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, 2000
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)
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 11, 2000, the Company had 25,251,536 shares of common stock
outstanding.
SEACOAST FINANCIAL SERVICES CORPORATION
INDEX
PAGE NO.
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999........................................... 1
Consolidated Statements of Income for the three months
ended March 31, 2000 and 1999................................... 2
Consolidated Statements of Changes in Stockholders' Equity
for the three months ended March 31, 2000 and 1999.............. 3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999................................... 4
Notes to Unaudited Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 9
Liquidity and Capital Resources................................. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 13
Item 2. Changes in Securities and Use of Proceeds....................... 13
Item 3. Defaults upon Senior Securities................................. 13
Item 4. Submission of Matters to a Vote of Security Holders............. 13
Item 5. Other Information............................................... 13
Item 6. Exhibits and Reports on Form 8-K................................ 13
SIGNATURES............................................................... 15
EXHIBIT 27 - Financial Data Schedule.....................................
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31,
2000 1999
--------- ------------
ASSETS:
Cash and due from banks......................................... $ 61,954 $60,245
Federal funds sold.............................................. 106 106
---------- ----------
Total cash and cash equivalents............................... 62,060 60,351
Other short-term investments.................................... 88 231
Investment securities--
Available-for-sale, at fair value............................. 237,175 245,583
Held-to-maturity, at amortized cost........................... 12,404 12,408
Restricted equity securities.................................. 16,051 14,936
Loans held-for-sale............................................. 971 756
Loans, net (Note 2)............................................. 1,817,265 1,730,378
Accrued interest receivable..................................... 10,692 9,426
Banking premises and equipment, net............................. 31,910 26,585
Other real estate owned, net.................................... 249 552
Net deferred tax asset.......................................... 13,087 12,527
Other assets.................................................... 8,288 9,052
---------- ----------
Total assets................................................ $2,210,240 $2,122,785
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Note 3)............................................... $1,583,725 $1,515,622
Short -term borrowings.......................................... 42,317 40,787
Federal Home Loan Bank advances................................. 287,279 271,900
Other borrowings................................................ 1,921 1,935
Mortgagors' escrow payments..................................... 4,544 3,829
Accrued expenses and other liabilities.......................... 16,321 14,691
---------- ----------
Total liabilities........................................... 1,936,107 1,848,764
---------- ----------
COMMITMENTS AND CONTINGENCIES
Stockholders' equity (Notes 6 and 7):
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.................................... 152,698 152,702
Treasury stock, at cost, 898,500 shares in 1999 and 1,299,100
shares in 2000......................................... (13,144) (9,310)
Retained earnings............................................. 153,201 149,256
Accumulated other comprehensive income (loss)................. (2,899) (2,430)
Unearned compensation - ESOP and restricted stock............. (15,847) (16,326)
Shares held in employee trust................................. (144) (139)
---------- ----------
Total stockholders' equity.................................. 274,133 274,021
---------- ----------
Total liabilities and stockholders' equity.................. $2,210,240 $2,122,785
========== ==========
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, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
2000 1999
-------- --------
INTEREST AND DIVIDEND INCOME:
Interest on loans................................................. $33,213 $27,876
Interest and dividends on investment securities................... 4,146 4,537
Interest on federal funds sold and short-term investments......... 9 313
------- -------
Total interest and dividend income.............................. 37,368 32,726
------- -------
INTEREST EXPENSE:
Interest on deposits.............................................. 13,750 13,413
Interest on borrowed funds........................................ 4,657 1,439
------- -------
Total interest expense.......................................... 18,407 14,852
------- -------
Net interest income............................................. 18,961 17,874
PROVISION FOR LOAN LOSSES............................................ 1,050 225
------- -------
Net interest income after provision
for loan losses............................................... 17,911 17,649
------- -------
NONINTEREST INCOME:
Deposit and other banking fees.................................... 1,228 1,188
Loan servicing fees, net.......................................... 203 169
Card fee income, net.............................................. 180 90
Other loan fees................................................... 225 123
Gain on sales of investment securities, net....................... 4 37
Gain on sales of loans, net....................................... -- 74
Other income...................................................... 339 181
------- -------
Total noninterest income........................................ 2,179 1,862
------- -------
NONINTEREST EXPENSE:
Salaries and employee benefits.................................... 6,695 5,299
Occupancy and equipment expenses.................................. 1,445 1,508
Data processing expenses.......................................... 1,158 1,161
Marketing expenses................................................ 545 527
Professional services expenses.................................... 378 234
Other operating expenses.......................................... 1,485 1,875
------- -------
Total noninterest expense....................................... 11,706 10,604
------- -------
Income before provision for income taxes........................ 8,384 8,907
PROVISION FOR INCOME TAXES........................................... 2,956 3,290
------- -------
Net income...................................................... $ 5,428 $ 5,617
======= ========
Net income per share-diluted (Note 4)........................... $ 0.23 $ 0.22
======= ========
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, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
SHARES
ADDITIONAL ACCUMULATED OTHER HELD IN
COMMON PAID-IN TREASURY RETAINED COMPREHENSIVE UNEARNED EMPLOYEE
STOCK CAPITAL STOCK EARNINGS INCOME (LOSS) COMPENSATION TRUST TOTAL
------ ---------- -------- -------- ---------------- ------------ -------- --------
Balance, December 31, 1998................... $268 $152,936 $ -- $127,263 $ 2,337 $(11,153) $(139) $271,512
Net income................................... -- -- -- 5,617 -- -- -- 5,617
Other comprehensive income -- Change in
unrealized gain on securities available
for sale, net of taxes...................... -- -- -- -- (746) -- -- (746)
--------
Comprehensive income...................... 4,871
Amortization of unearned compensation........ -- -- -- -- -- 140 -- 140
---- -------- -------- -------- ------- -------- ----- --------
Balance, March 31, 1999...................... $268 $152,936 $ $132,880 1,591 $(11,013) (139) $276,523
==== ======== ======== ======== ======== ========= ====== ========
Balance, December 31, 1999................... $268 $152,702 $ (9,310) $149,256 $(2,430) $(16,326) $(139) $274,021
Repurchase of common stock (Note 6).......... -- -- (3,834) -- -- -- -- (3,834)
Net income................................... -- -- -- 5,428 -- -- -- 5,428
Other comprehensive income -- Change in
unrealized loss on securities available
for sale, net of taxes...................... -- -- -- -- (469) -- -- (469)
--------
Comprehensive income...................... 4,959
Cash dividends - $.06 per share.............. -- -- -- (1,483) -- -- -- (1,483)
Amortization of unearned compensation........ -- (4) -- 479 -- 475
Other........................................ -- -- -- -- -- -- (5) (5)
---- -------- -------- -------- ------- -------- ----- --------
Balance, March 31, 2000...................... $268 $152,698 $(13,144) $153,201 $(2,899) $(15,847) $(144) $274,133
==== ======== ========= ======== ======== ========= ====== ========
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, 2000 AND 1999
(UNAUDITED)
(IN THOUSANDS)
2000 1999
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................ $ 5,428 $ 5,617
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation...................................................... 603 613
Amortization and accretion, net................................... 194 242
Stock based compensation.......................................... 475 140
Provision for loan losses......................................... 1,050 225
Gain on sale of investment securities, net........................ (4) (37)
Other real estate owned losses (income)........................... -- (102)
Provision for deferred (prepaid) taxes............................ (260) (92)
Origination of loans held-for-sale................................ (215) (3,488)
Proceeds from sales of loans originated for resale................ -- 3,562
Gain on sales of loans, net....................................... -- (74)
Net increase in accrued interest receivable....................... (1,266) (1,050)
Net (increase) decrease in other assets........................... 612 (108)
Net increase (decrease) in accrued expenses
and other liabilities........................................... 1,615 (965)
----------- ----------
Net cash provided by operating activities................... 8,232 4,483
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments, net............................. 143 31,119
Purchase of securities classified as available-for-sale........... (23,346) (15,985)
Purchase of restricted equity securities.......................... (1,115) (320)
Proceeds from sales, calls, paydowns and maturities of
securities classified as available-for-sale..................... 30,961 32,417
Purchase of loans................................................. (7,533) --
Net increase in loans............................................. (80,302) (107,460)
Recoveries of loans previously charged off........................ 59 129
Proceeds from sales of other real estate owned.................... 142 38
Purchase of premises and equipment................................ (5,928) (1,667)
----------- ----------
Net cash used in investing activities....................... (86,919) (61,729)
----------- ----------
4
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(UNAUDITED)
(IN THOUSANDS)
2000 1999
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in NOW, money market deposit and
demand deposit accounts......................................... $ 8,332 $ (7,489)
Increase (decrease) in passbook and other savings accounts........ (519) 7,317
Increase (decrease) in term certificates.......................... 60,290 (7,982)
Advances from Federal Home Loan Bank.............................. 90,000 16,503
Repayments of Federal Home Loan Bank advances..................... (74,621) (1,954)
Increase in short-term and other borrowings....................... 1,516 920
Increase in mortgagors' escrow payments........................... 715 743
Repurchase of common stock........................................ (3,834) --
Cash dividends.................................................... (1,483) --
-------- ---------
Net cash provided by financing activities................... 80,396 8,058
-------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.............................................. 1,709 (49,188)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR................................................. 60,351 101,419
-------- ---------
CASH AND CASH EQUIVALENTS,
END OF PERIOD..................................................... $ 62,060 $ 52,231
======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid on deposits and borrowed funds...................... $18,313 $ 14,843
Income taxes paid................................................. 345 3,340
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Transfers from loans to other real estate owned................... 61 104
See accompanying notes to the unaudited consolidated financial statements.
5
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(1) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
December 31, 1999 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) 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, 1999 filed with the Securities and Exchange
Commission. For interim reporting purposes, the Company follows the same
significant accounting policies.
(2) LOANS
The Bank's loan portfolio consisted of the following:
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS)
Real estate loans:
Residential (one-to-four family)............................ $ 936,531 $ 896,479
Commercial.................................................. 229,273 223,500
Home equity lines of credit................................. 27,374 26,076
Construction................................................ 76,294 71,735
---------- ----------
Total real estate loans.................................. 1,269,472 1,217,790
---------- ----------
Commercial loans............................................... 72,668 66,360
---------- ----------
Consumer loans:
Indirect auto loans......................................... 463,433 439,753
Less-Unearned discount...................................... 13,950 17,370
---------- ----------
Indirect auto loans, net................................. 449,483 422,383
Other....................................................... 43,207 40,673
---------- ----------
Total consumer loans, net................................ 492,690 463,056
---------- ----------
Total loans.............................................. 1,834,830 1,747,206
Less-Allowance for loan losses................................. 17,565 16,828
---------- ----------
Total loans, net......................................... $1,817,265 $1,730,378
========== ==========
Non-accrual loans amounted $5,734,000 and $5,199,000 at December 31, 1999
and March 31, 2000, respectively.
6
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(3) DEPOSITS
A summary of deposit balances is as follows:
MARCH 31, DECEMBER 31,
2000 1999
----------- ------------
(IN THOUSANDS)
Demand deposit accounts....................................... $ 118,735 $ 101,218
NOW and money market deposit accounts......................... 453,967 463,152
Passbook and other savings accounts........................... 213,798 214,317
---------- ----------
Total non-certificate accounts........................... 786,500 778,687
---------- ----------
Term certificates--
Term certificates of $100,000 and over..................... 166,906 157,113
Term certificates less than $100,000....................... 630,319 579,822
---------- ----------
Total term certificate accounts.......................... 797,225 736,935
---------- ----------
Total deposits......................................... $1,583,725 $1,515,622
========== ==========
(4) EARNINGS PER SHARE
Diluted earnings per share for the three months ended March 31, 1999 and
2000 were computed based on the adjusted weighted average number of shares
outstanding during the periods, which amounted to 25,646,690 shares and
24,068,039 shares, respectively. Unallocated ESOP shares and unvested
restricted stock awards 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.
(5) BUSINESS SEGMENT INFORMATION
The community banking business segment consists of commercial and
retail banking. This segment is managed as a single strategic unit which
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 Bank operates
within a single geographic area (southeastern Massachusetts).
Non reportable operating segments of the Company's operations which
do not have similar characteristics to the community banking operations and
do not meet the quantitative thresholds requiring disclosure, are included in
the Other category in the disclosure of business segments below. These non
reportable segments include the Parent Company.
7
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
(5) BUSINESS SEGMENT INFORMATION (CONTINUED)
Reportable segment specific information and reconciliation to
consolidated financial information is as follows (in thousands):
COMMUNITY OTHER ADJUSTMENTS
BANKING OTHER AND ELIMINATIONS CONSOLIDATED
--------- --------- ------------------ -----------
March 31, 2000
Investment securities................................................ $ 262,651 $ 2,979 $ -- $ 265,630
Net loans............................................................ 1,817,265 10,706 (10,706) 1,817,265
Total assets......................................................... 2,207,185 274,387 (271,332) 2,210,240
Total deposits....................................................... 1,583,725 -- -- 1,583,725
Total borrowings..................................................... 331,517 -- -- 331,517
Total liabilities.................................................... 1,935,852 255 -- 1,936,107
Net interest income.................................................. 18,933 236 (208) 18,961
Provision for loan losses............................................ 1,050 -- -- 1,050
Total noninterest income............................................. 2,179 -- -- 2,179
Total noninterest expense............................................ 11,471 235 -- 11,706
Net income........................................................... 5,427 5,428 (5,427) 5,428
March 31, 1999
Investment securities................................................ $ 296,998 $ 2,103 $ -- $299,101
Net loans............................................................ 1,495,762 11,140 (11,140) 1,495,762
Total assets......................................................... 1,898,246 277,096 (274,942) 1,900,400
Total deposits....................................................... 1,489,061 -- -- 1,489,061
Total borrowings..................................................... 114,230 -- -- 114,230
Total liabilities.................................................... 1,623,305 572 -- 1,623,877
Net interest income.................................................. 17,855 235 (216) 17,874
Provision for loan losses............................................ 225 -- -- 225
Total noninterest income............................................. 1,862 -- -- 1,862
Total noninterest expense............................................ 10,434 170 -- 10,604
Net income........................................................... 5,552 5,617 (5,552) 5,617
(6) 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, the Board of Directors, with the
approval of the Commissioner of Banks, authorized the Company to repurchase
up to an additional 1,231,900 shares on 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
the subsequent repurchases and the prices at which repurchases will be made.
As of May 11, 2000, the Company had repurchased 2,066,600 shares of
its common stock under these programs at a total cost of $21,696,876 of which
1,859,100 shares at a cost of $19,773,590 had been repurchased as of March
31, 2000.
(7) QUARTERLY CASH DIVIDEND
On April 20, 2000, the Board of Directors voted the payment of a
quarterly cash dividend of $.06 per share. The dividend is payable on May
19, 2000 to stockholders of record on May 5, 2000.
8
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,
changes in interest rates, and increased competition and bank consolidations
in the Company's market area.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2000 AND DECEMBER 31, 1999
Total assets increased by $87.4 million from $2,122.8 million at
December 31, 1999 to $2,210.2 million at March 31, 2000. During the quarter
ended March 31, 2000, Compass increased its loan portfolio by $87.6 million,
or 5.0%, which was funded principally by deposit growth (primarily
certificates of deposit) of $68.1 million and, to a lesser extent, additional
Federal Home Loan Bank advances of $15.4 million.
The increase in loans occurred primarily in the residential mortgage,
indirect auto and commercial loan portfolios. From December 31, 1999 to March
31, 2000, residential mortgage loans increased by $40.1 million, or 4.5%,
indirect auto loans (net of unearned discounts) increased by $27.1 million,
or 6.4% and commercial loans (including commercial real estate loans)
increased by $12.1 million, or 4.2%. The growth during the quarter ended
March 31, 2000 is generally attributable to the favorable economic conditions
which prevailed during this period. The Company has continued to retain all
residential mortgage loan originations in portfolio 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.
Total deposits at March 31, 2000 were $1,583.7 million, an increase of
$68.1 million, compared to $1,515.6 million at December 31, 1999. This
increase was largely due to an increase in certificates of deposit of $60.3
million during the quarter. This increase was fueled by the introduction, in
February 2000, of a 7 month certificate at 6.30%. Core deposit account
balances increased by 1% during the quarter. The modest change in core
deposits during the quarter was generally attributable to normal seasonal
fluctuations as well as the shift in funds to higher yielding certificates of
deposit. Management believes that the bank consolidation and divestitures
currently underway in the Bank's market area as a result of the
Fleet/BankBoston merger will peak during the next two quarters offering
Compass a significant opportunity to increase its deposits.
Total borrowed funds were $331.5 million at March 31, 2000 compared to
$314.6 million at December 31, 1999, an increase of $16.9 million, or 5.4%.
During the quarter ended March 31, 2000, Compass increased its net borrowings
from the Federal Home Loan Bank by $15.8 million in order to fund loan
growth. Management believes that it will continue to expand its Federal Home
Loan Bank borrowings during the remainder of 2000 to partially fund
anticipated loan growth.
The increase in stockholders' equity of $112,000 to $274.1 million at
March 31, 2000 resulted from the net income of $5.4 million for the quarter
ended March 31, 2000 which was substantially offset by an increase in the
unrealized loss on securities available for sale, cash dividends and stock
repurchases. During 1999, the Company announced two stock repurchase programs
aggregating 2,231,900 shares. As of May 11, 2000, 2,066,600 shares had been
repurchased leaving up to 165,300 shares for repurchase. Management expects
to fully repurchase the remaining shares under these programs during 2000.
9
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED MARCH 31, 2000 AND 1999
Net income was $5.4 million, or $.23 per diluted share, for the quarter
ended March 31, 2000 compared to net income of $5.6 million, or $.22 per diluted
share, for the comparable period in 1999. The 2000 results, as compared to 1999,
include an increase of $1.1 million, or 6.1%, in net interest income, an
increase of $825,000 in the provision for loan losses, an increase of $317,000,
or 17.0%, in non-interest income and an increase of $1.1million, or 10.4%, in
non-interest expense. The Company's effective tax rate declined to 35.3% in 2000
from 36.9% in the comparable 1999 period.
INTEREST INCOME. Interest income for the quarter ended March 31, 2000 was
$37.4 million, compared to $32.7 million for the quarter ended March 31, 1999,
an increase of $4.7 million, or 14.4%. All of the increase in interest income
resulted from growth in average interest-earning assets of $332.2 million, or
22.9%, as the overall yield on interest-earning assets declined by 4 basis
points in the 2000 period. The principal areas of growth in average balances
were related to real estate loans (up $230.9 million, or 22.9%) and indirect
auto loans (up $103.1 million, or 31.1%). Most of the real estate loan growth
resulted from increased origination and retention in portfolio of one-to-four
family real estate loans. The increase in indirect auto loans resulted from the
positive economic environment within Compass's local markets and the continued
emphasis of this area of lending.
INTEREST EXPENSE. Interest expense for the quarter ended March 31, 2000 was
$18.4 million compared to $14.9 million for the quarter ended March 31, 1999, an
increase of $3.5 million or 23.5%. This increase resulted from a 19 basis points
increase in the cost of all funds from 4.03% in 1999 to 4.22% in 2000, and a
higher average balance of interest-bearing liabilities (up $271.1 million, or
18.4%). Average interest-bearing deposit balances increased $49.0 million, or
3.6%, during the quarter ended March 31, 2000 compared to the same period in
1999.
Interest expense on borrowed funds increased $3.2 million in the
quarter ended March 31, 2000 due to a $222.1 million increase in the average
balance of such funds, and a 1 basis point increase in the average rate paid
on borrowed funds to 5.79% in the 2000 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 chargeoffs 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 $1.05 million for loan losses in the quarter ended
March 31, 2000 compared to $225,000 in the quarter ended March 31, 1999. The
increase of $825,000 in 2000 was primarily attributable to the growth in the
loan portfolio as all indicators of credit quality continue to be positive.
NON-INTEREST INCOME. Total non-interest income was $2.2 million for the
quarter ended March 31, 2000 compared to $1.9 million in the same period of
1999, an increase of $317,000. This increase was principally caused by increases
in loan fees, debit and ATM card usage and an insurance settlement. Also
non-interest income in the 1999 quarter was adversely impacted by the waiver of
the monthly fee on deposit accounts in the month of conversion of former
Sandwich Bank customers to Compass's computer system.
NON-INTEREST EXPENSE. Non-interest expense increased by $1.1million, or
10.4%, from $10.6 million for the quarter ended March 31, 1999 to $11.7 million
for the quarter ended March 31, 2000. Of this increase, $1.4 million related to
salaries and employee benefits, which totaled $6.7 million for the quarter ended
March 31, 2000, partially offset by a $294,000 aggregate decrease in all other
categories of non-interest expense.
Of the increase of $1.4 million in salaries and employee benefits for the
quarter ended March 31, 2000, approximately $500,000 related to increases in the
number of employees and annual wage adjustments, $318,500 was attributable to
the restricted stock awarded in July 1999, employment taxes increased $112,000
and employee-related insurance costs increased $100,000. In addition, the amount
accrued in connection with Compass's management incentive plan increased
$335,000 in 2000 principally due to a reduced expense in the first quarter of
1999 resulting from the utilization of amounts accrued but not paid during the
two month transition period ended December 31, 1998.
10
The aggregate decrease in other categories of non-interest expense,
which amounted to $294,000 for the quarter ended March 31, 2000 was primarily
caused by certain non-recurring costs incurred in 1999 attributable to the
merger with Sandwich Bank.
INCOME TAXES. The effective tax rate for the quarter ended March 31,
2000 was 35.3% compared to 36.9% in the same period in 1999. 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.
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 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 a voluntary member of the Federal Home Loan Bank of Boston (FHLB),
Compass is 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 at the FHLB. At March 31, 2000,
Compass had approximately $429 million 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, 2000, the Company maintained cash
and due from banks, short-term investments and debt securities maturing
within one year of $92.9 million, or 4.20% of total assets. Compass invests
excess funds, if any, in federal funds sold which provides liquidity to meet
lending requirements.
At March 31, 2000, construction of the Bank's new corporate headquarters
was in-progress. At that date, the estimated remaining construction and
related costs to be incurred were approximately $9.1 million. Compass
believes it has adequate sources of liquidity to fund these costs.
At March 31, 2000, Compass had commitments to originate loans, unused
outstanding lines of credit, standby letters of credit and undisbursed
proceeds of loans totaling $185.9 million. Compass anticipated that it will
have sufficient funds available to meet its current loan commitments.
Certificates of deposit maturing within one year from March 31, 2000 amounted
to $663.8 million. Compass expects that a significant portion of maturing
certificate accounts will be retained at maturity, although the percentage
retained may be below historical levels due to increased price competition
for these deposits.
Compass's Tier 1 capital measured 15.5% of risk-weighted assets at March
31, 2000. Total capital, including the Tier 2 allowance for loan losses, was
16.7% of risk weighted assets. The leverage ratio was 10.9%. These ratios
placed Compass in the "well capitalized" category according to regulatory
standards.
The Company's Tier 1 capital measured 18.2% of risk-weighted assets at
March 31, 2000. Total capital, including the Tier 2 allowance for loan
losses, was 19.4% of risk-weighted assets. The leverage ratio was 12.8%.
These ratios placed the Company in excess of regulatory standards set forth
by the Federal Reserve Board.
11
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 of Directors. 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. 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, 2000, 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.............................. (17.94%) (17.01%)
200 basis point decrease in rates.............................. (.23%) (4.66%)
At March 31, 2000, the Company exceeded its internal guidelines for
interest rate risk as set forth above. This occurred as a result of increases
in short-term rates and the greater utilization of shorter term borrowings and
certificates of deposit to fund asset growth. Since Compass began using its
simulation model in 1997, this is the first quarter in which it has exceeded
its internal guidelines for interest rate risk. Management, along with its
professional advisors, will continue to monitor the trend in short-term and
long-term interest rates and the related impact which changes in rates may
have on net interest income.
Based on the scenario above, net income would be adversely affected 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 $542,000,
assuming a 36% tax rate.
12
PART II - 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
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 January 2000 Incentive Compensation Plan +++++
10.12* Compass Bank for Savings Executive Deferred Compensation Plan+
13
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 4,
of this report.
27 EDGAR Financial Data Schedule
b. Reports on Form 8-K: No reports have been filed during the first quarter
of 2000 and through the date of filing of this Form 10-Q.
- -------------------------------------------------------------------------------
* 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.
14
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 12, 2000 By /S/ KEVIN G. CHAMPAGNE
----------------------------------------------
Kevin G. Champagne
President and Chief Executive Officer
Date: May 12, 2000 By /S/ FRANCIS S. MASCIANICA, JR
-----------------------------------------------
Francis S. Mascianica, Jr.
Treasurer, as Principal
Financial and Accounting Officer
15