July 18, 1994 by and
between Sandwich Co-operative Bank and Frederic D. Legate, Dana S.
Briggs and George L. Larson***
10.15(a)* Employment Agreement dated December 17, 1991 by and between Sandwich
Cooperative Bank and David A. Parsons***
10.15(b)* 1998 Amendment to Employment Agreement dated December 17, 1991 by and
between Sandwich Co-operative Bank and David A. Parsons***
10.16* Sandwich Co-operative Bank 1983 Directors Deferred Income Agreement***
10.17* Sandwich Co-operative Bank 1992 Directors Deferred Compensation
Plan***
10.18* Supplemental Executive Retirement Agreements dated May 5, 1995 by and
between Sandwich Co-operative Bank and Frederic D. Legate, Dana S.
Briggs, George L. Larson and David A. Parsons and amendments
thereto***
10.19* Employment Agreement by and among Seacoast Financial Services
Corporation, Compass Bank for Savings and James E. Lambert***
10.20* Seacoast Financial Services Corporation 1999 Stock Incentive Plan*****
11 A statement regarding earnings per share is included in Item 1, Note
6, of this Report.
27 EDGAR Financial Data Schedule
- ----------------
* 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.
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<PAGE>
b. Reports on Form 8-K:
The Company filed Amendment No. 1 to a Current Report on Form 8-K with the
SEC on February 9, 1999, in connection with the acquisition of Sandwich Bancorp,
Inc. The Company also filed a Current Report on Form 8-K with the SEC on
February 9, 1999 in connection with its change in fiscal year from October 31 to
December 31.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Seacoast Financial Services Corporation
---------------------------------------
(Registrant)
Date: May 14, 1999 By /s/ Kevin G. Champagne
---------------------------------------
Kevin G. Champagne
President and Chief Executive Officer
Date: May 14, 1999 By /s/ Francis S. Mascianica, Jr.
---------------------------------------
Francis S. Mascianica, Jr.
Senior Vice President and
Chief Financial Officer
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<PAGE>
EXHIBIT 10.7
COMPASS BANK
[GRAPHIC OMITTED]
New Bedford, Massachusetts
INCENTIVE COMPENSATION PLAN
JANUARY, 1999
APPROVED AND ADOPTED BY
THE EXECUTIVE COMMITTEE
OF THE BOARD OF DIRECTORS
MARCH 25, 1999
<PAGE>
[GRAPHIC OMITTED]
New Bedford, Massachusetts
INCENTIVE PLAN
--------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Introduction and Highlights of Incentive Plan for 1999......................................3 - 4
INCENTIVE PLAN
Section I - Definitions.........................................................................4
Section II - Participation......................................................................5
Section III -Activating the Plan................................................................5
Section IV - Calculation of Awards.............................................................5
Section V - Distribution of Awards...........................................................6
Section VI - Plan Administration...............................................................6
Section VII - Amendment, Modification, Suspension or Termination...............................6
Section VIII - Effective Date of Plan..........................................................6
Section IX - Employer Relation with Participants...............................................7
Section X - Governing Law ..................................................................7
Section XI - President's Discretion............................................................7
1999 Performance Goals.................................................................Appendix A
Distribution of Awards.................................................................Appendix B
</TABLE>
<PAGE>
[GRAPHIC OMITTED]
INTRODUCTION AND HIGHLIGHTS OF INCENTIVE PLAN FOR 1999
Thomas Warren and Associates has been retained by Compass Bank to
develop an incentive plan. It is important to examine the benefits which accrue
to the organization through the operation of the incentive plan. The plan covers
all employees.
- - PROVIDES MOTIVATION: The opportunity for incentive awards provides
employees with the impetus to "stretch" for challenging, yet attainable,
goals.
- - PROVIDES RETENTION: by enhancing the Bank's competitive compensation
posture.
- - PROVIDES MANAGEMENT TEAM BUILDING: by making the incentive award dependent
on the attainment of bank goals, a "team orientation" is fostered among
all employees.
- - PROVIDES COMPETITIVE COMPENSATION STRATEGY: The implementation of
incentive arrangements is common in the banking industry today.
The highlights of the incentive plan included in the following pages
are as follows:
1. The recommended plan is competitive compared with similar sized
banks and the banking industry in general.
2. The Board of Directors controls all aspects of the Plan.
3. All employees are participants.
4. The financial criteria necessary for plan operation consists of EPS
and ROE goals.
5. Incentive distributions range from 0% of base salary (did not meet
goal) to 40% of base salary (maximum performance under plan).
6. Award distribution would be made during first quarter 2000 for
fiscal year end December 31, 1999 performance.
3
<PAGE>
7. The categories of incentive plan participants are as follows:
<TABLE>
<CAPTION>
Position Range of Bonus Awards
-------- ---------------------
<S> <C>
A. President & CEO 0% - 40%
Board of Directors
B. Executive Officers 0% - 30%
C. Senior Officers 0% - 25%
D. Vice Presidents 0% - 20%
E. Other Officers/Exempt Employees 0% - 13%
F. Non-exempt Employees 0% - 8%
</TABLE>
The Board of Directors of Compass Bank has established this Incentive
Plan. The PURPOSE of the plan is to meet and exceed financial goals and to
promote a superior level of performance relative to the Bank's competition in
its market area. Through payment of incentive compensation beyond base salaries,
the plan provides reward for meeting and exceeding the Bank's financial goals.
SECTION I -DEFINITIONS
Various terms used in the plan are defined as follows:
BASE SALARY: The base salary at the end of the plan year for
all employees. Total fees including retainers and
meeting fees for Board of Directors.
BOARD OF DIRECTORS: The Board of Directors of Compass Bank.
PRESIDENT & CEO: President and CEO of Compass Bank.
MANAGEMENT PERFORMANCE GOALS: Those pre-set objectives and goals which
are required to activate distribution of
awards under the plan.
COMPENSATION: The Compensation Committee of the Board of
Directors of the Bank.
PLAN PARTICIPANT: An eligible employee of the Bank designated by the
President & CEO and approved by the Personnel Committee for
participation for the Plan Year.
PLAN YEAR: The fiscal year.
4
<PAGE>
EPS: Earnings per Share.
---
ROE: Return on Equity.
---
Earnings are measured by Net Profit Return On Equity which is defined as the
Bank's net profit stated as a percentage of average surplus outstanding
exclusive of FAS 115 adjustments to capital and current year bonus accruals.
SECTION II -ELIGIBILITY TO PARTICIPATE
To be eligible for an award under the plan, a plan participant must be
in the full-time or part-time service of the Bank at the start and close of the
fiscal year and be in the employ of the Bank when the award is paid out.
However, if the active, full-time service with the Bank of a participant in the
plan is terminated by death, disability, retirement, or if the participant is on
an approved leave of absence, the President & CEO may recommend an award to such
a participant based on the proportion of the plan year that he/she was in active
service with the Bank. The President may recommend a prorated incentive award to
an employee with less than one year's service.
SECTION III - ACTIVATING THE PLAN
The operation of the plan is predicated on attaining and exceeding
management performance goals. The goals will consist of EPS and ROE. The
performance goals for the fiscal year are set forth in Appendix A.
SECTION IV - CALCULATION OF AWARDS
The Compensation Committee designates a rate of distribution for the
incentive awards as determined by this plan. The actual rate of distribution for
each category of employees will be based upon Bank performance. The individual
performance of each employee may also affect the dollar amount or percentage of
the award granted to each recipient under this plan. The full Board of Directors
will approve the final award distributions.
SECTION V - DISTRIBUTION OF AWARDS
Distribution of awards will be made during first quarter 2000 following
the end of the fiscal year. Distribution of the bonus award must be recommended
by CEO and approved by the Compensation Committee. IN THE EVENT OF DEATH, any
approved award as outlined in Section II for distribution will become payable to
the designated beneficiary of the participant as recorded under the Bank's group
life insurance program, or in the absence of valid designation, to the
participant's estate.
SECTION VI - PLAN ADMINISTRATION
The Board of Directors shall, with respect to the plan, have full power
and authority to construe, interpret and manage, control and administer this
plan, and to pass and decide upon cases in conformity with the objectives of the
plan.
Any decision made or action taken by the Bank or the Board of
Directors, arising out of, or in connection with, the administration,
interpretation, and effect of the plan shall be at their absolute discretion and
will be conclusive and binding on all parties.
5
<PAGE>
No member of the Board of Directors or employee of the Bank shall be
liable for any act or action hereunder, whether of omission or commission, by a
plan participant or employee or by any agent to whom duties in connection with
the administration of the plan have been delegated in accordance with the
provision of the plan.
SECTION VII - AMENDMENT, MODIFICATION, SUSPENSION OR TERMINATION
The Bank reserves the right, by and through its Board of Directors to
amend, modify, suspend, reinstate or terminate all or part of the plan at the
end of any plan year. The Board of Directors will give prompt written notice to
each participant of any amendment, suspension or termination or any material
modification of the plan.
SECTION VIII - EFFECTIVE DATE OF THE PLAN
The initial effective date of the plan shall be January 1, 1999 and
January 1st of each year for succeeding plan years.
SECTION IX - EMPLOYER RELATION WITH PARTICIPANTS
Neither establishment nor the maintenance of the plan shall be
construed as conferring any legal rights upon any participant or any person for
a continuation of employment, nor shall it interfere with the right of an
employer to discharge any participant or otherwise deal with him/her without
regard to the existence of the plan.
SECTION X - GOVERNING LAW
Except to the extent pre-empted under federal law, the provisions of
the plan shall be construed, administered and enforced in accordance with the
domestic internal law of the State of Massachusetts.
In the event of relevant changes in the Internal Revenue Code, related
rulings and regulations, or changes imposed by other regulatory agencies
affecting the continued appropriateness of the plan and awards made thereunder,
the Board may, at its sole discretion, accelerate or change the manner of
payments of any unpaid awards or amend the provisions of the plan.
SECTION XI - PRESIDENT'S DISCRETION
The President & CEO will review the amounts to be awarded to individual
participants in the incentive plan. No award will be made to a participant whose
normal performance appraisal does not meet acceptable standards. The President
may recommend to the Board of Directors an upward or downward adjustment to a
bonus award if an individual recipients performance warrants. The Board of
Directors may adjust the President & CEO's bonus award upward or downward if in
their opinion the President & CEO's performance warrants. Under no circumstances
should an upward adjustment exceed 20% for the President & CEO.
6
<PAGE>
[GRAPHIC OMITTED]
APPENDIX A
New Bedford, Massachusetts
1999 PERFORMANCE GOALS
The Board of Directors has established the following performance goals
for the 1999 plan year:
1.) ROE target of 8.05 to 9.73
(50% of Plan)
2.) EPS target of $0.85 - $1.04
ending December 31, 1999
(50% of Plan)
<PAGE>
APPENDIX B
COMPASS BANK FOR SAVINGS
NEW BEDFORD, MASSACHUSETTS
A: CEO & BOARD OF DIRECTORS
<TABLE>
<CAPTION>
PERFORMANCE EPS GOAL AWARD BASED ROE GOAL AWARD BASED TOTAL
LEVEL GOAL = 50% ON EPS GOAL = 50% ON ROE AWARD
<S> <C> <C> <C> <C> <C>
100% 0.85 5.00% 8.05 5.00% 10%
110% 0.89 8.00% 8.39 8.00% 16%
120% 0.93 11.00% 8.73 11.00% 22%
130% 0.96 14.00% 9.06 14.00% 28%
140% 1 17.00% 9.40 17.00% 34%
150% 1.04 20.00% 9.73 20.00% 40%
</TABLE>
B: EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
PERFORMANCE EPS GOAL AWARD BASED ROE GOAL AWARD BASED TOTAL
LEVEL GOAL = 50% ON EPS GOAL = 50% ON ROE AWARD
<S> <C> <C> <C> <C> <C>
100% 0.85 5.00% 8.05 5.00% 10%
110% 0.89 7.00% 8.39 7.00% 14%
120% 0.93 9.00% 8.73 9.00% 18%
130% 0.96 11.00% 9.06 11.00% 22%
140% 1 13.00% 9.40 13.00% 26%
150% 1.04 15.00% 9.73 15.00% 30%
</TABLE>
C: SENIOR OFFICERS
<TABLE>
<CAPTION>
PERFORMANCE EPS GOAL AWARD BASED ROE GOAL AWARD BASED TOTAL
LEVEL GOAL = 50% ON EPS GOAL = 50% ON ROE AWARD
<S> <C> <C> <C> <C> <C>
100% 0.85 5.00% 8.05 5.00% 10%
110% 0.89 6.50% 8.39 6.50% 13%
120% 0.93 8.00% 8.73 8.00% 16%
130% 0.96 9.50% 9.06 9.50% 19%
140% 1 11.00% 9.40 11.00% 22%
150% 1.04 12.50% 9.73 12.50% 25%
</TABLE>
<PAGE>
D: VICE PRESIDENTS
<TABLE>
<CAPTION>
PERFORMANCE EPS GOAL AWARD BASED ROE GOAL AWARD BASED TOTAL
LEVEL GOAL = 50% ON EPS GOAL = 50% ON ROE AWARD
<S> <C> <C> <C> <C> <C>
100% 0.85 5.00% 8.05 5.00% 10%
110% 0.89 6.00% 8.39 6.00% 12%
120% 0.93 7.00% 8.73 7.00% 14%
130% 0.96 8.00% 9.06 8.00% 16%
140% 1 9.00% 9.40 9.00% 18%
150% 1.04 10.00% 9.73 10.00% 20%
</TABLE>
E: OTHER OFFICERS AND EXEMPT
<TABLE>
<CAPTION>
PERFORMANCE EPS GOAL AWARD BASED ROE GOAL AWARD BASED TOTAL
LEVEL GOAL = 50% ON EPS GOAL = 50% ON ROE AWARD
<S> <C> <C> <C> <C> <C>
100% 0.85 4.00% 8.05 4.00% 8%
110% 0.89 4.50% 8.39 4.50% 9%
120% 0.93 5.00% 8.73 5.00% 10%
130% 0.96 5.50% 9.06 5.50% 11%
140% 1 6.00% 9.40 6.00% 12%
150% 1.04 6.50% 9.73 6.50% 13%
</TABLE>
F: NON-EXEMPT EMPLOYEES
<TABLE>
<CAPTION>
PERFORMANCE EPS GOAL AWARD BASED ROE GOAL AWARD BASED TOTAL
LEVEL GOAL = 50% ON EPS GOAL = 50% ON ROE AWARD
<S> <C> <C> <C> <C> <C>
100% 0.85 1.50% 8.05 1.50% 3%
110% 0.89 2.00% 8.39 2.00% 4%
120% 0.93 2.50% 8.73 2.50% 5%
130% 0.96 3.00% 9.06 3.00% 6%
140% 1 3.50% 9.40 3.50% 7%
150% 1.04 4.00% 9.73 4.00% 8%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> $52,125
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 106
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 277,053
<INVESTMENTS-CARRYING> 12,693
<INVESTMENTS-MARKET> 12,800
<LOANS> 1,511,827
<ALLOWANCE> 16,065
<TOTAL-ASSETS> 1,900,400
<DEPOSITS> 1,489,061
<SHORT-TERM> 13,758
<LIABILITIES-OTHER> 20,586
<LONG-TERM> 100,472
0
0
<COMMON> 268
<OTHER-SE> 276,255
<TOTAL-LIABILITIES-AND-EQUITY> 1,900,400
<INTEREST-LOAN> 27,876
<INTEREST-INVEST> 4,537
<INTEREST-OTHER> 313
<INTEREST-TOTAL> 32,726
<INTEREST-DEPOSIT> 13,413
<INTEREST-EXPENSE> 14,852
<INTEREST-INCOME-NET> 17,874
<LOAN-LOSSES> 225
<SECURITIES-GAINS> 37
<EXPENSE-OTHER> 10,604
<INCOME-PRETAX> 8,907
<INCOME-PRE-EXTRAORDINARY> 8,907
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,617
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
<YIELD-ACTUAL> 4.00
<LOANS-NON> 5,782
<LOANS-PAST> 2,231
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,914
<CHARGE-OFFS> 203
<RECOVERIES> 129
<ALLOWANCE-CLOSE> 16,065
<ALLOWANCE-DOMESTIC> 16,065
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
