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 SEPTEMBER 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
COMMISSION FILE NUMBER: 000-25077
SEACOAST FINANCIAL SERVICES CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-1659040
------------------------- ----------------------------------
(State of Incorporation) (IRS Employer Identification No.)
791 Purchase Street, New Bedford, Massachusetts 02740
- ----------------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
(508) 984-6000
-------------------------------
(Registrant's Telephone Number)
N/A
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Former Name, Former Address and Former Fiscal Year if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
At November 12, 1999, the Company had 26,432,134 shares of common stock
outstanding.
SEACOAST FINANCIAL SERVICES CORPORATION
INDEX
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at September 30, 1999 1
and December 31, 1998
Consolidated Statements of Income for the three months and nine months 2
ended September 30, 1999 and 1998
Consolidated Statements of Changes in Stockholders' Equity 3
for the nine months ended September 30, 1999 and 1998
Consolidated Statements of Cash Flows for the nine months ended 4
September 30, 1999 and 1998
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Liquidity and Capital Resources 17
Impact of The Year 2000 Issue 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds 20
Item 3. Defaults upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
EXHIBIT 27 - Financial Data Schedule
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
September 30, December 31,
1999 1998
--------------- --------------
ASSETS:
Cash and due from banks............................................................ $ 60,216 $ 54,006
Federal funds sold................................................................. 106 47,413
------------ ------------
Total cash and cash equivalents.................................................. 60,322 101,419
Other short-term investments....................................................... 177 31,119
Investment securities--
Available-for-sale, at fair value................................................ 237,787 294,500
Held-to-maturity, at amortized cost.............................................. 11,406 12,693
Restricted equity securities..................................................... 10,725 9,062
Loans held-for-sale................................................................ -- --
Loans, net (Note 4)................................................................ 1,671,180 1,388,140
Accrued interest receivable........................................................ 9,361 8,523
Banking premises and equipment, net (Note 3)....................................... 23,873 19,743
Other real estate owned............................................................ 662 1,391
Net deferred tax asset............................................................. 12,474 10,715
Other assets....................................................................... 10,160 10,775
------------ ------------
Total assets................................................................... $ 2,048,127 $ 1,888,080
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Note 5).................................................................. $ 1,530,548 $ 1,497,215
Short -term borrowings............................................................. 30,277 12,835
Federal Home Loan Bank advances.................................................... 186,483 83,951
Other borrowings................................................................... 1,947 1,987
Mortgagors' escrow payments........................................................ 4,304 3,411
Accrued expenses and other liabilities............................................. 16,097 17,169
------------ ------------
Total liabilities.............................................................. 1,769,656 1,616,568
COMMITMENTS AND CONTINGENCIES ------------ ------------
Stockholders' equity (Notes 7, 8, 9 and 11):
Preferred stock, par value $.01 per share; authorized 10,000,000 shares;
none issued.................................................................... -- --
Common stock, par value $.01 per share; authorized 100,000,000 shares;
26,758,134 shares issued....................................................... 268 268
Additional paid-in capital....................................................... 152,699 152,936
Treasury stock, at cost, 70,000 shares........................................... (740) --
Retained earnings................................................................ 144,368 127,263
Accumulated other comprehensive income (loss).................................... (1,200) 2,337
Unearned compensation - ESOP and restricted stock................................ (16,785) (11,153)
Shares held in employee trust.................................................... (139) (139)
------------ ------------
Total stockholders' equity..................................................... 278,471 271,512
------------ ------------
Total liabilities and stockholders' equity..................................... $ 2,048,127 $ 1,888,080
------------ ------------
------------ ------------
See accompanying notes to the unaudited consolidated financial statements.
-1-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Nine Months
Ended September 30, Ended September 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- -------- --------
INTEREST AND DIVIDEND INCOME:
Interest on loans....................................................... $ 30,913 $ 26,023 $ 88,038 $ 76,666
Interest and dividends on investment securities......................... 4,219 4,794 13,041 14,258
Interest on federal funds sold and short-term investments............... 10 528 369 1,629
--------- --------- -------- --------
Total interest and dividend income.................................... 35,142 31,345 101,448 92,553
--------- --------- -------- --------
INTEREST EXPENSE:
Interest on deposits.................................................... 13,277 14,357 39,935 41,705
Interest on borrowed funds.............................................. 2,815 1,660 6,491 5,371
--------- --------- -------- --------
Total interest expense................................................ 16,092 16,017 46,426 47,076
--------- --------- -------- --------
Net interest income................................................... 19,050 15,328 55,022 45,477
PROVISION FOR LOAN LOSSES.................................................. 650 263 1,225 968
--------- --------- -------- --------
Net interest income after provision
for loan losses..................................................... 18,400 15,065 53,797 44,509
--------- --------- -------- --------
NONINTEREST INCOME:
Deposit and other banking fees.......................................... 1,427 1,416 3,877 3,944
Loan servicing fees, net................................................ 117 177 441 568
Card fee income, net.................................................... 264 214 552 448
Other loan fees......................................................... 143 88 376 396
Gain on sales of investment securities, net............................. 7 6 165 17
Gain on sales of loans, net............................................. 12 611 90 1,369
Gain on pension plan termination (Note 10).............................. 1,472 -- 1,472 --
Other income............................................................ 278 253 736 736
--------- --------- -------- --------
Total noninterest income.............................................. 3,720 2,765 7,709 7,478
--------- --------- -------- --------
NONINTEREST EXPENSE:
Salaries and employee benefits.......................................... 5,790 5,230 16,610 15,875
Occupancy and equipment................................................. 1,428 1,332 4,363 3,814
Data processing......................................................... 1,094 883 3,339 2,497
Marketing............................................................... 656 512 1,773 1,605
Professional services................................................... 558 328 1,260 941
Other operating expenses................................................ 1,769 1,511 5,606 4,837
--------- --------- -------- --------
Total noninterest expense............................................. 11,295 9,796 32,951 29,569
--------- --------- -------- --------
Income before provision for income taxes.............................. 10,825 8,034 28,555 22,418
PROVISION FOR INCOME TAXES................................................. 3,880 2,966 10,188 8,422
--------- --------- -------- --------
Net income............................................................ $ 6,945 $ 5,068 $ 18,367 $ 13,996
--------- --------- -------- --------
--------- --------- -------- --------
Net income per share-diluted (Note 6)................................. $ 0.27 N/A $ 0.72 N/A
--------- --------- -------- --------
--------- --------- -------- --------
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Additional
Common Paid-In Retained Treasury
Stock Capital Surplus Earnings Stock
---------- ---------- ---------- ---------- -----------
Balance, December 31, 1997..................................... $ -- $ -- $ 140,642 $ -- $ --
Net income..................................................... -- -- 13,996 -- --
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes............... -- -- -- -- --
Comprehensive income..................................
Transactions with stockholders of acquired entity.............. -- -- 369 -- --
Change in intercorporate investment............................ -- -- (4,254) -- --
------ ---------- ---------- ---------- --------
Balance, September 30, 1998 $ -- $ -- $ 150,753 $ -- $ --
------ ---------- ---------- ---------- --------
------ ---------- ---------- ---------- --------
Balance, December 31, 1998..................................... $ 268 $ 152,936 $ -- $ 127,263 $ --
Grant of restricted stock awards............................... -- 6,370 -- -- --
Repurchase of common stock..................................... -- -- -- -- (7,369)
Issuance of restricted stock awards............................ -- (6,629) -- -- 6,629
Net income..................................................... -- -- -- 18,367 --
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes............... -- -- -- -- --
Comprehensive income..................................
Cash dividend-- $.05 per share................................. -- -- -- (1,262) --
Amortization of unearned compensation.......................... -- 22 -- -- --
------ ---------- ---------- ---------- --------
Balance, September 30, 1999.................................... $ 268 $ 152,699 $ -- $ 144,368 $ (740)
------ ---------- ---------- ---------- --------
------ ---------- ---------- ---------- --------
Unearned
Accumulated Compensation Shares
Other ESOP / Held -
Comprehensive Restricted Employee
Income (Loss) Stock Trust Total
--------------- ------------- ----------- ------------
Balance, December 31, 1997..................................... $ 1,822 $ -- $ -- $ 142,464
Net income..................................................... -- -- -- 13,996
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes............... 1,464 -- -- 1,464
----------
Comprehensive income.................................. 15,460
Transactions with stockholders of acquired entity.............. -- -- -- 369
Change in intercorporate investment............................ (453) -- -- (4,707)
--------- ---------- ------- ----------
Balance, September 30, 1998 $ 2,833 $ -- $ -- $ 153,586
--------- ---------- ------- ----------
--------- ---------- ------- ----------
Balance, December 31, 1998..................................... $ 2,337 $ (11,153) $ (139) $ 271,512
Grant of restricted stock awards............................... -- (6,370) -- --
Repurchase of common stock..................................... -- -- -- (7,369)
Issuance of restricted stock awards............................ -- -- -- --
Net income..................................................... -- -- -- 18,367
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes............... (3,537) -- -- (3,537)
----------
Comprehensive income.................................. 14,830
Cash dividend-- $.05 per share................................. -- -- -- (1,262)
Amortization of unearned compensation.......................... -- 738 -- 760
--------- ---------- ------- ----------
Balance, September 30, 1999.................................... $ (1,200) $ (16,785) $ (139) $ 278,471
--------- ---------- ------- ----------
--------- ---------- ------- ----------
See accompanying notes to the unaudited consolidated financial statements.
-3-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1999 1998
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................ $ 18,367 $ 13,996
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and writedown of premises and equipment................ 2,042 1,829
Amortization and accretion, net..................................... 1,644 839
Provision for loan losses........................................... 1,225 968
Gain on pension plan termination.................................... (1,472) --
Gain on sale of investment securities, net.......................... (165) (17)
Gain on sale of equipment........................................... (7) --
Other real estate owned income...................................... (63) (67)
Provision for deferred taxes........................................ 483 542
Origination of loans held-for-sale.................................. (5,543) (136,237)
Proceeds from sales of loans originated for resale.................. 5,633 139,379
Gain on sales of loans, net......................................... (90) (1,369)
Net (increase) decrease in accrued interest receivable.............. (838) 470
Net decrease in other assets....................................... 354 643
Net increase in accrued expenses
and other liabilities............................................. 459 1,082
----------- -----------
Net cash provided by operating activities......................... 22,029 22,058
----------- -----------
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in short-term investments, net................................. 30,942 (11,936)
Purchase of securities classified as available-for-sale............... (47,922) (109,605)
Purchase of securities classified as held-to-maturity................. (75) (4,368)
Purchase of restricted equity securities.............................. (1,663) (130)
Proceeds from sales, calls, paydowns and maturities of
securities classified as available-for-sale......................... 98,701 127,763
Proceeds from paydowns, maturities and calls of securities
classified as held-to-maturity...................................... 1,360 5,150
Purchase of loans..................................................... (12,589) (6,457)
Net increase in loans................................................. (271,542) (96,307)
Recoveries of loans previously charged off............................ 433 342
Proceeds from sales of other real estate owned........................ 225 1,327
Purchase of premises and equipment.................................... (6,525) (3,493)
----------- -----------
Net cash used in investing activities............................. (208,655) (97,714)
----------- -----------
----------- -----------
-4-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
(IN THOUSANDS)
1999 1998
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in NOW, money market deposit and
demand deposit accounts............................................. $ 27,823 $ 60,148
Increase in passbook and other
savings accounts.................................................... 18,670 17,530
Increase (decrease) in term certificates.............................. (13,160) 39,329
Advances from Federal Home Loan Bank.................................. 117,000 26,790
Repayments of Federal Home Loan Bank advances......................... (14,468) (44,694)
Increase in short-term and other borrowings........................... 17,402 3,863
Increase (decrease) in mortgagors' escrow payments.................... 893 687
Repurchase of common stock............................................ (7,369) --
Cash dividend......................................................... (1,262) --
Transactions with stockholders of acquired entity, net................ -- 369
Payment of merger and stock offering costs............................ -- (3,070)
---------- -----------
Net cash provided by financing activities......................... 145,529 100,952
---------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS.................................................. (41,097) 25,296
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR..................................................... 101,419 50,395
---------- -----------
CASH AND CASH EQUIVALENTS,
END OF PERIOD......................................................... $ 60,322 $ 75,691
---------- -----------
---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid on deposits and borrowed funds........................ $ 46,004 $ 47,317
Income taxes paid................................................... 9,470 7,988
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfers from loans to other real estate owned..................... 514 1,779
Financed sales of other real estate owned........................... 1,081 1,081
See accompanying notes to the unaudited consolidated financial statements.
-5-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(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" or "Seacoast Financial"), and its
wholly-owned subsidiaries, Compass Bank for Savings ("Compass" or "the Bank")
and Lighthouse Securities Corporation presented herein should be read in
conjunction with the consolidated financial statements of the Company as of and
for the year ended October 31, 1998 included as part of its Form 10-K. A change
in the Company's fiscal year end from October 31 to December 31 was voted by the
Board of Directors on January 28, 1999.
On November 20, 1998, the Company completed its conversion from a mutual
bank holding company to a stock holding company with the issuance of 14,000,000
shares of common stock in an initial public offering. On December 4, 1998, the
Company completed its acquisition of Sandwich Bancorp, Inc. (Sandwich) in a
stock-for-stock exchange accounted for as a pooling of interests and the merger
of Sandwich's wholly-owned subsidiary, Sandwich Co-operative Bank ("Sandwich
Bank") into Compass. The accompanying financial statements have been restated to
combine the assets, liabilities, equity and results of operations of Sandwich as
if the merger had occurred as of December 31, 1997 as required by the pooling of
interests method of accounting.
In the opinion of management, the accompanying unaudited financial
statements reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation. Management is required to make estimates and
assumptions that affect amounts reported in the financial statements. Actual
results could differ significantly from those estimates.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are described in Note 1 of
the Notes to Consolidated Financial Statements included in its Form 10-K filed
with the Securities and Exchange Commission. For interim reporting purposes, the
Company follows the same significant accounting policies.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS
Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting and displaying comprehensive
income, which is defined as all changes to equity except investments by and
distributions to stockholders. Net income is a component of comprehensive income
with all other components referred to in the aggregate as other comprehensive
income. At September 30, 1999, the Company's other comprehensive income
consisted of unrealized gains (losses) on securities classified as available for
sale, net of taxes. The Company has presented its components of comprehensive
income as part of its statements of changes in stockholders' equity and, as
required by SFAS No. 130, has restated the prior period financial statements for
comparative purposes. Included in net income are gains on the sale of investment
securities, net of taxes, of $4,000 and $96,000 for the three and nine months
ended September 30, 1999, respectively, and $4,000 and $10,000, respectively,
for the comparable 1998 periods that had previously been classified with other
comprehensive income.
Effective November 1, 1998, the Company adopted SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information". In the opinion of
management, the Company functions as a single reportable operating unit and,
accordingly, the presentation of disaggregated information about segments of a
business enterprise is not applicable.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1998 financial statements
to conform to the 1999 presentation. Such reclassifications have no effect on
previously reported net income or stockholders' equity.
-6-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(2) CONVERSION AND MERGER
The Company completed its mutual-to-stock conversion and the initial public
offering of common stock on November 20, 1998, whereby a total of 14,000,000
shares were sold at a purchase price of $10 per share. An Employee Stock
Ownership Plan (ESOP) set up by Compass acquired 8%, or 1,120,000, of the shares
issued, which was funded by a loan from the Company. Net proceeds of the
Conversion were $121,371,000 excluding the sale of ESOP shares, which were
internally funded.
On December 4, 1998, the Company completed its acquisition of Sandwich.
Pursuant to the Amended and Restated Affiliation and Merger Agreement, each
share of common stock of Sandwich (other than 90,000 shares held by the Company
and the Bank and other than fractional shares) was converted into and became
exchangeable for 6.385 shares of the Company's common stock. The exchange ratio
was determined using a formula based on the Company's stock trading price
between the date of the Conversion and the closing of the acquisition. A total
of 12,758,134 shares were issued in connection with the acquisition.
The following presentation reflects selected financial information on a
historical basis for Seacoast Financial and Sandwich and on a pro forma basis
assuming the merger was in effect for the periods presented (in thousands):
Seacoast
Seacoast Financial
Financial Sandwich (Restated)
------------ ---------- ------------
At September 30, 1998 and for the nine months then ended:
Net interest income......................................... $ 32,762 $ 12,715 $ 45,477
Net income.................................................. 10,412 3,584 13,996
Total assets................................................ 1,220,322 541,801 1,757,413
Total deposits.............................................. 1,019,934 460,776 1,480,710
Stockholders' equity / Surplus.............................. 112,113 46,202 153,586
For the three months ended September 30, 1998:
Net interest income......................................... 11,186 4,142 15,328
Net income.................................................. 3,826 1,242 5,068
The restated balances reflect certain adjustments for the elimination of
Seacoast Financial's ownership of Sandwich common stock and the reclassification
of $48.3 million of Sandwich investment securities from the held-to-maturity
classification to securities available-for-sale.
-7-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(2) CONVERSION AND MERGER (CONTINUED)
The Company has identified and separately classified those costs
attributable to the merger. These costs encompass both costs directly
identifiable to the merger, such as professional fees for investment bankers,
attorneys and accountants, and contractual severance pay as well as costs
incurred by Sandwich and the Bank that result from the merger and do not
generally benefit the on-going activities of the banks. Merger-related costs
consist of the following items (in thousands):
Professional fees................................................... $2,692
Severance pay....................................................... 2,555
Asset write-offs.................................................... 143
Contractual obligations............................................. 406
Shareholder meeting (including printing costs)...................... 283
Customer service (including checkbook replacements)................. 662
Other............................................................... 72
------
$6,813
------
------
These costs were expensed in the two month period ended December 31, 1998.
(3) NEW CORPORATE HEADQUARTERS
On December 1, 1998, the Bank closed on its acquisition of several parcels
of land in downtown New Bedford, Massachusetts to be used for the development of
the Company's and the Bank's corporate headquarters and main banking office. The
Bank purchased the land from the New Bedford Redevelopment Authority and an
optionholder for $550,000. In connection with this transaction, the Bank agreed
to donate one of its downtown New Bedford buildings to the City at the time it
takes occupancy of its proposed new corporate headquarters. In February 1999,
the Bank selected a general contractor for construction. Based on estimates by
its architectural consultants, it expects to expend approximately $20 million in
the construction of the building and the purchase of land, furniture, fixtures
and equipment. At the completion of the project, which is estimated to be in the
second quarter of 2000, all Bank personnel, except retail branch and regional
lending personnel, are expected to be located in this building.
As part of this transaction, the Bank entered into a Tax Increment
Financing Agreement with the City of New Bedford. This agreement provides a
reduction in future property taxes to the Bank in return for its investment,
through this project, in downtown New Bedford. The tax incentives extend over a
twenty year period and are scheduled to produce an estimated $1.2 million in
property tax reductions. This agreement is conditional and requires the Bank to
retain and create permanent jobs in the City.
The Bank's plan to construct a new corporate headquarters will result in
the ultimate disposal of its existing corporate offices. One location is
currently being marketed for sale. Two other buildings will continue to be
utilized until the Bank relocates to its new corporate headquarters (one of
which will be donated to the City of New Bedford at that time). Based on
estimates of the fair value of these buildings and the benefits associated with
their continuing utilization through the estimated date of relocation, the Bank
recorded a write-down of $1,967,000 in December 1998.
-8-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(4) LOANS
Compass's loan portfolio consisted of the following:
September 30, December 31,
1999 1998
--------------- ----------------
(In thousands)
Real estate loans:
Residential (one-to-four family)........................... $ 859,072 $ 697,031
Commercial................................................. 211,005 201,636
Home equity lines of credit................................ 25,483 25,984
Construction............................................... 81,506 66,373
------------ ------------
Total real estate loans.................................. 1,177,066 991,024
------------ ------------
Commercial loans.............................................. 67,080 58,829
------------ ------------
Consumer loans:
Indirect auto loans........................................ 425,350 358,101
Less - Unearned discount................................... 21,925 37,394
------------ ------------
Indirect auto loans, net................................. 403,425 320,707
Other...................................................... 40,201 33,494
------------ ------------
Total consumer loans..................................... 443,626 354,201
------------ ------------
Total loans.............................................. 1,687,772 1,404,054
Less-Allowance for loan losses................................ 16,592 15,914
------------ ------------
Total loans, net......................................... $ 1,671,180 $ 1,388,140
------------ ------------
------------ ------------
Nonaccrual loans amounted to $5,841,000 and $7,763,000 at December 31, 1998
and September 30, 1999, respectively.
Through December 1998, the majority of the Bank's indirect auto loans were
written as discounted installment loans. The precomputed interest on such loans
is accounted for as unearned discount and recognized in income on a level yield
basis. Beginning in January 1999, all indirect auto loans are originated as
simple interest loans. Accordingly, the balance of unearned discount declined
significantly during the first nine months of 1999 and will continue to do so
over the next few years as the pre-1999 indirect auto loans are repaid.
-9-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(5) DEPOSITS
A summary of deposit balances is as follows:
September 30, December 31,
1999 1998
--------------- --------------
(In thousands)
Demand deposit accounts....................................... $ 108,170 $ 116,104
NOW and money market deposit accounts......................... 466,077 430,320
Passbook and other savings accounts........................... 224,156 205,486
------------ ------------
Total noncertificate accounts............................ 798,403 751,910
------------ ------------
Term certificates-
Term certificates of $100,000 and over..................... 158,741 154,589
Term certificates less than $100,000....................... 573,404 590,716
------------ ------------
Total term certificate accounts.......................... 732,145 745,305
------------ ------------
Total deposits........................................... $ 1,530,548 $ 1,497,215
------------ ------------
------------ ------------
(6) EARNINGS PER SHARE
Earnings per share for the three and nine months ended September 30, 1998
are not presented as the Company did not convert from a mutual to a stock form
of ownership until November 1998.
Earnings per share for the three and nine months ended September 30, 1999
are based on the weighted average number of shares outstanding during the
periods, which amounted to 25,355,658 and 25,552,145 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.
(7) STOCK INCENTIVE PLAN
In March 1999, the Company's Board of Directors voted to adopt the 1999
Stock Incentive Plan (the Stock Incentive Plan) for officers, employees and
directors of Compass and the Company. The Stock Incentive Plan, which was
approved by stockholders at the adjourned annual meeting held on June 18, 1999,
is administered by a committee consisting of those members of the Compensation
Committee of the Company's Board of Directors who qualify as "outside
directors".
The maximum number of shares of common stock issuable as a result of option
grants and stock awards under the Stock Incentive Plan shall be 1,960,000, which
equals 14% of the number of shares issued in connection with the Company's
conversion from mutual to stock form (subject to adjustment upon the occurrence
of a stock dividend, stock split or similar change in capitalization affecting
the Company's common stock). Of this number, up to 560,000 shares are issuable
in connection with "conditioned stock awards". A conditioned stock award is an
award entitling the recipient to acquire,
-10-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(7) STOCK INCENTIVE PLAN (CONTINUED)
at no cost or for a purchase price to be determined by the Compensation
Committee, shares of common stock subject to restrictions and conditions
determined at the date of grant. Conditions may be based on continuing
employment and/or achievement of performance goals. The remaining 1,400,000
shares issuable in connection with the Stock Incentive Plan may be either
incentive stock options (as defined in the Internal Revenue Code) or options
that do not so qualify (non-qualified options).
Incentive stock options shall have an exercise price that is not less than
the fair market value at the date of grant and shall not be exercisable more
than ten years after the date of grant. All incentive stock options and
non-qualified options shall vest and become exercisable based on the
determination of the Compensation Committee. Payment of the exercise price for
option shares may be made 1) by cash or check, (2) with the consent of the
Compensation Committee, by delivery of shares of common stock, (3) with the
consent of the Compensation Committee, by reducing the number of option shares
otherwise issuable upon exercise of the option or (4) by other means acceptable
to the Compensation Committee, including any combination of the foregoing. At
the discretion of the Compensation Committee, options may include a so-called
"reload" feature whereby an optionee exercising an option by delivery of shares
of common stock would automatically be granted an additional option at the fair
market value of stock when such additional option is granted equal to the number
of shares so delivered.
The Stock Incentive Plan also provides for the issuance of unrestricted
stock awards, performance share awards and stock appreciation rights (SARs).
SARs may be granted, at the discretion of the Compensation Committee,
simultaneously with and in conjunction with the grant of a stock option,
subsequent to and in conjunction with the grant of a non-qualified option or
alone and are deemed to be exercised on the last day of their term, if not
otherwise exercised by the holder, provided that the fair value of the common
stock subject to the SARs exceeds the exercise price on such date. The amount
paid upon exercise may be in additional stock or, in the discretion of the
Compensation Committee, in cash.
In July 1999, the Compensation Committee approved the award of 560,000
shares of the Company's common stock to a group of officers and directors. Under
the terms of the award, there is no cost to the recipient for the shares, which
will vest annually over a five year period conditioned on continued employment
with the Company. Shares that do not vest are forfeited and are returned to the
Company. While the shares issued under this conditioned stock award are
outstanding, recipients have both voting and dividend rights in such shares.
The total compensation cost of the conditioned stock award was
determined at the award date since both the number of shares and price to be
paid (zero) were known. This cost, which amounts to $6,370,000, is being
amortized ratably over five years beginning in July 1999 and ending when all
risks of forfeiture have passed. Forfeitures will be recognized as a
reduction of compensation costs in the period in which they occur.
In July 1999, the Compensation Committee also approved the grant of options
to officers and directors to acquire 1,243,000 shares of common stock at $11.375
per share, the fair market value at the date of grant. Such options will become
exercisable at a rate of 20% per year over the five year period following the
date of grant.
The Company has accounted for these options in accordance with Accounting
Principles Board Opinion No. 25 and, accordingly, will recognize no compensation
cost for options issued to employees and directors.
-11-
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
(8) STOCK REPURCHASE PROGRAM
On July 22, 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 Stock
Incentive Plan. On October 28, 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 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 November 12, 1999, the Company had repurchased 886,000 shares of its
common stock under these programs at a total cost of $10,088,000, of which
630,000 shares at a cost of $7,369,000 had been repurchased as of September 30,
1999.
(9) QUARTERLY CASH DIVIDEND
On October 14, 1999, the Board of Directors voted the payment of a
quarterly cash dividend of $.05 per share. The dividend is payable on November
19, 1999 to stockholders of record on November 5, 1999.
(10) PENSION PLAN TERMINATION
As part of a program to redesign its retirement benefits, the Board of
Directors voted in September 1999 to freeze the Bank's defined benefit,
non-contributory pension plan (the Plan) effective as of October 31, 1999 and
terminate the Plan effective on or about December 31, 1999. In connection
therewith, the Bank intends to amend the Plan to improve the benefit formula for
current employees and permit payment of lump sums from the Plan.
Excess assets of the Plan, after considering the impact of Plan amendments,
are expected to be less than $500,000. Such excess will be refunded to the Bank.
The Bank intends to pledge 25% of the refund for future contribution to the
Bank's 401(k) plan.
As part of the redesign of retirement benefits, the Bank added, effective
in November 1999, a 3% automatic contribution to the 401(k) plan for all
employees even if they do not separately contribute to that plan. Such
contribution is being made for all eligible participants based on their W-2
compensation.
As a result of the decision to terminate the Plan, the Bank will recognize
both a curtailment and settlement gain. A curtailment gain of $1,472,000 was
recognized in the quarter ended September 30, 1999. A settlement gain, which is
expected to be approximately $1.5 million, will be recognized after the receipt
of all necessary regulatory approvals and settlement of plan obligations which
are expected to occur in 2000.
(11) DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
On October 28, 1999, the Board of Directors authorized a dividend
reinvestment and stock purchase plan for up to 500,000 shares of common stock.
Stockholders owning 100 or more shares will be eligible to enroll and may
reinvest part or all of their cash dividends. Participants may also invest
optional cash payment from $100 to $5,000 maximum per quarter. This plan will
commence upon Board approval of the Company's next quarterly cash dividend.
-12-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-Q contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Actual events could differ materially from
those anticipated in the forward-looking statements. Important factors that
might cause such a difference include, among other things, general economic
conditions, particularly the real estate market, in the Company's primary market
area, potential increases in the Company's non-performing assets (as well as
increases in the allowance for loan losses that might be necessary),
concentrations of loans in a particular geographic area or with certain large
borrowers, changes in government regulation and supervision, including increased
deposit insurance premiums or capital or reserve requirements, the so-called
Year 2000 issue, changes in interest rates, and increased competition and bank
consolidations in the Company's market area.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets increased by $160.0 million from $1,888.1 million at December
31, 1998 to $2,048.1 million at September 30, 1999. During the nine months ended
September 30, 1999, Compass increased its loan portfolio by $283.7 million, or
20.2%, which was funded by liquid assets, principally maturing investment
securities, federal funds sold and other short-term investments remaining from
the proceeds of the November 1998 stock offering, net deposit growth of $33.3
million and by additional Federal Home Loan Bank borrowings of $110.1 million.
The increase in loans occurred primarily in the residential mortgage and
indirect auto loan portfolios and, to a lesser extent, in the construction loan
portfolio. From December 31, 1998 to September 30, 1999, residential mortgage
loans increased by $162.0 million, or 23.2%, indirect auto loans (net of
unearned discounts) increased by $82.7 million, or 25.8% and construction loans
increased by $15.1 million, or 22.8%. The growth during the nine months ended
September 30, 1999 was generally attributable to the favorable interest rate
environment and economic conditions which prevailed during this period and, more
specifically, is due to the previously disclosed temporary change in practice by
Compass to retain in portfolio all fixed rate residential mortgage loan
originations. As a result, residential mortgage loan sales declined from $138.0
million in the nine months ended September 30, 1998 to $5.5 million in the
comparable period ended September 30, 1999. The growth in residential mortgage
loans was also aided by a program begun in August 1998 to fund adjustable rate
mortgages originated by loan correspondents. During the nine months ended
September 30, 1999, $71.9 million of such loans were funded. Loan originations
through this program were substantially curtailed in the third quarter of 1999
and are expected to be insignificant during the fourth quarter. The Company has
continued to emphasize the origination of indirect auto loans through its
network of automobile dealers causing the growth in this portfolio. During 1999,
the number of dealers doing business with the Bank increased by 29%.
Total deposits at September 30, 1999 were $1,530.5 million, an increase of
$33.3 million, compared to $1,497.2 million at December 31, 1998. This increase
was partially offset by a reduction of approximately 2% in the balance of
certificates of deposit. Core deposit account balances increased by 6.2% during
the nine months ended September 30, 1999. The increase in deposits during this
period is generally attributable to normal seasonal fluctuations during the
summer months, particularly in the Cape Cod and Martha's Vineyard markets. Total
borrowed funds were $218.7 million at September 30, 1999 compared to $98.8
million at December 31, 1998, an increase of $119.9 million, or 121.4%. During
the nine months ended September 30, 1999, Compass increased its net borrowings
from the Federal Home Loan Bank by $110.1 million in order to fund loan growth,
which included $7.6 million of borrowings on Compass's line of credit of $38
million. Management believes that it will continue to expand its Federal Home
Loan Bank borrowings during the remainder of 1999 to partially fund anticipated
loan growth, as deposit growth has historically been seasonally constrained in
the fourth quarter. In addition, because of interest rate increases initiated by
the Federal Reserve Board in recent months, many financial institutions have
reacted by increasing deposit rates, particularly for certificate of deposit
accounts. The aggressive price competition for such accounts could also
adversely affect Compass's balance of certificates of deposit during the fourth
quarter.
The increase in stockholders' equity of $7.0 million to $278.5 million at
September 30, 1999 resulted from the net income of $18.4 million for the nine
months ended September 30, 1999 which was partially offset by a decline in the
fair value on securities available for sale, net of taxes, of $3.5 million,
stock repurchases of $7.4 million and a cash dividend of $1.3 million.
-13-
COMPARISON OF OPERATING RESULTS FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND
1998
Net income was $6.9 million, or $.27 per diluted share, for the quarter
ended September 30, 1999 compared to net income of $5.1 million for the
comparable period in 1998. The 1999 results, as compared to 1998, include an
increase of $3.7 million, or 24.3%, in net interest income, an increase of
$955,000, or 34.5%, in non-interest income and an increase of $1.5 million, or
15.3%, in non-interest expense. The increase in non-interest income was entirely
due to a gain of $1.5 million on termination of the Bank's pension plan. The
Company's effective tax rate declined to 35.8% in 1999 from 36.9% in the
comparable 1998 period.
INTEREST INCOME. Interest income for the quarter ended September 30, 1999
was $35.1 million, compared to $31.3 million for the quarter ended September 30,
1998, an increase of $3.8 million, or 12.1%. All of the increase in interest
income resulted from growth in average interest-earning assets of $272.2
million, or 16.4%, as the overall yield on interest-earning assets declined by
27 basis points in the 1999 period. Yields continue to be impacted by aggressive
price competition for both new and existing loan relationships. The principal
areas of growth in average balances were related to real estate loans (up $238.2
million, or 25.9%) and indirect auto loans (up $112.6 million, or 40.7%). Most
of the real estate loan growth resulted from increased originations and
retention in portfolio of one-to-four family real estate loans. The increase in
indirect auto loans resulted from the favorable economic environment within
Compass's local markets and a 29% increase in the number of auto dealers doing
business with the Bank in 1999.
The net proceeds of the November 1998 stock offering of $121.4 million had
a positive impact on the Company's interest income and, in particular, its net
interest income. Of the increase of $3.8 million in interest income,
approximately $1.9 million was attributable to the earnings on the use of the
net proceeds of the stock offering during the quarter ended September 30, 1999.
INTEREST EXPENSE. Interest expense for the quarter ended September 30, 1999
was $16.1 million compared to $16.0 million for the quarter ended September 30,
1998, an increase of $75,000 or .5%. This increase resulted from growth in
average interest bearing liabilities of $145.8 million, substantially offset by
a 38 basis point decline in the cost of all funds from 4.38% in 1998 to 4.00% in
1999. Average interest-bearing deposit balances increased $55.8 million, or
4.1%, during the quarter ended September 30, 1999 compared to the same period in
1998.
Interest expense on borrowed funds increased $1.2 million in the quarter
ended September 30, 1999 due to an $89.9 million, or 84.1%, increase in the
average balance of such funds partially offset by a 49 basis point reduction in
the average rate paid on borrowed funds to 5.72% in the 1999 period compared to
6.21% in the 1998 period.
PROVISION FOR LOAN LOSSES. Compass provides for loan losses in order to
maintain the allowance for loan losses at a level that management estimates is
appropriate to absorb future charge-offs of loans deemed uncollectible. In
determining the appropriate level of the allowance for loan losses, management
considers past and anticipated loss experience, evaluations of real estate
collateral, current and anticipated economic conditions, volume and type of
lending and the levels of nonperforming and other classified loans. The amount
of the allowance is based on estimates and ultimate losses may vary from such
estimates. Management assesses the allowance for loan losses on a quarterly
basis and provides for loan losses monthly in order to maintain the adequacy of
the allowance.
Compass provided $650,000 for loan losses in the quarter ended September
30, 1999 compared to $263,000 in the quarter ended September 30, 1998. The
provision was primarily attributable to the growth in the loan portfolio.
NON-INTEREST INCOME. Total non-interest income was $3.7 million for the
quarter ended September 30, 1999 compared to $2.8 million in the same period of
1998, an increase of $955,000. Exclusive of the non-recurring gain of $1.5
million on termination of the pension plan, non-interest income declined
$517,000 due entirely to a decrease of $598,000 in gains on the sale of loans
and investments as compared to the same period in 1998. This decline is a result
of the temporary change in practice, initiated by the Bank in November 1998,
whereby fixed rate residential mortgage loans with terms of 15 years or longer
are not being sold in the secondary mortgage market. This change resulted from
the Sandwich acquisition and the stock offering and their impact on the
sensitivity of the balance sheet to changes in interest rates along with the
relative attractiveness of the yield and expected duration of such mortgage
loans. While the Company expects to return to selling longer-term fixed rate
residential mortgage loans by 2000, until it does so, the Company expects to
experience a decline in its gains on the sale of loans.
-14-
NON-INTEREST EXPENSE. Non-interest expense increased by $1.5 million, or
15.3%, from $9.8 million for the quarter ended September 30, 1998 to $11.3
million for the quarter ended September 30, 1999. Of this increase, $560,000
related to salaries and employee benefits, which rose 10.7% to $5.8 million for
the quarter ended September 30, 1999. This increase is attributable to overall
salary increases averaging 4% in 1999, costs associated with the ESOP
established in November 1998 ($158,000) and restricted stock awarded in July
1999 ($318,000), partially offset by elimination of certain executive positions
at the former Sandwich Bank.
Occupancy and equipment expenses increased $96,000, or 7.2%, to $1.4
million for the quarter ended September 30, 1999. This increase was due to an
increase in rent expense and depreciation attributable to the relocation of the
Bank's Consumer Lending Department and the opening of a new branch in Hyannis.
Data processing expenses increased $211,000, or 23.9%, to $1.1 million for
the quarter ended September 30, 1999. This increase was due to a number of
factors such as new services, including laser printing and Internet services,
the installation of additional communication lines and related network changes,
outsourcing of cash letter processing, expansion of the ATM network on Cape Cod
and volume-related core processing costs due to increases in loans and deposits.
Marketing expenses increased $144,000, or 28.1%, to $656,000 for the
quarter ended September 30, 1999. This increase was due to lower than normal
marketing costs at the former Sandwich Bank in the 1998 period due to the
impending merger with the Company and increased costs in 1999 associated with a
program to attract new customers affected by the branch divestiture required by
the Fleet/BankBoston merger.
Professional services expenses increased $230,000, or 70.1%, to $558,000
for the quarter ended September 30, 1999. This increase was primarily due to
costs associated with being a public company as well as costs incurred to
develop the Bank's strategic plan, assess business expansion opportunities,
implement the stock award program and review the defined benefit pension plan.
Other non-interest expenses increased $258,000, or 17.1%, for the quarter
ended September 30, 1999 but were $193,000 less than such expenses for the
quarter ended June 30, 1999. This increase is due primarily to certain
nonrecurring costs associated with the merger with Sandwich.
INCOME TAXES. The effective tax rate for the quarter ended September 30,
1999 was 35.8% compared to 36.9% in the same period in 1998. This reduction in
overall tax rate is due to greater utilization of non-bank subsidiaries that are
taxed at lower rates for state tax purposes and an increase in federal low
income housing tax credits.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
1998
Net income was $18.4 million, or $.72 per diluted share, for the nine
months ended September 30, 1999 compared to net income of $14.0 million for the
comparable period in 1998. The 1999 results, as compared to 1998, include an
increase of $9.5 million, or 21.0%, in net interest income, an increase of
$231,000, or 3.1%, in non-interest income and an increase of $3.4 million, or
11.4%, in non-interest expense. The Company's effective tax rate declined to
35.7% in 1999 from 37.6% in the comparable 1998 period.
INTEREST INCOME. Interest income for the nine months ended September 30,
1999 was $101.5 million, compared to $92.6 million for the nine months ended
September 30, 1998, an increase of $8.9 million, or 9.6%. All of the increase in
interest income resulted from growth in average interest-earning assets of
$237.7 million, or 14.7%, as the overall yield on interest-earning assets
declined by 34 basis points in the 1999 period. Yields continue to be impacted
by aggressive price competition for both new and existing loan relationships.
The principal areas of growth in average balances were related to real estate
loans (up $176.3 million, or 19.2%) and indirect auto loans (up $111.5 million,
or 45.0%). Most of the real estate loan growth resulted from increased
originations and retention in portfolio of one-to-four family real estate loans.
The increase in indirect auto loans resulted from an improved economic
environment within Compass's local markets and a 29% increase in the number of
auto dealers doing business with the Bank in 1999.
The net proceeds of the November 1998 stock offering of $121.4 million had
a positive impact on the Company's interest income and, in particular, its net
interest income. Of the increase of $8.9 million in interest income,
approximately $5.5 million was attributable to the earnings on the use of the
net proceeds of the stock offering during
-15-
the nine months ended September 30, 1999.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1999 was $46.4 million compared to $47.1 million for the nine months ended
September 30, 1998, a decrease of $650,000 or 1.4%. This decrease resulted from
a 37 basis points decline in the cost of all funds from 4.39% in 1998 to 4.02%
in 1999, substantially offset by a higher average balance of interest-bearing
liabilities (up $109.8 million, or 7.7%). Average interest-bearing deposit
balances increased $75.7 million, or 5.8%, during the nine months ended
September 30, 1999 compared to the same period in 1998.
Interest expense on borrowed funds increased $1.1 million, or 20.9%, in the
nine months ended September 30, 1999 due to a $34.0 million, or 29.2%, increase
in the average balance of such funds partially offset by a 40 basis points
reduction in the average rate paid on borrowed funds to 5.75% in the 1999 period
compared to 6.15% in the 1998 period.
PROVISION FOR LOAN LOSSES. Compass provided $1.2 million for loan losses in
the nine months ended September 30, 1999 compared to $968,000 in the nine months
ended September 30, 1998. The provision was primarily attributable to the growth
in the loan portfolio.
NON-INTEREST INCOME. Total non-interest income was $7.7 million for the
nine months ended September 30, 1999 compared to $7.5 million in the same period
of 1998, an increase of $231,000. Exclusive of the non-recurring gain of $1.5
million on termination of the pension plan, non-interest income declined $1.2
million due almost entirely to a $1.1 million decrease in gains on the sale of
loans and investments. Such decline is a result of the previously noted
temporary change in practice whereby fixed rate residential mortgage loans with
terms of 15 years or longer are not being sold in the secondary mortgage market.
Other non-interest income decreased by $110,000 during the nine months
ended September 30, 1999 compared to the comparable 1998 period. The principal
items causing this decline were the waiver of the monthly deposit fee for
customers of the former Sandwich Bank for February 1999 due to the conversion of
accounts to Compass's computer system and the growing impact of the amortization
of mortgage servicing rights which resulted from application of SFAS No. 125 by
Compass in 1996 and which reduces loan servicing fee income.
NON-INTEREST EXPENSE. Non-interest expense increased by $3.4 million, or
11.5%, from $29.6 million for the nine months ended September 30, 1998 to $33.0
million for the nine months ended September 30, 1999. Of this increase, $735,000
related to salaries and employee benefits, which rose 4.6% to $16.6 million for
the nine months ended September 30, 1999. This increase is attributable to
overall salary increases averaging 4% in 1999, costs associated with the ESOP
established in November 1998 ($447,000) and restricted stock awarded in July
1999 ($318,000), and additional payroll costs for branches opened in July 1998
and September 1999, partially offset by elimination of certain executive
positions at the former Sandwich Bank.
Occupancy and equipment expenses increased $549,000, or 14.4%, to $4.4
million for the nine months ended September 30, 1999. This increase was due to
an increase in maintenance costs and rent expense attributable to relocation of
the Bank's Operations and Consumer Lending Departments, the opening of a new
branch in Plymouth and Hyannis as well as an upgraded branch in Westport.
Data processing expenses increased $842,000, or 33.7%, to $3.3 million for
the nine months ended September 30, 1999. This increase was due to a number of
factors such as new services, including laser printing and Internet services,
the installation of additional communication lines and related network changes,
outsourcing of cash letter processing, Y2K compliance costs, expansion of the
ATM network on Cape Cod and volume-related core processing costs due to
increases in loans and deposits.
Marketing expenses increased $168,000, or 10.5%, to $1.8 million for the
nine months ended September 30, 1999. This increase was due to lower than normal
marketing costs at the former Sandwich Bank in the 1998 period due to the
impending merger with the Company and increased costs in 1999 associated with a
program to attract new customers affected by the branch divestiture required by
the Fleet/BankBoston merger.
-16-
Professional services expenses increased $319,000, or 33.9% to $1.3 million
for the nine months ended September 30, 1999. This increase was primarily due to
costs associated with being a public company as well as costs incurred to
develop the Bank's strategic plan, perform a salary study, assess business
expansion opportunities, implement the stock award program and review the
defined benefit pension plan.
Other non-interest expenses increased $769,000, or 15.9%, for the nine
months ended September 30, 1999. This increase is due primarily to certain
nonrecurring costs resulting from the merger with Sandwich as well as additional
costs associated with being a publicly-owned company.
INCOME TAXES. The effective tax rate for the nine months ended September
30, 1999 was 35.7% compared to 37.6% in the same period in 1998. This reduction
in overall tax rate is due to greater utilization of non-bank subsidiaries that
are taxed at lower rates for state tax purposes and an increase in federal low
income housing tax credits.
LIQUIDITY AND CAPITAL RESOURCES
Compass's liquidity, represented by cash and cash equivalents and debt
securities, is a product of its operating, investing, and financing activities.
The Bank's primary sources of funds are deposits, borrowings, principal and
interest payments on outstanding loans, mortgage-backed securities and
collateralized mortgage obligations, maturities of investment securities and
funds provided from operations, which in recent years had included the proceeds
on the sale of fixed rate residential mortgage loans. While scheduled payments
from the amortization of loans and mortgage related securities and maturing
investment securities are relatively predictable sources of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates. Compass
invests excess funds, if any, in federal funds sold and other short-term
investments which provide liquidity to meet lending requirements.
Compass is a voluntary member of the Federal Home Loan Bank of Boston (FHLB
of Boston) and, as such, is entitled to borrow an amount up to the value of its
qualified collateral that has not been pledged to other parties. Qualified
collateral generally consists of residential first mortgage loans, U.S.
Government and agency securities (both issued or guaranteed) and funds on
deposit at the FHLB of Boston. During 1999, Compass has utilized FHLB of Boston
advances as a funding sources to a greater extent than in prior years. For the
nine months ended September 30, 1999, Compass increased its net borrowings from
the FHLB of Boston by approximately $110 million. At September 30, 1999, Compass
had approximately $525.0 million in unused borrowing capacity that is contingent
upon the purchase of additional FHLB of Boston stock.
At September 30, 1999, Compass had outstanding commitments to originate
loans totaling $59.4 million. Compass also had outstanding commitments under
existing lines of credit of $75.2 million as well as unadvanced commitments
under construction loans totaling $42.7 million. In addition, the Bank has
certain commitments outstanding in connection with the construction of its
corporate headquarters building, currently in progress, totaling $17.0 million.
The Company believes that it has adequate sources of liquidity to fund these
commitments.
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 September 30,1999, the Company maintained cash
and due from banks, short-term investments and debt securities (other than
mortgage related securities) maturing within one year of $105.9 million, or
5.17% of total assets.
The Company's Tier 1 capital measured 19.81% of risk-weighted assets at
September 30, 1999. Total capital, including the Tier 2 allowance for loan
losses, was 21.03% of risk-weighted assets. The leverage capital ratio was
13.48%. These ratios placed the Company in the "well-capitalized" category
according to regulatory standards.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue (commonly referred to as "Y2K") is the result of
computer programs being written using two digits, rather than four digits, to
define the applicable year. The Y2K issue, which is common to most corporations,
including banks, concerns the inability of information systems, primarily (but
not exclusively) computer software programs, to properly recognize and process
date-sensitive information as the Year 2000 approaches and beyond. The following
constitutes the Company's Y2K readiness disclosure under the Year 2000
Information and Readiness
-17-
Disclosure Act.
Since Compass's information systems functions are either outsourced to
service bureaus or processed in-house using programs developed by third-party
vendors, the direct effort to correct Y2K issues is being undertaken largely by
third parties and is therefore not totally within Compass's direct control.
Compass is bringing its mission critical operating systems into compliance with
Y2K requirements through the installation of updated or replacement programs
developed by third parties.
Compass began addressing the Y2K issue in the Fall of 1996 when it formed a
Y2K Project Team comprised of financial, operations, information systems,
internal audit, compliance, lending, corporate services, loan servicing and
retail personnel. A formal Y2K Action Plan was developed by the Y2K Project Team
and approved by the Board of Directors in 1997. The Board of Directors receives
quarterly Year 2000 status reports on all mission critical systems and related
testing details. During 1998, Compass engaged an outside consultant to assist in
providing limited Y2K assurance. Notwithstanding this engagement, Compass
retains responsibility for Y2K issues, plans and compliance efforts.
The Y2K Project Team has completed an assessment, identified mission
critical systems, and created a formal tracking system identifying all third
party vendors and their Y2K compliant version of all bank installed systems.
Mission critical systems include hardware, software, program interfaces,
operating systems as well as other mechanical or computer-generated requirements
that are beyond Compass's main central processing system and network. Based upon
the results of the assessment, Compass established internal time frames to
upgrade or replace its existing hardware and software systems and added to the
Information Systems staff in the first quarter of 1999. During the second
quarter, Compass completed the planned upgrade to its 34 then existing retail
branches with new Y2K compliant hardware and branch teller platform software.
Additionally, Compass replaced other specific hardware and software that had
been identified as non-compliant according to schedule. Accordingly, Compass's
information technology infrastructure has been determined to be Year 2000 ready
and is deployed for use.
Compass's plan to resolve the Y2K issue was developed along the five phase
project management process outlined in the Federal Financial Institutions
Examination Council (FFIEC) Year 2000 statement of May 5, 1997 which consisted
of (i) awareness; (ii) assessment; (iii) renovation; (iv) validation; and (v)
implementation. The awareness phase has been completed. The Y2K assessment was
completed and monitoring of service bureau and vendor progress is ongoing.
Renovation of third party systems that were identified as non-compliant were
upgraded or replaced by the compliant version by September 30, 1999. All non
critical software applications affected by the millennium have been identified.
These applications were upgraded and Y2K compliant by October 31, 1999. The Y2K
Project Team has developed and implemented test plans of all mission critical
systems. Compass conducted a successful test of its key transaction processing
system with its service bureau in the fourth quarter of 1998 and again in the
third quarter of 1999. In addition, Compass and its outside consultant have
reviewed documentation of its service bureaus' test results during the first
quarter of 1999 and found the results of the tests to be acceptable. Compass has
developed its Y2K contingency plan incorporating certain elements of its
bankwide Disaster Recovery Plan. Also, Compass has entered into an arrangement
with its service bureau to establish a remote branch Mobile Recovery Unit,
located in Framingham, Massachusetts to be used in the event of a catastrophic
telecommunications or power failure. The remote branch Mobile Recovery Unit will
be located at an off premises site that is capable of creating its own emergency
power for extended periods of time. Key documents would then be delivered to the
remote branch which is capable of transmitting data to Compass's service bureau.
Both locations also have emergency power to continue processing customer account
activity. The Compass contingency plan was completed by June 30, 1999 in
accordance with the Interagency Regulatory Statement on Contingency Planning.
Validation of contingency plans and re-testing of certain applications will
continue throughout 1999, if necessary, to provide maximum assurance that all
hardware and software will be Y2K compliant. Compass's efforts are focused on
its ability to provide continued service to customers and to process data in the
event of temporary problems beyond the Bank's control.
The chief components of Compass's expense related to the Y2K issue has been
the replacement of personal computer equipment and the purchase or upgrade of
third-party software. External maintenance and internal modification costs have
been expensed as incurred. Costs of new hardware and software have been
capitalized and depreciated in accordance with Compass policies. Management
expects to expend in the range of $1.05 to $1.1 million on its Year 2000
readiness efforts. Through September 30, 1999, Compass had expended
approximately $1.0 million. Costs of the Y2K project are based on current
estimates and actual results could vary from such estimates. If the
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resolution plan is unsuccessful, it may have a material, adverse effect on
Compass's future operating results and financial condition.
Recognizing the importance of customer awareness, Compass has completed
five mailings of Y2K information to all customers with statement accounts. Also,
letters have been sent to major commercial loan customers and automobile
dealerships informing them of the Year 2000 Issue and how it can impact
businesses. An overall assessment of the Y2K readiness of Compass's commercial
loan customers was completed in October 1998, with an overall assessment of low
to medium risk. The Bank will continue to monitor its large commercial loan
relationships through account officers contact programs. Also, new and renewed
commercial credits greater than $100,000 include a Y2K analysis as part of the
normal underwriting decision process.
To date, Compass has not identified any system which presents a material
risk of not being Year 2000 ready in a timely fashion or for which a suitable
alternative cannot be implemented. However, as Compass progresses with its Year
2000 project, it may identify systems which do present a material risk of Year
2000 disruption. Such disruption could include, among other things, the
inability to process and underwrite loan applications, to make deposits to or
withdrawals from customer accounts, to credit loan payments or track
delinquencies, to properly reconcile and record daily activity or to engage in
normal banking activities. Additionally, if Compass's commercial customers are
not Year 2000 compliant and suffer adverse effects on their operations, their
ability to meet their obligations to the Bank could be adversely affected. The
failure of Compass to identify systems which require Year 2000 hardware and
software upgrades that are critical to the Bank's operations or the failure of
the Bank or others with which the Bank does business to become Year 2000 ready
in a timely manner could have a material adverse impact on the Bank's financial
condition and results of operations. Moreover, to the extent that the risks
posed by the Year 2000 problem are pervasive in data processing and transmission
and communications services worldwide, the Bank cannot predict with any
certainty that its operations will remain materially unaffected after January 1,
2000 or on dates preceding this date at which time post-January 1, 2000 dates
become significant within the Bank's systems.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting the financial condition and
operating results of the Company is interest rate risk. This risk is managed by
periodic evaluation of the interest risk inherent in certain balance sheet
accounts, determination of the level of risk considered appropriate given
Compass's capital and liquidity requirements, business strategy, performance
objectives and operating environment and maintenance of such risks within
guidelines approved by the Board. Through such management, Compass seeks to
reduce the vulnerability of its net earnings to changes in interest rates.
Compass's Asset/Liability Committee, comprised of senior management, is
responsible for managing interest rate risk and reviewing with the Board of
Directors on a quarterly basis its activities and strategies, the effect of
those strategies on Compass's and the Company's operating results, Compass's
interest rate risk position and the effect changes in interest rates would have
on Compass's net interest income. The extent of movement of interest rates is an
uncertainty that could have a negative impact on the earnings of the Company.
The principal strategies the Company and Compass generally use to manage
interest rate risk include (i) emphasizing the origination and retention of
adjustable-rate loans, origination of indirect auto loans which have relatively
short maturities and origination of loans with maturities at least partly
matched with those of the deposits and borrowings funding the loans, (ii)
investing in debt securities with relatively short maturities and (iii)
classifying a significant portion of its investment portfolio as available for
sale so as to provide sufficient flexibility in liquidity management.
The Company quantifies its interest-rate risk exposure using a
sophisticated simulation model. Simulation analysis is used to measure the
exposure of net interest income to changes in interest rates over a specified
time horizon. 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.
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As of September 30, 1999, the Company's estimated exposure as a percentage
of estimated net interest income for the next twelve and twenty-four month
periods is as follows:
PERCENTAGE CHANGE IN ESTIMATED
NET INTEREST INCOME OVER:
------------------------------------------------
12 MONTHS 24 MONTHS
---------------------- -------------------------
300 basis point increase in rates (12.35%) (9.81%)
200 basis point decrease in rates (1.73%) (5.92%)
Based on the scenario above, net income would be adversely affected (within
Compass's internal guidelines) in both the twelve and twenty-four month periods.
For each one percentage point change in net interest income, the effect on net
income would be $534,000, assuming a 37% tax rate.
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and Compass are not involved in any pending legal proceedings
other than in the ordinary course of business. Management believes that the
resolution of these matters will not materially affect the business or
consolidated financial condition of the Company and Compass.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3.1 Articles of Organization of Seacoast Financial Services Corporation****
3.2 By-Laws of Seacoast Financial Services Corporation****
4 Specimen
certificate for the common stock of Seacoast Financial Services Corporation***
10.1* Form of Employment Agreement by and among Seacoast Financial Services Corporation, Compass Bank for Savings
and Kevin G. Champagne**
10.2* Form of Employment Agreement by and among Compass Bank for Savings, Seacoast Financial Services Corporation
and certain Officers of Compass Bank for Savings**
10.3* Form of Change in Control Agreements by and among Seacoast Financial Services Corporation, Compass Bank for
Savings, Kevin G. Champagne and certain other Officers of Compass Bank for Savings**
10.4* Form of Change in Control Agreement by and among Seacoast Financial Services Corporation, Compass Bank for
Savings and certain Officers of Compass Bank for Savings**
10.5* Form of Executive Salary Continuation Agreements made and entered into by and between Compass Bank for Savings
and Kevin G. Champagne, Arthur W. Short, John D. Kelleher and Francis S. Mascianica and forms of amendments
thereto**
10.6* Trust Agreement, made as of December 18, 1992 by and between Compass Bank for Savings and Shawmut
Bank, N.A.**
10.7* Compass Bank for Savings 1999 Incentive Compensation Plan******
10.8 Amended and Restated Affiliation and Merger Agreement dated at of March 23, 1998 by and among Seacoast
Financial Services Corporation, Compass Bank for Savings, Sandwich Bancorp, Inc. and the Sandwich Co-operative
Bank**
10.9 Stock Option Agreement dated as of March 23, 1998 by and between Sandwich Bancorp, Inc. and Seacoast Financial
Services Corporation**
10.10 Form of Voting Agreements between Seacoast Financial Services Corporation and the Directors of Sandwich Bancorp,
Inc.**
10.11 Form of Affiliates Agreements between Seacoast Financial Services Corporation and certain affiliates of Sandwich
Bancorp, Inc.**
10.12* Compass Bank for Savings Executive Deferred Compensation Plan**
10.13* Rabbi Trust for Compass Bank for Savings Executive Deferred Compensation Plan**
10.14(a)* Employment Agreements dated July 18, 1994 by and between Sandwich Co-operative Bank and Frederic D. Legate,
Dana S. Briggs and George L. Larson***
10.14(b)* 1998 Amendment to Employment Agreements dated July 18, 1994 by and between Sandwich Co-operative Bank and
Frederic D. Legate, Dana S. Briggs and George L. Larson***
10.15(a)* Employment Agreement dated December 17, 1991 by and between Sandwich Co-operative Bank and David A.
Parsons***
10.15(b)* 1998 Amendment to Employment Agreement dated December 17, 1991 by and between Sandwich Co-operative Bank
and David A. Parsons***
10.16* Sandwich Co-operative Bank 1983 Directors Deferred Income Agreement***
10.17* Sandwich Co-operative Bank 1992 Directors Deferred Compensation Plan***
10.18* Supplemental Executive Retirement Agreements dated May 5, 1995 by and between Sandwich Co-operative Bank
and Frederic D. Legate, Dana S. Briggs, George L. Larson and David A. Parsons and amendments thereto***
10.19* Seacoast Financial Services Corporation 1999 Stock Incentive Plan*****
11 A statement regarding earnings per share is included in Item 1, Note 6, of this Report.
27 EDGAR Financial Data Schedule
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* 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 Quarterly Report on Form
10-Q filed with the Securities and Exchange Commission on May 14, 1999.
b. Reports on Form 8-K:
None filed during the quarter.
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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: November 12, 1999 By /s/ Kevin G. Champagne
-------------------------------------
Kevin G. Champagne
President and Chief Executive Officer
Date: November 12, 1999 By /s/ Francis S. Mascianica, Jr.
-------------------------------------
Francis S. Mascianica, Jr.
Treasurer
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