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 MARCH 31, 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/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 ý No o
At May 15, 2002, the Company had 24,231,886 shares of common stock outstanding.
SEACOAST FINANCIAL SERVICES CORPORATION
INDEX
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
(Unaudited)
(In thousands, except share amounts)
|
| March 31, |
| December 31, |
| ||
|
| 2002 |
| 2001 |
| ||
ASSETS |
|
|
|
|
| ||
Cash and due from banks |
| $ | 101,973 |
| $ | 87,834 |
|
Federal funds sold |
| 40,617 |
| 92,899 |
| ||
Short-term investments |
| 10,000 |
| 10,000 |
| ||
Total cash and cash equivalents |
| 152,590 |
| 190,733 |
| ||
Investment securities— |
|
|
|
|
| ||
Available-for-sale, at fair value |
| 480,426 |
| 405,788 |
| ||
Held-to-maturity, at amortized cost |
| 19,482 |
| 20,551 |
| ||
Restricted equity securities |
| 41,667 |
| 40,837 |
| ||
Loans held-for-sale |
| 18,456 |
| 19,675 |
| ||
Loans, net (Note 3) |
| 2,611,004 |
| 2,545,469 |
| ||
Accrued interest receivable |
| 17,524 |
| 15.872 |
| ||
Banking premises and equipment, net |
| 50,902 |
| 51,294 |
| ||
Other real estate owned, net |
| 308 |
| 427 |
| ||
Net deferred tax asset |
| 11,828 |
| 9,895 |
| ||
Goodwill (Note 2) |
| 33,903 |
| 33,903 |
| ||
Intangible assets (Note 2) |
| 2,162 |
| 2,370 |
| ||
Other assets |
| 10,160 |
| 10,653 |
| ||
Total assets |
| $ | 3,450,412 |
| $ | 3,347,467 |
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
| ||
Deposits (Note 4) |
| $ | 2,253,111 |
| $ | 2,192,357 |
|
Short-term borrowings |
| 46,508 |
| 34,584 |
| ||
Federal Home Loan Bank advances |
| 809,042 |
| 786,917 |
| ||
Other borrowings |
| 1,825 |
| 1,840 |
| ||
Mortgagors' escrow payments |
| 5,175 |
| 4,761 |
| ||
Accrued expenses and other liabilities |
| 25,422 |
| 21,284 |
| ||
Total liabilities |
| 3,141,083 |
| 3,041,743 |
| ||
COMMITMENTS AND CONTINGENCIES |
|
|
|
|
| ||
Stockholders' equity (Notes 7 and 8): |
|
|
|
|
| ||
Preferred stock, par value $.01 per share; authorized 10,000,000 shares; none issued |
| — |
| — |
| ||
Common stock, par value $.01 per share; authorized 100,000,000 shares; 26,758,136 shares issued |
| 268 |
| 268 |
| ||
Additional paid-in capital |
| 153,370 |
| 153,216 |
| ||
Retained earnings |
| 196,278 |
| 189,743 |
| ||
Treasury stock, at cost, 2,519,250 shares in 2002 and 2,439,000 shares in 2001 |
| (29,712 | ) | (28,185 | ) | ||
Accumulated other comprehensive income |
| 1,529 |
| 3,531 |
| ||
Unearned compensation — ESOP and restricted stock |
| (12,123 | ) | (12,575 | ) | ||
Shares held in employee trust |
| (281 | ) | (274 | ) | ||
Total stockholders' equity |
| 309,329 |
| 305,724 |
| ||
Total liabilities and stockholders' equity |
| $ | 3,450,412 |
| $ | 3,347,467 |
|
See accompanying notes to the unaudited consolidated financial statements.
1
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
(In thousands, except per share amounts)
|
| 2002 |
| 2001 |
| ||
INTEREST AND DIVIDEND INCOME: |
|
|
|
|
| ||
Interest on loans |
| $ | 46,923 |
| $ | 47,212 |
|
Interest and dividends on investment securities |
| 5,847 |
| 4,971 |
| ||
Interest on federal funds sold and short-term investments |
| 430 |
| 481 |
| ||
Total interest and dividend income |
| 53,200 |
| 52,664 |
| ||
|
|
|
|
|
| ||
INTEREST EXPENSE: |
|
|
|
|
| ||
Interest on deposits |
| 13,724 |
| 19,267 |
| ||
Interest on borrowed funds |
| 10,681 |
| 9,464 |
| ||
Total interest expense |
| 24,405 |
| 28,731 |
| ||
Net interest income |
| 28,795 |
| 23,933 |
| ||
|
|
|
|
|
| ||
PROVISION FOR LOAN LOSSES |
| 1,535 |
| 1,400 |
| ||
Net interest income after provision for loan losses |
| 27,260 |
| 22,533 |
| ||
|
|
|
|
|
| ||
NONINTEREST INCOME: |
|
|
|
|
| ||
Deposit and other banking fees |
| 2,172 |
| 1,843 |
| ||
Loan servicing fees, net |
| 197 |
| 281 |
| ||
Merchant card fee income, net |
| 167 |
| 131 |
| ||
Other loan fees |
| 234 |
| 424 |
| ||
Gain (loss) on investment securities, net |
| 141 |
| (1 | ) | ||
Gain on sales of loans, net |
| 83 |
| 39 |
| ||
Other income |
| 211 |
| 347 |
| ||
Total noninterest income |
| 3,205 |
| 3,064 |
| ||
|
|
|
|
|
| ||
NONINTEREST EXPENSE: |
|
|
|
|
| ||
Salaries and employee benefits |
| 9,413 |
| 7,999 |
| ||
Occupancy and equipment expenses |
| 2,171 |
| 2,156 |
| ||
Data processing expenses |
| 1,700 |
| 1,585 |
| ||
Marketing expenses |
| 473 |
| 619 |
| ||
Professional services expenses |
| 608 |
| 806 |
| ||
Amortization of goodwill and intangibles (Note 2) |
| 208 |
| 736 |
| ||
Other operating expenses |
| 2,316 |
| 1,906 |
| ||
Total noninterest expense |
| 16,889 |
| 15,807 |
| ||
Income before provision for income taxes |
| 13,576 |
| 9,790 |
| ||
|
|
|
|
|
| ||
PROVISION FOR INCOME TAXES |
| 4,702 |
| 3,059 |
| ||
Net income |
| $ | 8,874 |
| $ | 6,731 |
|
|
|
|
|
|
| ||
Earnings per share (Note 5): |
|
|
|
|
| ||
Basic |
| $ | 0.39 |
| $ | 0.29 |
|
Diluted |
| $ | 0.38 |
| $ | 0.28 |
|
See accompanying notes to the unaudited consolidated financial statements.
2
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
(In thousands, except per share amounts)
|
|
|
|
| Common Stock |
| Additional Paid-In Capital |
| Retained Earnings |
| Treasury Stock |
| Accumulated Other Comprehensive Income (Loss) |
| Unearned Compensation ESOP/Restricted Stock |
| Shares Held in Employee Trust |
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, December 31, 2000 |
| $ | 268 |
| $ | 152,795 |
| $ | 166,865 |
| $ | (17,990 | ) | $ | 791 |
| $ | (14,384 | ) | $ | (157 | ) | $ | 288,188 |
|
Repurchase of common stock (Note 7) |
| — |
| — |
| — |
| (1,518 | ) | — |
| — |
| — |
| (1,518 | ) | ||||||||
Net income |
| — |
| — |
| 6,731 |
| — |
| — |
| — |
| — |
| 6,731 |
| ||||||||
Other comprehensive income — Change in unrealized loss on securities available for sale, net of taxes |
| — |
| — |
| — |
| — |
| 1,615 |
| — |
| — |
| 1,615 |
| ||||||||
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,346 |
| ||||||||
Cash dividends — $.08 per share |
| — |
| — |
| (1,912 | ) | — |
| — |
| — |
| — |
| (1,912 | ) | ||||||||
Amortization of unearned compensation |
| — |
| 44 |
| — |
| — |
| — |
| 452 |
| — |
| 496 |
| ||||||||
Other |
| — |
| — |
| — |
| — |
| — |
| — |
| (52 | ) | (52 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, March 31, 2001 |
| $ | 268 |
| $ | 152,839 |
| $ | 171,684 |
| $ | (19,508 | ) | $ | 2,406 |
| $ | (13,932 | ) | $ | (209 | ) | $ | 293,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, December 31, 2001 |
| $ | 268 |
| $ | 153,216 |
| $ | 189,743 |
| $ | (28,185 | ) | $ | 3,531 |
| $ | (12,575 | ) | $ | (274 | ) | $ | 305,724 |
|
Exercise of Stock Options |
| — |
| 36 |
| — |
| 20 |
| — |
| — |
| — |
| 56 |
| ||||||||
Repurchase of common stock (Note 7) |
| — |
| — |
| — |
| (1,547 | ) | — |
| — |
| — |
| (1,547 | ) | ||||||||
Net income |
| — |
| — |
| 8,874 |
| — |
| — |
| — |
| — |
| 8,874 |
| ||||||||
Other comprehensive income — Change in unrealized gain on securities available for sale, net of taxes |
| — |
| — |
| — |
| — |
| (2,002 | ) | — |
| — |
| (2,002 | ) | ||||||||
Comprehensive income |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 6,872 |
| ||||||||
Cash dividends — $.10 per share |
| — |
| — |
| (2,339 | ) | — |
| — |
| — |
| — |
| (2,339 | ) | ||||||||
Amortization of unearned compensation |
| — |
| 118 |
| — |
| — |
| — |
| 452 |
|
|
| 570 |
| ||||||||
Other |
| — |
| — |
| — |
| — |
| — |
| — |
| (7 | ) | (7 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Balance, March 31, 2002 |
| $ | 268 |
| $ | 153,370 |
| $ | 196,278 |
| $ | (29,712 | ) | $ | 1,529 |
| $ | (12,123 | ) | $ | (281 | ) | $ | 309,329 |
|
See accompanying notes to the unaudited consolidated financial statements.
3
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(Unaudited)
(In Thousands)
|
| 2002 |
| 2001 |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
| ||
Net income |
| $ | 8,874 |
| $ | 6,731 |
|
Adjustments to reconcile net income to net cash provided by operating activities — |
|
|
|
|
| ||
Depreciation |
| 1,081 |
| 976 |
| ||
Amortization and accretion, net |
| 650 |
| 742 |
| ||
Goodwill and intangibles amortization, net |
| 99 |
| 429 |
| ||
Stock-based compensation |
| 570 |
| 496 |
| ||
Provision for loan losses |
| 1,535 |
| 1,400 |
| ||
(Gain) loss on investment securities, net |
| (141 | ) | 1 |
| ||
(Gain) loss on sale of fixed assets |
| 1 |
| (30 | ) | ||
Other real estate owned income |
| — |
| (47 | ) | ||
Benefit for prepaid taxes |
| (433 | ) | (562 | ) | ||
Originations of loans held-for-sale |
| (7,311 | ) | (10,845 | ) | ||
Proceeds from sales of loans originated for resale |
| 8,613 |
| 3,888 |
| ||
Gain on sales of loans, net |
| (83 | ) | (39 | ) | ||
Net increase in accrued interest receivable |
| (1,652 | ) | (288 | ) | ||
Net decrease in other assets |
| 493 |
| 499 |
| ||
Net increase in accrued expenses and other liabilities |
| 4,109 |
| 3,498 |
| ||
Net cash provided by operating activities |
| 16,405 |
| 6,849 |
| ||
|
|
|
|
|
| ||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
| ||
Purchase of securities classified as held to maturity |
| (1,098 | ) | — |
| ||
Purchase of securities classified as available-for-sale |
| (113,385 | ) | (11,086 | ) | ||
Purchase of restricted equity securities |
| (830 | ) | (5,375 | ) | ||
Proceeds from sales, calls, paydowns and maturities of |
| 34,718 |
| 15,691 |
| ||
Proceeds from sales, calls, paydowns and maturities of |
| 2,134 |
| 6,127 |
| ||
Purchase of loans |
| — |
| (1,300 | ) | ||
Net increase in loans |
| (67,009 | ) | (88,846 | ) | ||
Recoveries of loans previously charged off |
| 181 |
| 137 |
| ||
Proceeds from sales of other real estate owned |
| 43 |
| 10 |
| ||
Proceeds from sales of fixed assets |
| — |
| 104 |
| ||
Purchase of premises and equipment |
| (700 | ) | (1,682 | ) | ||
Net cash used in investing activities |
| (145,946 | ) | (86,220 | ) | ||
4
|
| 2002 |
| 2001 |
| |||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
| |||||
Increase in NOW, money market deposit and demand deposit accounts |
| $ | 44,330 |
| $ | 3,631 |
| |||
Increase in passbook and other savings accounts |
| 14,226 |
| 8,386 |
| |||||
Increase in certificates of deposit |
| 2,213 |
| 8,977 |
| |||||
Advances from Federal Home Loan Bank |
| 62,000 |
| 154,973 |
| |||||
Repayments of Federal Home Loan Bank advances |
| (39,864 | ) | (49,237 | ) | |||||
Increase (decrease) in short-term and other borrowings |
| 11,909 |
| (3,589 | ) | |||||
Increase in mortgagors' escrow payments |
| 414 |
| 1,305 |
| |||||
Repurchase of common stock |
| (1,547 | ) | (1,518 | ) | |||||
Cash dividends |
| (2,339 | ) | (1,912 | ) | |||||
Exercise of stock options |
| 56 |
| — |
| |||||
Net cash provided by financing activities |
| 91,398 |
| 121,016 |
| |||||
|
|
|
|
|
| |||||
Net (decrease) increase in cash and cash equivalents |
| (38,143 | ) | 41,645 |
| |||||
Cash and cash equivalents, beginning of year |
| 190,733 |
| 107,513 |
| |||||
Cash and cash equivalents, end of period |
| $ | 152,590 |
| $ | 149,158 |
| |||
|
|
|
|
|
| |||||
Supplemental disclosure of cash flow information: |
|
|
|
|
| |||||
Interest paid on deposits and borrowed funds |
| $ | 24,378 |
| $ | 28,064 |
| |||
Income taxes paid |
| 1,175 |
| 758 |
| |||||
|
|
|
|
|
| |||||
Supplemental disclosure of noncash transactions: |
|
|
|
|
| |||||
Transfers from loans to other real estate owned |
| — |
| 339 |
| |||||
See accompanying notes to the unaudited consolidated financial statements.
5
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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 and Lighthouse Securities Corporation (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.
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.
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. Certain reclassifications have been made to prior year balances to conform to the current year presentation.
6
(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 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 first quarter of 2002. An initial impairment test is required to be performed by June 30, 2002 and 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 expects to complete its initial impairment test during the second quarter of 2002. The Company does not expect to record an impairment charge upon completion of the initial impairment test. However, there can be no assurance that a material impairment charge will not be recorded after the test is completed.
Prior to adoption of SFAS 142, goodwill was being amortized on a straight-line basis over 15 years. For the three months ended March 31, 2001 goodwill amortization expense was $606,000. Actual results of operations for the three-month period ended March 31, 2002 and pro forma results of operations for the three-month period ended March 31, 2001 as if SFAS 142 had been adopted as of January 1, 2001 are as follows:
|
| Three Months Ending |
| |||||
|
| March 31, 2002 |
| March 31, 2001 |
| |||
|
| (In thousands) |
| |||||
Reported net income |
| $ | 8,874 |
| $ | 6,731 |
| |
Add: Goodwill amortization, net of tax |
| — |
| 606 |
| |||
Adjusted Net Income |
| $ | 8,874 |
| $ | 7,337 |
| |
|
|
|
|
|
| |||
Weighted average common shares outstanding — basic |
| 23,004,842 |
| 23,483,824 |
| |||
Weighted average common and common stock |
|
|
|
|
| |||
equivalent shares outstanding — diluted |
| 23,524,716 |
| 23,734,187 |
| |||
|
|
|
|
|
| |||
Basic earnings per share: |
|
|
|
|
| |||
Reported net income |
| $ | 0.39 |
| $ | 0.29 |
| |
Add: goodwill amortization, net of tax |
| — |
| 0.03 |
| |||
Adjusted net income |
| $ | 0.39 |
| $ | 0.32 |
| |
Diluted earnings per share: |
|
|
|
|
| |||
Reported net income |
| $ | 0.38 |
| $ | 0.28 |
| |
Add: goodwill amortization, net of tax |
| — |
| 0.03 |
| |||
Adjusted net income |
| $ | 0.38 |
| $ | 0.31 |
| |
7
(3) LOANS
The loan portfolio consisted of the following:
|
| March 31, 2002 |
| December 31, 2001 |
| ||
|
| (In thousands) |
| ||||
Real estate loans: |
|
|
|
|
| ||
Residential (one-to-four family) |
| $ | 1,335,577 |
| $ | 1,311,606 |
|
Commercial |
| 336,315 |
| 337,277 |
| ||
Construction |
| 113,133 |
| 108,556 |
| ||
Home equity lines of credit |
| 50,561 |
| 45,709 |
| ||
Total real estate loans |
| 1,835,586 |
| 1,803,148 |
| ||
Commercial loans |
| 123,022 |
| 115,562 |
| ||
Consumer loans: |
|
|
|
|
| ||
Indirect auto loans |
| 629,091 |
| 601,884 |
| ||
Less-unearned discount |
| 1,075 |
| 1,651 |
| ||
Indirect auto loans, net |
| 628,016 |
| 600,233 |
| ||
Other |
| 54,712 |
| 56,039 |
| ||
Total consumer loans, net |
| 682,728 |
| 656,272 |
| ||
Total loans |
| 2,641,336 |
| 2,574,982 |
| ||
Less-allowance for loan losses |
| 30,332 |
| 29,513 |
| ||
Total loans, net |
| $ | 2,611,004 |
| $ | 2,545,469 |
|
Non-accrual loans amounted $12,194,000 and $13,408,000 at March 31, 2002 and December 31, 2001, respectively.
(4) DEPOSITS
A summary of deposit balances is as follows: |
| March 31, 2002 |
| December 31, 2001 |
| ||
|
| (In thousands) |
| ||||
Demand deposit accounts |
| $ | 180,556 |
| $ | 180,916 |
|
NOW and money market deposit accounts |
| 788,845 |
| 744,155 |
| ||
Passbook and other savings accounts |
| 289,389 |
| 275,163 |
| ||
Total non-certificate accounts |
| 1,258,790 |
| 1,200,234 |
| ||
|
|
|
|
|
| ||
Certificates of deposit — |
|
|
|
|
| ||
Term certificates of $100,000 and over |
| 268,324 |
| 268,326 |
| ||
Term certificates less than $100,000 |
| 725,997 |
| 723,797 |
| ||
Total certificates of deposit |
| 994,321 |
| 992,123 |
| ||
|
| $ | 2,253,111 |
| $ | 2,192,357 |
|
(5) EARNINGS PER SHARE (EPS)
Basic EPS for the three months ended March 31, 2002 and 2001 was computed based on the weighted average number of shares outstanding during the periods, which amounted to 23,004,842 shares and 23,483,824 shares, respectively. Unallocated ESOP shares and unvested restricted stock awards are not considered outstanding for purposes of the computation of basic EPS. Diluted EPS reflects the potential dilution that could occur if contracts to issue common stock were exercised and has been computed after giving consideration to the dilutive effect of stock options, stock awards and shares held in an employee trust.
8
(6) BUSINESS SEGMENT INFORMATION
The Company has identified its reportable segment as “Community Banking” which consists of commercial and retail banking. The Company operates under two operating segments 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 that 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.
Reportable segment specific information and reconciliation to consolidated financial information as of March 31, 2002 and 2001 and for the three-month periods then ended are as follows (in thousands):
March 31, 2002 |
| Community Banking |
| Other |
| Other Adjustments and Eliminations |
| Consolidated |
| ||||
Investment securities |
| $ | 537,019 |
| $ | 4,556 |
| $ | — |
| $ | 541,575 |
|
Net loans |
| 2,611,004 |
| 10,221 |
| (10,221 | ) | 2,611,004 |
| ||||
Total assets |
| 3,445,388 |
| 309,727 |
| (304,703 | ) | 3,450,412 |
| ||||
Total deposits |
| 2,253,111 |
| — |
| — |
| 2,253,111 |
| ||||
Total borrowings |
| 857,375 |
| — |
| — |
| 857,375 |
| ||||
Total liabilities |
| 3,140,179 |
| 904 |
| — |
| 3,141,083 |
| ||||
Net interest income |
| 28,758 |
| 236 |
| (199 | ) | 28,795 |
| ||||
Provision for loan losses |
| 1,535 |
| — |
| — |
| 1,535 |
| ||||
Noninterest income |
| 3,008 |
| 197 |
| — |
| 3,205 |
| ||||
Noninterest expense |
| 16,640 |
| 249 |
| — |
| 16,889 |
| ||||
Net income |
| $ | 8,775 |
| $ | 8,874 |
| $ | (8,775 | ) | $ | 8,874 |
|
March 31, 2001 |
|
|
|
|
|
|
|
|
| ||||
Investment securities |
| $ | 301,239 |
| $ | 3,442 |
| $ | — |
| $ | 304,681 |
|
Net loans |
| 2,447,215 |
| 10,509 |
| (10,509 | ) | 2,447,215 |
| ||||
Total assets |
| 3,019,263 |
| 294,159 |
| (289,537 | ) | 3,023,885 |
| ||||
Total deposits |
| 2,010,609 |
| — |
| — |
| 2,010,609 |
| ||||
Total borrowings |
| 692,402 |
| — |
| — |
| 692,402 |
| ||||
Total liabilities |
| 2,729,693 |
| 668 |
| — |
| 2,730,361 |
| ||||
Net interest income |
| 23,900 |
| 237 |
| (204 | ) | 23,933 |
| ||||
Provision for loan losses |
| 1,400 |
| — |
| — |
| 1,400 |
| ||||
Noninterest income |
| 3,024 |
| 40 |
| — |
| 3,064 |
| ||||
Noninterest expense |
| 15,438 |
| 369 |
| — |
| 15,807 |
| ||||
Net income |
| $ | 6,793 |
| $ | 6,731 |
| $ | (6,793 | ) | $ | 6,731 |
|
9
(7) STOCK REPURCHASE PROGRAMS
In July 1999, the Board of Directors authorized the Company 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 May 15, 2002, the Company had repurchased 3,121,500 shares of its common stock under these programs at a total cost of $36,922,133 of which 3,109,000 shares at a cost of $36,657,883 had been repurchased as of March 31, 2002.
(8) QUARTERLY CASH DIVIDEND
On April 25, 2002, the Board of Directors voted for the payment of a quarterly cash dividend of $.10 per share. The dividend is payable on May 24, 2002 to stockholders of record on May 10, 2002.
10
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 and supervision, 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 March 31, 2002 and December 31, 2001
Total assets increased by $102.9 million from $3,347.5 million at December 31, 2001 to $3,450.4 million at March 31, 2002. During the quarter ended March 31, 2002, the loan portfolio increased by $66.4 million, or 2.6%, which was funded principally by deposit growth of $60.8 million and, to a lesser extent, Federal Home Loan Bank advances of $22.1 million and short-term borrowings of $11.9 million. During the quarter, the Company’s borrowings from the Federal Home Loan Bank (FHLB) exceeded its actual funding needs. Management decided that because rates from the Federal Home Loan Bank were attractive, it was strategically prudent to borrow these funds in anticipation of funding loan growth during the year. Short-term borrowings increased due to Nantucket Bank’s seasonal cash-flow requirements to fund commercial loans to Nantucket businesses and deposit outflows which normally occur during this period. The average interest rate on FHLB advances taken during the first quarter of 2002 was 3.0%. At March 31, 2002, these additional funds were invested in investment securities.
The increase in loans occurred primarily in the residential mortgage, indirect auto and commercial loan portfolios. From December 31, 2001 to March 31, 2002, residential mortgage loans increased by $24.0 million, or 1.8%, indirect auto loans (net of unearned discounts) increased by $27.8 million, or 4.6% and commercial loans increased by $7.5 million, or 6.5%. The growth during the quarter ended March 31, 2002 is generally attributable to the improved and stable economic conditions which prevailed during this period. Management decided (for Compass only) in the first quarter of 2002 to retain in portfolio all residential mortgage loan originations and has continued to emphasize the origination of indirect auto loans through its network of automobile dealers which has recently been expanded to include dealers in communities contiguous to the metropolitan Boston area. The growth in commercial lending was primarily with existing customers to fund business expansion and seasonal borrowing needs.
Total deposits at March 31, 2002 were $2,253.1 million, an increase of $60.7 million, compared to $2,192.4 million at December 31, 2001. Core deposit account balances increased by $58.6 million during the quarter. The increase in core deposits during the quarter was generally attributable to normal seasonal fluctuations and continued uncertainty in the stock market. The slight growth in certificates of deposits was primarily the result of declining interest rates for this type of product and consumers wanting to maintain a liquid position.
The increase in stockholders’ equity of $3.6 million to $309.3 million at March 31, 2002 resulted from the net income of $8.9 million for the quarter ended March 31, 2002 which was partially offset by cash dividends and stock repurchases totaling $3.9 million, and a decrease in the market value of investment securities of $2.0 million. During 1999 and 2000, the Company announced three stock repurchase programs aggregating 3,486,212 shares. As of May 15, 2002, 3,121,500 shares had been repurchased leaving up to 364,712 shares for repurchase. Management expects to fully repurchase the remaining shares under these programs during 2002.
Comparison of Operating Results for the Quarters Ended March 31, 2002 and 2001
Interest Income. Interest income for the quarter ended March 31, 2002 was $53.2 million, compared to $52.7 million for the quarter ended March 31, 2001, an increase of $536,000, or 1.02%. The increase in interest income resulted from growth in average interest-earning assets of $446.5 million, or 16.1%, partially offset by a decrease in the overall yield on interest-earning assets of 99 basis points in the 2002 period. The principal areas of growth in average balances were related to investments (up $236.2 million, or 68.9%) and loans (up $210.3 million, or 8.7%). The funding growth in investment securities resulted from the sale of mortgage loans and an increase in deposits and borrowings in excess of funding loan requirements during the period. The increase in indirect auto loans resulted from the favorable interest rate environment and the continued emphasis of this lending product resulting from the expansion of participating dealers and locations.
11
Interest Expense. Interest expense for the quarter ended March 31, 2002 was $24.4 million compared to $28.7 million for the quarter ended March 31, 2001, a decrease of $4.3 million or 15.0%. This decrease resulted from a 1.26% decrease in the cost of all funds from 4.66% in 2001 to 3.40% in 2002, partially offset by a higher average balance of interest-bearing liabilities (up $402.4 million, or 16.3%). Average interest-bearing deposit balances increased $207.1 million, or 11.4%, during the quarter ended March 31, 2002 compared to the same period in 2001.
Interest expense on borrowed funds increased $1.2 million in the quarter ended March 31, 2002 due to a $195.3 million increase in the average balance of such funds, partially offset by a decrease of 78 basis points in the average rate paid on borrowed funds to 5.07% in 2002 from 5.85% in 2001.
The decrease in the overall cost of funds on interest-bearing liabilities are reflective of the aggressive interest rate reductions implemented by the Federal Reserve during the period and the impact it has had on term deposits.
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 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, 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 as necessary 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 $1.5 million for loan losses in the quarter ended March 31, 2002 compared to $1.4 million in the quarter ended March 31, 2001. The increase of $135,000 in 2002 was primarily attributable to the growth in the loan portfolio. The total allowance of $30.3 million at March 31, 2002 represented 1.15% of total loans compared to the same ratio of 1.15% at December 31, 2001. The allowance for loan losses as a percentage of non-performing loans was 248.7% compared to 220.1% at December 31, 2001.
Noninterest Income. Total noninterest income was $3.2 million for the quarter ended March 31, 2002 compared to $3.1 million in the same period of 2001, an increase of $141,000. This increase was primarily caused by increases on sales of investment securities, fees on checking accounts and on other retail services on deposit accounts partially offset by decreases in loan fees, loan servicing fees and other income.
Noninterest Expense. Noninterest expense increased by $1.1 million or 6.8%, from $15.8 million for the quarter ended March 31, 2001 to $16.9 million for the quarter ended March 31, 2002. This increase reflected increases in salaries and employee benefits ($1.4 million), occupancy and equipment ($15,000), data processing ($115,000), and other noninterest expense ($410,000). The increases in noninterest expenses were partically offset by decreases in marketing expenses ($146,000), professional services ($198,000) and amortization of intangibles ($528,000).
Salaries and employee benefits increased $1.4 million, or 17.7%, during the quarter ended March 31, 2002. This increase was the result of salary increases averaging 4.5%, the creation of the Credit Administration department, additions to staff in 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 increases in staffing related to franchise expansion.
Data processing expenses increased $115,000, or 7.3%, during the quarter ended March 31, 2002 due primarily to volume-related services related to retail deposits and loans and increases due to ATM 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 $146,000, or 23.6%, during the quarter ended March 31, 2002. This decrease was primarily attributable to a reduction in production costs for television commercials and newspaper advertising, partially offset by increases in promotions and other advertising media.
Professional services expenses decreased $198,000 or 24.6%, during the quarter ended March 31, 2002. This decrease was primarily the result of reductions in costs for tax services, consulting and legal fees associated with the start-up of Compass’s private banking initiative started in 2001.
12
Amortization of goodwill and intangibles decreased $528,000, or 71.7%, during the quarter ending March 31, 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 $410,000, or 21.5%, during the quarter ended March 31, 2002. This increase reflects primarily volume-related items such as printing, postage and telephone costs.
Income Taxes. The effective tax rate for the quarter ended March 31, 2002 was 34.6% compared to 31.2% 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 quarter ended March 31, 2001. Exclusive of this non-recurring item, the effective tax rate in 2001 was 36.1%. The decrease in 2002 reflects primarily the impact of nondeductible goodwill amortization in 2001.
Liquidity and Capital Resources
Liquidity, represented by cash and cash equivalents and debt securities is a product of 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 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 Nantucket Bank are entitled to borrow an amount up to the value of its 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 specifically pledged to the FHLB. At March 31, 2002, Compass and Nantucket Bank had approximately $394.5 million and $46 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 March 31, 2002, the Company maintained cash and due from banks, federal funds sold, short-term investments and debt securities maturing within one year of $235.6 million, or 6.83% of total assets. The Company invests excess funds, if any, in federal funds sold which provides liquidity to meet lending requirements.
At March 31, 2002, The Company had commitments to originate loans, unused outstanding lines of credit, standby letters of credit and undisbursed proceeds of loans totaling $270.6 million. The Company anticipated that it will have sufficient funds available to meet its current loan commitments. Certificates of deposit maturing within one year from March 31, 2002 amounted to $750.3 million. The Company expects that a significant portion of maturing certificate accounts will be retained at maturity.
The Company’s and the Banks’ capital ratios at March 31, 2002 were as follows:
|
| Seacoast Financial |
| Compass Bank |
| Nantucket |
|
Total Capital (to risk weighted assets) |
| 13.20 | % | 12.12 | % | 16.26 | % |
Tier 1 Capital (to risk weighed assets) |
| 11.92 |
| 10.86 |
| 14.99 |
|
Tier 1 Capital (to average assets) |
| 8.08 |
| 7.34 |
| 9.62 |
|
These ratios placed the Company in excess of regulatory standards and the Banks in the “well capitalized” category as set forth by the FDIC.
13
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 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 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 March 31, 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 months |
| |||
300 basis point increase in rates |
| (9.32 | )% | (8.78 | )% | |||
150 basis point decrease in rates (Note 1) |
| 1.07 | % | (0.36 | )% | |||
For each one percentage point change in net interest income, the effect on net income would be $819,000, assuming a 36% tax rate.
(1) Due to the low interest rate environment in effect at March 31, 2002 (the average Federal Fund overnight rates were trading below 2%) the simulation model could only be rate shocked down 150 basis points.
14
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 their 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
Not applicable.
Item 4. Submission of Matters to A Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Exhibits and Reports on Form 8-K | |
|
|
a. | Exhibits: |
|
|
2.1 | Agreement and Plan of Merger by and between Seacoast Financial Services Corporation and Home Port Bancorp, Inc. date as of July 20, 2000++++++ |
|
|
2.2 | Stock Option Agreement between Home Port Bancorp, Inc. and Seacoast Financial Services Corporation dated as of July 20, 2000++++++ |
|
|
3.1 | Articles of Organization of Seacoast Financial Services Corporation+++ |
|
|
3.2 | By-Laws of Seacoast Financial Services Corporation+++ |
|
|
4 | Specimen certificate for the common stock of Seacoast Financial Services Corporation++ |
|
|
10.1* | Form of Employment Agreement by and among Seacoast Financial Services Corporation, Compass Bank for Savings and Kevin G. Champagne+ |
|
|
10.2* | Form of Employment Agreement by and among Compass Bank for Savings, Seacoast Financial Services Corporation and certain Officers of Compass Bank for Savings+ |
|
|
10.3* | Form of Change in Control Agreements by and among Seacoast Financial Services Corporation, Compass Bank for Savings, Kevin G. Champagne and certain other Officers of Compass Bank for Savings+ |
|
|
10.4* | Form of Change in Control Agreement by and among Seacoast Financial Services Corporation, Compass Bank for Savings and certain Officers of Compass Bank for Savings+ |
|
|
10.5* | Form of Executive Salary Continuation Agreements made and entered into by and between Compass Bank for Savings and Kevin G. Champagne, Arthur W. Short, John D. Kelleher and Francis S. Mascianica and forms of amendments thereto+ |
15
10.6* | Trust Agreement, made as of December 18, 1992, by and between Compass Bank for Savings and Shawmut Bank, N.A.+ |
|
|
10.7* | Compass Bank for Savings January 2000 Incentive Compensation Plan +++++ |
|
|
10.12* | Compass Bank for Savings Executive Deferred Compensation Plan+ |
|
|
10.13* | Rabbi Trust for Compass Bank for Savings Executive Deferred Compensation Plan+ |
|
|
10.17* | Sandwich Co-operative Bank 1992 Directors Deferred Compensation Plan+ |
|
|
10.20* | Seacoast Financial Services Corporation 1999 Stock Incentive Plan++++ |
|
|
11 | A statement regarding earnings per share is included in Item 1, Note 5, of this report. |
|
|
b. | Reports on Form 8-K: On January 12, 2001, a Form 8-K was filed and on March 15, 2001 Amendment No. 1 to Form 8-K was filed, both in connection with the Company’s acquisition of Home Port Bancorp, Inc. |
|
|
12 | Reports on Form S-3: On April 16, 2002 a form S-3 was filed and on May 9, 2002 Amendment No. 1 to |
| Form S-3 was filed, both in connection with the Company’s issuance of Cumulative Trust Preferred Securities. |
|
|
13 | Report on Form 8-K: On May 2, 2002 a form 8-K was filed in connection with the Company’s first quarter financial results as of March 31, 2002. |
Management compensatory plan or arrangement. | |
|
|
+ | Incorporated by reference to the Company’s Registration Statement on Form S-1 (333-52889), filed with the Securities and Exchange Commission under the Company’s prior name, “The 1855 Bancorp”, on May 15, 1998. |
|
|
++ | Incorporated by reference to Amendment No. 1 to the Company’s Registration Statement on Form S-1 (333-52889), filed with the Securities and Exchange Commission under the Company’s prior name, “The 1855 Bancorp”, on August 14, 1998. |
|
|
+++ | Incorporated by reference to the Company’s Registration Statement on Form 8-A filed with the Securities and Exchange Commission on November 18, 1998. |
|
|
++++ | Incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed with the Securities and Exchange Commission on April 16, 1999. |
|
|
+++++ | Incorporated by reference to the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 28, 2000. |
|
|
++++++ | Incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on August 3, 2000. |
16
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 15, 2002 | By /s/ Kevin G. Champagne |
| ||||
| Kevin G. Champagne | |||||
| President and Chief Executive Officer | |||||
| ||||||
Date: May 15, 2002 | By /s/ Francis S. Mascianica, Jr. |
| ||||
| Francis S. Mascianica, Jr. | |||||
| Treasurer, as Principal | |||||
| Financial and Accounting Officer | |||||
| ||||||
17