Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1999
or
[ ] TRANSITIONAL REPORT UNDER 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 Number)
791 PURCHASE STREET, NEW BEDFORD, MASSACHUSETTS 02740
- ----------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(508) 984-6000
------------------------------
(Registrant's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, par value $.01 per share
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 _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment of this Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based on the closing price on March 17, 2000, on the Nasdaq National
Market was $233,501,797. Although directors and executive officers of the
registrant were assumed to be "affiliates" of the registrant for the purposes of
this calculation, this classification is not to be interpreted as an admission
of such status.
As of March 17, 2000, 25,467,036 shares of the registrant's common stock were
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the annual meeting of stockholders to be
held on May 18, 2000 are incorporated by reference into the annual report as
portions of Part III of Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Until the completion of a mutual to stock conversion and initial
public offering of its stock on November 20, 1998, Seacoast Financial Services
Corporation (the "Company" or "Seacoast Financial") was a mutual holding company
created in connection with Compass Bank for Savings' (the "Bank" or "Compass")
reorganization into a mutual holding company form of organization in 1994. The
Company is registered with the Board of Governors of the Federal Reserve System
(the "FRB") as a bank holding company under the Bank Holding Company Act of
1956, as amended (the "BHCA"). Since its formation, the Company has owned 100%
of Compass's outstanding capital stock.
On December 4, 1998, the Company acquired by merger all of the
issued and outstanding capital stock of Sandwich Bancorp, Inc. ("Sandwich") in a
stock-for-stock exchange and merged Sandwich's wholly-owned subsidiary, the
Sandwich Co-operative Bank ("Sandwich Bank"), into Compass. This acquisition has
been accounted for as a pooling of interests and, accordingly, all financial
data is presented herein as if the Company and Sandwich had always been
combined. At December 31, 1999, the Company had $2,122.8 million of total
assets.
Compass was organized in 1855 as a Massachusetts-chartered mutual
savings bank, and reorganized into mutual holding company form in 1994.
Compass's principal business has been, and continues to be, gathering deposits
from customers within its market area and investing those funds in residential
and commercial real estate loans, indirect automobile loans, commercial loans,
construction loans, home equity loans and other consumer loans and investment
securities. Compass's investment portfolio consists primarily of U.S. Government
and Agency securities, corporate debt obligations, mortgage-backed securities,
collateralized mortgage obligations and, to a lesser extent, marketable equity
securities. Individual and business customers of Compass have a variety of
deposit accounts with Compass, including NOW (checking) and other demand deposit
accounts, passbook savings accounts, money market deposit accounts, Individual
Retirement Accounts ("IRAs") and various certificates of deposit.
Compass's deposits are insured by the Bank Insurance Fund (the
"BIF"), as administered by the Federal Deposit Insurance Corporation (the
"FDIC"), up to the maximum amount permitted by law, except that certain deposits
that Compass acquired from a savings association are insured by the Savings
Association Insurance Fund (the "SAIF"), also administered by the FDIC. Deposit
amounts in excess of FDIC insurance limits are insured by the Depositors
Insurance Fund (the "DIF"), a deposit insuring entity for Massachusetts savings
banks. Compass is a voluntary member of the Federal Home Loan Bank of Boston
(FHLB), which serves principally as a credit source in providing funds for
residential loans.
On January 28, 1999, the Board of Directors voted to change the
Company's yearend from October 31 to December 31.
MARKET AREA AND COMPETITION
At December 31, 1999, Compass conducted business from its corporate
headquarters in New Bedford, Massachusetts and 35 full-service banking offices,
six of which are located in New Bedford and the remaining 29 of which are
located in the Massachusetts communities of Fall River (two offices), Plymouth
(four offices), Fairhaven, North Dartmouth, Somerset, Swansea, Wareham,
Westport, Assonet and Carver, Cape Cod (ten offices) and the island of Martha's
Vineyard (five offices). Compass also has two limited service high school
branches and five remote service ATMs. In addition, Compass's indirect auto
lending business extends into the state of Rhode Island.
Compass faces significant competition both in generating loans and
in attracting deposits. Compass's primary market area is highly competitive and
Compass faces direct competition from a significant number of financial
institutions, many with a state-wide, a regional and, in some cases, a national
presence. Many of these financial institutions are significantly larger and have
greater financial resources than Compass. Compass's competition for loans comes
principally from commercial banks, savings banks, credit unions, mortgage
brokers, mortgage banking companies and insurance companies. Its most direct
competition for deposits has historically come from savings, cooperative and
commercial banks and credit unions, particularly in Fall River and New Bedford.
In addition, Compass faces increasing competition for deposits from non-bank
institutions, such as brokerage firms and insurance companies which offer
instruments such as short-term money-market funds, corporate and government
securities funds, mutual funds and
1
annuities. Competition may also increase as a result of the lifting of
restrictions on the interstate operations of financial institutions. Finally,
credit unions do not pay federal or state income taxes and are generally subject
to fewer regulatory constraints than savings banks. Numerous credit unions are
located in Fall River, New Bedford and Rhode Island and, because of their tax
and regulatory status, they enjoy a competitive advantage over Compass.
PERSONNEL
As of December 31, 1999, Compass had 485 full-time employees
and 81 part-time employees. None of the Bank's employees are represented by a
labor union and management considers its relationship with its employees to be
good.
LENDING ACTIVITIES
GENERAL. Compass's gross loan portfolio totaled $1,747.2
million as of December 31, 1999, representing 82.3% of Compass's total assets on
that date. Compass primarily makes residential real estate loans secured by one-
to four-family residences, indirect auto loans and commercial real estate loans.
Such loans represented 51.3%, 24.2% and 12.8%, respectively, of Compass's loan
portfolio as of December 31, 1999. Compass also makes home equity line of credit
loans, residential and commercial construction loans, commercial loans, fixed
rate home equity loans, personal installment loans, education loans and passbook
loans. Real estate secures a majority of Compass's loans, including some loans
classified as commercial loans.
Compass makes loans throughout its market area and originated
$716.0 million in loans during 1998 and $818.2 million in loans during 1999. It
sold, on a servicing retained basis, $151.8 million and $6.9 million in
residential loans in the secondary market during those same periods,
respectively.
The types of loans that Compass may originate are subject to
federal and state law and regulations. Interest rates charged by Compass on
loans are affected primarily by the demand for such loans, the supply of money
available for lending purposes, secondary mortgage market rates and the rates
offered by competitors. These factors are, in turn, affected by national,
regional and local economic conditions, the levels of federal government
spending and revenue, monetary policies of the FRB and tax policies.
2
The following table summarizes the composition of Compass's loan portfolio as of
the dates indicated:
At December 31, At October 31,
--------------------------------------- -----------------------------------------
1999 1998 1998 1997
------------------- ------------------ ------------------ ------------------
Percent Percent Percent Percent
Amount of total Amount of total Amount of total Amount of total
------ -------- ------ -------- ------ -------- ------ --------
(Dollars in thousands)
Real estate loans:
Residential (one - to four-family) $ 896,479 51.3 % $ 697,031 49.6% $ 629,779 47.7% $ 618,084 51.9%
Commercial (1) 223,500 12.8 201,636 14.4 209,366 15.8 202,781 17.0
Home equity 26,076 1.5 25,984 1.9 27,471 2.1 27,835 2.3
Construction, net 71,735 4.1 66,373 4.7 63,189 4.8 59,178 5.0
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total real estate loans 1,217,790 69.7 991,024 70.6 929,805 70.4 907,878 76.2
---------- ----- ---------- ----- ---------- ----- ---------- -----
Commercial loans 66,360 3.8 58,829 4.2 50,344 3.8 43,496 3.7
---------- ----- ---------- ----- ---------- ----- ---------- -----
Consumer loans:
Indirect auto loans 439,753 358,101 343,910 238,114
Less: unearned discount 17,370 37,394 37,201 30,066
---------- ---------- ---------- ----------
Indirect auto loans, net 422,383 24.2 320,707 22.8 306,709 23.2 208,048 17.5
Other 40,673 2.3 33,494 2.4 33,822 2.6 31,517 2.6
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total consumer loans, net 463,056 26.5 354,201 25.2 340,531 25.8 239,565 20.1
---------- ----- ---------- ----- ---------- ----- ---------- -----
Total loans $1,747,206 100.0 %$1,404,054 100.0% $1,320,680 100.0% $1,190,939 100.0%
========== ===== ========== ===== ========== ===== ========== =====
At October 31,
----------------------------------------
1996 1995
----------------- ------------------
Percent Percent
Amount of total Amount of total
------ -------- ------ --------
Real estate loans:
Residential (one - to four-family) $ 550,178 51.5% $ 504,534 53.1 %
Commercial (1) 202,447 18.9 175,675 18.5
Home equity 29,766 2.8 32,228 3.4
Construction, net 49,576 4.6 30,635 3.2
---------- ----- ---------- -----
Total real estate loans 831,967 77.8 743,072 78.2
---------- ----- ---------- -----
Commercial loans 41,618 3.9 40,060 4.2
---------- ----- ---------- -----
Consumer loans:
Indirect auto loans 189,865 159,433
Less: unearned discount 24,232 19,911
---------- ----------
Indirect auto loans, net 165,633 15.5 139,522 14.7
Other 29,739 2.8 27,448 2.9
---------- ----- ---------- -----
Total consumer loans, net 195,372 18.3 166,970 17.6
---------- ----- ---------- -----
Total loans $1,068,957 100.0% $ 950,102 100.0 %
========== ===== ========== =====
(1) In September 1996, Compass reclassified approximately $28.0 million in
multifamily loans from residential real estate to commercial real estate
loans. A corresponding reclassification for 1995 has not been made.
3
LOAN ORIGINATION AND UNDERWRITING. Loan officers based in each of
Compass's five regions -- Plymouth, Fall River, New Bedford, Cape Cod and
Martha's Vineyard -- originate and underwrite Compass's mortgage and commercial
loans. Compass underwrites consumer loans at its main office, although it
originates such loans at its branches and, in the case of indirect auto loans,
through a network of car dealers. Compass also employs external loan
originators, based in each of the regions, who originate residential mortgage
loans. In August 1998, Compass began to fund adjustable rate residential
mortgage loans originated by two loan correspondents. During the year ended
December 31, 1999, Compass funded $74.2 million of such loans. Loans originated
through correspondents were significantly curtailed beginning in the third
quarter of 1999.
Compass relies on print, radio, television and cable advertising, on
referrals from existing customers, accountants, attorneys and real estate
professionals and on relationships with existing borrowers to originate loans.
In addition, Compass solicits consumer loans, including home equity loans, by
direct mail to existing deposit and residential mortgage loan customers. Compass
tries to develop relationships with its customers in which customers see Compass
as a source of support in the management of their personal finances or in the
conduct of their businesses. Based on those relationships, many customers have
more than one account with and/or loan from Compass. Finally, Compass has
historically relied on relationships with automobile dealers operating
throughout its current market area and Rhode Island to generate new indirect
auto loans. During 2000, Compass intends to expand its geographic market for
indirect auto loans to communities contiguous to the metropolitan Boston area.
Accordingly, management anticipates that a higher percentage of its indirect
auto loan originations in 2000 will come from dealers outside its primary market
area.
Compass's underwriting of loans varies depending on the type of loan.
It generally includes the use of credit applications, property appraisals and
verification of an applicant's credit history, employment and banking
relationships to the extent management deems appropriate in each case. With
respect to indirect auto loans, the dealers originate the loans, send loan
applications to Compass and Compass underwrites them. Additional information
concerning the underwriting of specific types of loans is set forth in sections
that discuss those loans and in the discussion of environmental factors that
affect lending. See "-- Lending Activities," "-- Residential Real Estate Loans,"
"-- Indirect Auto and Other Consumer Loans," "-- Commercial Real Estate Loans,"
"-- Commercial Loans," "-- Construction Loans" and "-- Environmental Issues."
Four senior loan officers oversee loan origination and underwriting.
Individual loan officers may originate loans within certain approved lending
limits. A credit committee, consisting of senior loan officers, must approve all
commercial and commercial real estate loans that exceed $500,000 and Compass's
Board of Directors, or the executive committee thereof, must approve all loans
over $1.5 million. Pursuant to its loan policy, Compass generally will not make
loans aggregating more than $10.0 million to any one borrower. Exceptions to
this "house" lending limit must be approved by the Board. At December 31, 1999,
no customers had aggregate borrowing capacity with Compass exceeding the $10.0
house limit. The Bank's legal lending limit, which is set at 20% of its capital,
was approximately $45 million at December 31, 1999.
4
The following table sets forth loan activity within Compass's portfolio
for the periods indicated:
Two months
ended
Year ended December 31, Year ended October 31,
December 31, 1999 1998 1999(1)
---------- ---------- ----------
(In thousands)
Loans outstanding at beginning period ... $1,404,054 $1,320,680 $1,190,939
Loans originated:
Mortgage loans:
Residential ................... 323,913 90,374 313,417
Commercial real estate ........ 46,549 12,150 40,123
Construction .................. 100,725 6,862 80,920
Home equity ................... 16,592 1,344 16,882
---------- ---------- ----------
Total mortgage loans ..... 487,779 110,730 451,342
---------- ---------- ----------
Commercial loans .............. 42,846 8,915 39,959
Indirect auto loans ........... 260,043 36,014 203,923
Other consumer loans .......... 27,550 3,097 20,744
---------- ---------- ----------
Total loans originated ... 818,218 158,756 715,968
---------- ---------- ----------
Purchases of mortgage loans ............. 13,343 4,158 11,911
Less:
Principal repayments ............... 479,117 66,535 442,597
Loans sold or securitized .......... 6,899 12,665 151,817
Transfers to other real estate owned 755 326 2,124
Principal charged-off .............. 1,638 14 1,600
---------- ---------- ----------
Loans outstanding at end of period ...... $1,747,206 $1,404,054 $1,320,680
========== ========== ==========
- --------------------------------------
(1) Loan activity for this period includes Sandwich Bank for the ten months
then ended.
Compass charges origination fees, or points, and collects fees to cover
the costs of appraisals and credit reports on most new residential mortgage
loans. Compass also collects late charges on real estate and consumer loans. For
information regarding Compass's recognition of loan fees and costs, see Note 1
of the Notes to the Consolidated Financial Statements presented elsewhere
herein.
LOAN PURCHASES. Compass occasionally purchases participation interests
in commercial and residential real estate loans originated by other banks.
Compass underwrites such loans as if it had originated them itself. Compass's
interest in participation loans as of December 31, 1999 totaled $44.2 million,
of which $26.7 million was acquired from a bank located on the island of
Nantucket, Massachusetts.
5
LOAN MATURITY AND REPRICING. The following table shows the contractual
maturity and repricing dates of Compass's loan portfolio at December 31, 1999.
The table does not reflect prepayments.
AT DECEMBER 31, 1999
------------------------------------------------------------------------------------------
REAL ESTATE MORTGAGE LOANS OTHER
-------------------------------------------
HOME INDIRECT CONSUMER TOTAL
RESIDENTIAL COMMERCIAL CONSTRUCTION EQUITY COMMERCIAL AUTO LOANS LOANS LOANS
----------------------------------- ------ ---------- ---------- ----- -----
(IN THOUSANDS)
Amounts due (1):
Within one year ........................ $ 23,856 $ 14,200 $ 14,616 $ 3,751 $ 42,947 $ 121,387 $ 8,524 $ 229,281
--------- --------- --------- --------- -------- ----------- --------- ----------
After one year:
More than one year to three years . 50,843 21,217 4,400 129 11,666 215,755 15,531 319,541
More than three years to five years 53,718 21,052 2,465 208 6,892 99,626 7,727 191,688
More than five years to ten years . 147,727 57,025 7,644 2,174 4,111 2,985 6,543 228,209
More than ten years ............... 620,335 110,006 42,610 19,814 744 -- 2,348 795,857
--------- --------- --------- --------- -------- ----------- --------- ----------
Total due after
December 31, 2000 ........ 872,623 209,300 57,119 22,325 23,413 318,366 32,149 1,535,295
--------- --------- --------- --------- -------- ----------- --------- ----------
Total amount due .............. $ 896,479 $ 223,500 $ 71,735 $ 26,076 $ 66,360 $ 439,753 $ 40,673 1,764,576
========= ========= ========= ========= ======== =========== =========
Less:
Unearned discount ................. (17,370)
Allowance for loan losses ......... (16,828)
----------
Net loans ..................... $1,730,378
==========
- ------------------------
(1) Amounts due are net of unadvanced funds on loans.
The following table sets forth, at December 31, 1999, the dollar amount
of gross loans, net of unadvanced funds on loans, contractually due or scheduled
to reprice after December 31, 2000 and whether such loans have fixed interest
rates or adjustable interest rates:
DUE AFTER DECEMBER 31, 2000
FIXED ADJUSTABLE TOTAL
----- ---------- -----
(IN THOUSANDS)
Real estate mortgage loans:
Residential .............................................................. $ 359,172 $ 513,451 $ 872,623
Commercial ............................................................... 19,613 189,687 209,300
Construction ............................................................. 23,072 34,047 57,119
Home equity .............................................................. -- 22,325 22,325
---------- ---------- ----------
Total real estate mortgage loans ...................................... 401,857 759,510 1,161,367
---------- ---------- ----------
Commercial loans ............................................................ 8,558 14,855 23,413
Indirect auto loans ......................................................... 318,366 -- 318,366
Other consumer loans ........................................................ 32,149 -- 32,149
---------- ---------- ----------
Total loans ........................................................... $ 760,930 $ 774,365 $1,535,295
========== ========== ==========
RESIDENTIAL REAL ESTATE LOANS. As of December 31, 1999, adjustable rate
mortgage loans represented approximately 60% and fixed-rate mortgage loans
represented approximately 40% of Compass's portfolio of residential mortgage
loans secured by one- to four-family owner-occupied properties. Compass
originated $313.4 million of residential real estate loans during the year ended
October 31, 1998, $90.4 million during the two months ended December 31, 1998
and $323.9 million during the year ended December 31, 1999. Compass's portfolio
of residential real estate loans totaled $896.5 million, which represented 51.3%
of Compass's total loan portfolio at December 31, 1999. Over 90% of this
portfolio is secured by single-family owner-occupied homes and the remainder is
secured primarily by two-, three- or four-family owner-occupied homes.
Until November 1998, Compass generally sold most of the fixed-rate
residential mortgage loans it originated with terms of 15 years or longer to the
Federal Home Loan Mortgage Corporation ("FHLMC"). Compass is also authorized to
sell loans to the Federal National Mortgage Association ("FNMA") and to service
those loans. Compass continues to service loans that it has sold to FHLMC and
receives a monthly fee for servicing such loans equal to .25% to service loans
that it has sold to FHLMC and receives a monthly fee for servicing such loans
equal to .25% per annum
6
of the amounts outstanding on them. Compass serviced loans for others
aggregating $339.9 million as of December 31, 1999 and $405.9 million as of
October 31, 1998 and it earned $587,000 and $759,000 in servicing fees, net
of the amortization of capitalized mortgage servicing rights, representing
5.87% and 7.56%, of its non-interest income in 1999 and 1998, respectively.
Compass generally retains for its own portfolio fixed-rate residential
mortgage loans with terms of less than 15 years and fixed-rate residential
mortgage loans that amortize on a bi-weekly basis and have terms between 10 and
30 years. Compass had $116.1 million of such loans in its portfolio as of
December 31, 1999. Compass also retains in its portfolio fixed-rate mortgage
loans that exceed the size limits of FHLMC's underwriting criteria, and loans
made under its program for low-to-moderate income borrowers, as described below.
Beginning in November 1998, Compass changed its practice and is
currently no longer selling its fixed rate residential mortgage loans. This
change was based on the Bank's assessment of the impact which the Sandwich
acquisition and the capital raised in the initial public offering would have on
the sensitivity of its balance sheet to changes in interest rates. In assessing
its options, the Bank concluded that, at this time, the retention of fixed rate
mortgages offered the best alternative as to yield and duration. The Bank
intends to continue this strategy so long as it does not result in an interest
rate risk exposure inconsistent with its stated policies. Compass's asset
liability strategy is reviewed quarterly and changes are expected to be made to
this practice when circumstances warrant.
Compass originates adjustable-rate residential mortgage loans mostly
for its own portfolio. Compass originated $101.2 million and $169.8 million in
such loans during 1998 and 1999, respectively, including $9.4 million in 1998
and $74.2 million in 1999 originated through two loan correspondents, and had
$533.9 million of such loans in its residential loan portfolio, representing
approximately 60% of such portfolio, as of December 31, 1999. Compass offers
adjustable-rate mortgage loans that reprice annually, every three years or after
five years and annually thereafter. The interest rate adjustments on these loans
are indexed to the applicable one-year or three-year U.S. Treasury CMT Index
with corresponding add-on margins of varying amounts. Such loans are subject to
certain requirements and limitations set forth in guidelines issued by the
Massachusetts Commissioner of Banks, including limitations on the amount and
frequency of interest rate changes. Rates adjust by no more than one or two
percentage points in each adjustment period and by no more than five or six
points over the life of a loan. Adjustable rate loans are generally originated
at a discount, generally ranging from 1.25% to 2.75%, from the fully margined
index rate.
Compass's residential mortgage loans are generally written in amounts
up to 95% of the appraised value or selling price, whichever is less, of the
property securing the loan, although the majority of such loans are written with
ratios of 80% or less. Compass generally requires borrowers to obtain private
mortgage insurance with respect to loans with a greater than 80% loan-to-value
ratio.
In 1994, Compass initiated a program to originate residential mortgage
loans to low-to-moderate income borrowers. The loans have fixed or adjustable
interest rates that are typically lower than prevailing market rates, are closed
without points, have substantially lower closing costs than Compass's other
residential loans and have terms of up to 30 years. The loans may have up to a
95% loan-to-value ratio, although borrowers must obtain private mortgage
insurance if the loan-to-value ratio exceeds 80%. Compass does not sell these
loans in the secondary market. Compass partially funds the loans with borrowings
under the Community Investment Program ("CIP") and the New England Fund ("NEF")
housing programs of the FHLB. These programs permit Compass to borrow from the
FHLB at below market rates to finance the loans. Compass had $17.5 million of
CIP-funded loans and $19.1 million of NEF-funded loans in its residential loan
portfolio, representing 4.1% of such portfolio, as of December 31, 1999.
COMMERCIAL REAL ESTATE LOANS. Compass makes commercial real estate
loans throughout its market area. Compass originated $40.1 million and $46.5
million in commercial real estate loans in 1998 and 1999, respectively, and had
$223.5 million in commercial real estate loans in its loan portfolio,
representing 12.8% of such portfolio, as of December 31, 1999.
Properties that are used for borrowers' businesses, such as small
office buildings, restaurants, inns, retail facilities or multi-family income
properties, normally collateralize Compass's commercial real estate loans. The
loans typically have terms of up to 20 years and interest rates which adjust
over periods of one to five years based on one of various rate indices.
Commercial real estate loans with fixed interest rates have terms generally
ranging from one to five years.
7
Compass primarily considers the quality of the borrower's management
and the borrower's cash flows when it underwrites commercial real estate loans.
Compass generally makes commercial real estate loans in an amount equal to no
more than 80% of the appraised value of the property securing the loan. Compass
generally requires the owners of businesses seeking commercial real estate loans
to personally guarantee those loans.
At December 31, 1999, $21.3 million of the commercial real estate loans
in Compass's portfolio were secured by multi-family income properties. A
majority of these properties are located in Fall River and New Bedford and
contain between five and twelve residential units.
Commercial real estate lending entails greater credit risks than
residential mortgage lending to owner occupants. The repayment of commercial
real estate loans depends on the business and financial condition of the
borrower. Economic events and changes in government regulations, which Compass
and its borrowers cannot control, could have an adverse impact on the cash flows
generated by properties securing Compass's commercial real estate loans and on
the value of such properties. Commercial properties tend to decline in value
more rapidly than residential owner-occupied properties during economic
recessions.
CONSTRUCTION LOANS. Compass makes both residential and commercial
construction loans, primarily in Plymouth County, Cape Cod, in and around New
Bedford and on Martha's Vineyard. Compass typically makes the loans to either
owner-borrowers who will occupy the properties (residential construction) or
licensed and experienced developers for the construction of single-family home
developments that have no more than 30 housing lots and, to a lesser extent, end
users of commercial properties (commercial construction). Commercial
construction loans to end users are generally originated with Compass committing
to the related permanent financing.
Compass makes commercial construction loans only to developers who have
successful track records. Compass generally increases the loan-to-value ratios
on such loans as construction progresses. Before any work has commenced, and
while a construction loan's only collateral is a plot of land, Compass will
typically finance only up to 70% of the value of that land. Once construction
has begun, Compass will generally make residential construction loans in amounts
up to 90% (for primary homes) and 80% (for secondary homes) of the lesser of the
appraised value of the property, as completed, or the property's cost of
construction. Compass generally makes commercial construction loans in amounts
up to 75% of the lesser of the property's appraised value, as completed, or
construction cost and generally requires developers seeking commercial
construction loans to personally guarantee them.
Compass disburses the proceeds of construction loans in stages and
requires developers to pre-sell a certain percentage of the properties they plan
to build before Compass will advance any construction financing. Compass
officials or appointed professionals inspect each project's progress before
Compass disburses additional funds to verify that borrowers have completed
project phases.
Residential construction loans to owner-borrowers generally convert to
a fully amortizing long-term mortgage loan upon completion of construction.
Commercial construction loans generally have terms of six months to a maximum of
two years. Some construction loans have fixed interest rates but Compass
originates mostly adjustable-rate construction loans.
Compass originated $80.9 million and $100.7 million in construction
loans during 1998 and 1999, respectively, and had $71.7 million in construction
loans in its loan portfolio, representing 4.1% of such portfolio, as of December
31, 1999.
Construction lending, particularly commercial construction lending,
entails greater credit risk than residential mortgage lending to owner
occupants. The repayment of construction loans depends on the business and
financial condition of the borrower and on the economic viability of the project
financed. A number of Compass's borrowers have more than one construction loan
outstanding with the Bank. Economic events and changes in government
regulations, which Compass and its borrowers cannot control, could have an
adverse impact on the value of properties securing construction loans and on the
borrowers' ability to complete projects financed and, if not the borrower's
residence, sell them for expected amounts at the time the projects were
commenced.
HOME EQUITY LOANS. Compass has a portfolio of home equity lines of
credit secured by one- to four-family owner-occupied properties. These loans are
revolving lines of credit and are typically secured by second mortgages.
Interest rates on home equity loans normally adjust based on Compass's prime
rate of interest. The lines of credit are available for up to ten years, at the
end of which they become term loans which are amortized for the same amount of
time as the
8
original revolving lines of credit. Compass generally originates home equity
line of credit loans in amounts from $10,000 to $150,000 but not, in any event,
more than the difference between 80% (for primary homes) or 70% (for secondary
homes) of the appraised value of the property securing the loan, or 70% (for
primary homes) or 60% (for secondary homes) of the value of such property as
assessed for tax purposes, and the outstanding balance of the first mortgage on
such property. Compass had $26.1 million in home equity loans in its loan
portfolio, representing 1.5% of the portfolio, as of December 31, 1999. The
undrawn portion of home equity lines of credit totaled $33.5 million at December
31, 1999.
COMMERCIAL LOANS. Compass primarily makes commercial loans to
businesses that operate in and around Southeastern Massachusetts including
Martha's Vineyard. In recent years Compass increased its efforts to originate
more such loans in Plymouth and Fall River by adding a commercial loan officer
dedicated to each of those markets. As a result of its recent merger with
Sandwich Bank, Compass also has commercial loan officers dedicated to the Cape
Cod market.
Compass reviews the financial resources, debt-to-equity ratios, cash
flows and its own experience with businesses when underwriting commercial loans.
Compass generally requires business owners to personally guarantee commercial
loans.
Compass's commercial loans are generally collateralized by equipment,
leases, inventory and/or accounts receivable. Many of Compass's commercial loans
are also collateralized by real estate, but are not classified as commercial
real estate loans because such loans are not made for the purpose of acquiring,
refinancing or constructing the real estate securing the loan. Commercial loans
provide, among other things, working capital, equipment financing, financing for
leasehold improvements and financing for acquisitions. Compass offers both term
and revolving commercial loans. The former have either fixed or adjustable rates
of interest and, generally, terms of between four and seven years. Term loans
generally amortize during their life, although some loans require a lump sum
payment at maturity. Revolving commercial lines of credit typically have
one-year terms, renewable annually, and rates of interest which are normally
indexed to Compass's prime rate of interest.
Compass's commercial borrowers are not concentrated in any one
particular industry. As of December 31, 1999, Compass's commercial loan
portfolio included, among others, floor plan loans to auto dealerships, loans to
hotels, inns and other tourism-related businesses, loans to building trade
companies and loans to liquor stores.
Compass originated $40.0 million and $42.8 million in commercial loans
during 1998 and 1999, respectively, and had $66.4 million in commercial loans in
its loan portfolio, representing 3.8% of such portfolio, as of December 31,
1999.
Commercial lending entails greater credit risks than residential
mortgage lending to owner occupants. Repayment of both secured and unsecured
commercial loans depends substantially on the borrower's underlying business,
financial condition and cash flows. Unsecured loans generally involve a higher
degree of risk of loss than do secured loans because, without collateral,
repayment is wholly dependent upon the success of the borrower's business.
Secured commercial loans are generally collateralized by equipment, leases,
inventory and/or accounts receivable. Compared to real estate, such collateral
is more difficult to monitor, its value is harder to ascertain, it may
depreciate more rapidly and it may not be as readily saleable if repossessed.
INDIRECT AUTO AND OTHER CONSUMER LOANS. Compass emphasizes indirect
auto lending through a network of automobile dealers. Compass has been in the
indirect auto lending business since 1985 and has increased its portfolio of
indirect auto loans from $165.6 million at October 31, 1996 to $422.4 million at
December 31, 1999, or 24.2% (net of unearned discount) of the loan portfolio on
the latter date. No one dealership originated more than $15.1 million of the
loan balances outstanding in Compass's loan portfolio at December 31, 1999. In
developing its network, Compass has historically focused on dealers in its
primary market areas and in Rhode Island. Because of increasing competition for
these loans in its market area and management's intent to continue to increase
this portion of the loan portfolio, Compass began to expand its network of auto
dealers to communities contiguous to the metropolitan Boston area during 1999.
This trend is expected to continue in 2000. The growth of the dealer network has
been achieved through an emphasis on quality service and the development of
long-term relationships with the owners and managers of the dealerships. Compass
does not engage in auto lease financing.
9
Management believes that indirect auto lending has several advantages,
including the following: (i) the dealer network creates numerous "loan centers"
throughout Compass's market area; (ii) Compass can increase the network without
increasing its operating expenses significantly; and (iii) the network develops
a pool of customers to whom Compass can cross-sell other products and services.
Compass makes indirect auto loans to purchase both new and used cars.
The loans have terms of up to six years for those secured by new vehicles and
five and a half years for those secured by used vehicles. As of December 31,
1999, approximately half of Compass's indirect auto loans were secured by new
cars and the other half by used cars. Compass originated $203.9 million and
$260.0 million in indirect auto loans during 1998 and 1999, respectively.
To underwrite its indirect auto loans, Compass reviews the credit
history of applicants and determines appropriate debt-to-equity and
loan-to-value ratios. Compass also believes that the quality of its indirect
auto portfolio is positively affected by its efforts to build and maintain
relationships with auto dealers who attract creditworthy customers. Compass
tries to identify such dealers based on Compass's knowledge of car dealers in
its market area.
In connection with the origination of indirect auto loans, the interest
rate charged to the borrower on the underlying loan is generally one to two
percentage points higher than the "buy rate" or rate earned by Compass. The
difference between the two rates is referred to as the "spread". At loan
inception, the dollar value of the spread over the contractual term of the loan
is prepaid by Compass to the auto dealer. Such prepaid amounts have generally
been subject to rebate to Compass in the event the underlying loan is prepaid or
defaults although recently more dealers have opted to receive a reduced spread
amount in exchange for elimination of their rebate obligation. Such arrangements
are referred to as "split reserve" deals. The risk of loss of amounts previously
advanced to the dealer in other than split reserve arrangements is primarily
dependent upon loan performance but is also dependent upon the financial
condition of the dealer. Consequently, the dealer's ability to refund any
portion of the prepaid interest which is unearned is subject to economic
conditions, generally, and the financial condition of the dealer. To mitigate
this risk, Compass withholds a portion of the spread at loan origination as a
dealer reserve. The amount withheld, in the aggregate, generally approximates 1%
of the outstanding balance of loans originated by each dealer. At December 31,
1999, the balance of the dealer reserve was $4.4 million, or 1.0% of the balance
of indirect auto loans.
In some originations of indirect auto loans, the interest charged to
the borrower is equal to the buy rate thereby eliminating the spread. In such
transactions auto dealers are paid a flat fee which is not rebatable to the Bank
in the event of loan prepayment or default.
Beginning in January 1999, Compass implemented a new "tiered rate
program" wherein the buy rate offered to auto dealers is based on the credit
bureau's credit score for each borrower. Previously, the Bank offered a single
rate for all borrowers. This program is also being used by most of the Bank's
competitors. By making this change, Compass believes it is better able to offer
competitive rates to attract lower risk credits while charging higher rates for
higher risk credits.
Indirect auto lending entails greater risks than residential mortgage
lending to owner occupants. Although Compass has not experienced significant
delinquencies in this portfolio, borrowers may be more likely to become
delinquent on an automobile loan than on a residential mortgage loan secured by
their primary residence. Moreover, automobiles depreciate rapidly and, in the
event of default, principal loss as a percentage of the loan balance depends
upon the mileage and condition of the vehicle at the time of repossession, over
which Compass has no control.
Compass makes a variety of other consumer loans, including personal
installment loans, education loans, fixed-rate home equity loans, auto loans
directly to customers and passbook loans. Compass does not have any credit card
loans. Other consumer loans represented 2.3% of Compass's gross loan portfolio
as of December 31, 1999. Compass's fixed-rate home equity loans are
collateralized generally by second mortgages on residential properties. The
loans have terms of up to 15 years and are available in amounts up to $100,000.
Compass generally makes fixed-rate home equity loans that, together with any
first mortgage loans on the properties collateralizing such loans, have a
loan-to-value ratio of 80% or less (if the first mortgage is with another bank)
or up to 90% (if the first mortgage is with Compass).
ENVIRONMENTAL ISSUES
Compass encounters certain environmental risks in its lending. Under
federal and state environmental laws, lenders may become liable for the costs of
cleaning up hazardous materials found on properties securing their loans. In
addition, the presence of hazardous materials on such properties may make it
unattractive for Compass to foreclose on them.
10
Also, the presence of environmentally hazardous materials near but not on
properties in which Compass has a security interest may have a negative effect
on the values of those properties. Commercial real estate loans typically
involve such risks but multi-family and other residential real estate loans are
also subject to them.
Compass has procedures for the assessment of environmental risks and it
believes that those procedures are adequate. Generally, before originating
commercial real estate loans in excess of $250,000, Compass requires prospective
borrowers to make a preliminary assessment of whether environmentally hazardous
materials are located on the properties that would collateralize such loans. If
a preliminary assessment raises concerns, Compass requires borrowers to conduct
further environmental analyses of the properties. Before originating a
commercial real estate loan below $250,000, a loan officer must review the
appraisal of the property that will collateralize the loan to make sure that the
borrower does not need to undertake a preliminary assessment of its
environmental condition.
Compass does not know of any environmental problems that might expose
it to any material liabilities. No assurance can be given, however, that the
values of properties securing loans in Compass's portfolio will not be adversely
affected by environmental risks.
DELINQUENT LOANS, OTHER REAL ESTATE OWNED, CLASSIFICATION OF ASSETS AND LOAN
REVIEW
DELINQUENT LOANS. Management performs a monthly review of all
delinquent loans with a principal balance in excess of $150,000. Compass's
Collection Department Manager discusses the status of each account with Lending
Department Managers, the Executive Vice President of Lending and Account
Officers. In addition, Compass's Board of Directors reviews delinquency
statistics by loan class on a monthly basis.
The actions taken with respect to delinquencies vary depending upon the
nature of the delinquent loans and the period of delinquency. Compass's
collection philosophy is predicated upon early detection and response to
delinquent and default situations. Compass seeks to make arrangements to cure
the entire default over the shortest time frame. Generally, Compass requires
that a delinquency notice be mailed no later than the 10th day of delinquency. A
second notice is mailed on the 15th day of delinquency. A late charge is usually
assessed on loans where the scheduled payment is unpaid after 15 days. After
mailing the delinquency notices, Compass's loan collection personnel call the
borrower to ascertain the reasons for delinquency and the prospects for payment.
On loans secured by one- to four-family owner occupied properties, Compass
attempts to work out a payment schedule with the borrower in order to avoid
foreclosure. If these efforts do not achieve a satisfactory arrangement, Compass
generally refers the loan to legal counsel and counsel initiates foreclosure
proceedings. At any time prior to a sale of the property at foreclosure, Compass
will terminate foreclosure proceedings if the borrower and Compass are able to
work out a satisfactory payment plan. On loans secured by commercial real estate
properties, Compass also seeks to reach a satisfactory payment plan so as to
avoid foreclosure. Prior to foreclosure, Compass will generally obtain an
updated appraisal of the property.
11
The following table sets forth delinquencies in Compass's loan portfolio as of
the dates indicated:
AT DECEMBER 31, 1999 AT OCTOBER 31, 1998
------------------------------------------ ----------------------------------------------
60-89 DAYS 90 DAYS OR MORE 60-89 DAYS 90 DAYS OR MORE
-------------------- --------------------- ----------------------- ----------------------
PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential ............... 20 $1,501 30 $2,002 17 $1,374 33 $2,229
Commercial real estate .... 1 27 9 942 7 598 7 646
Construction .............. -- -- 1 56 -- -- -- --
Home equity ............... 6 304 10 614 3 53 6 268
Commercial loans .............. 2 115 9 570 7 138 3 7
Indirect auto loans ........... 148 883 106 725 67 536 48 418
Other consumer loans .......... 30 38 14 26 36 83 31 58
------ ------ ------ ------ ------ ------ ------ ------
Total ................... 207 $2,868 179 $4,935 137 $2,782 128 $3,626
====== ====== ====== ====== ====== ====== ====== ======
Delinquent loans to total loans 0.16% 0.28% 0.21% 0..27%
====== ====== ====== ======
AT OCTOBER 31, 1997
60-89 DAYS 90 DAYS OR MORE
PRINCIPAL PRINCIPAL
NUMBER BALANCE NUMBER BALANCE
OF LOANS OF LOANS OF LOANS OF LOANS
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential ............... 18 $1,297 33 $3,298
Commercial real estate .... 3 232 13 1546
Construction .............. -- -- 1 148
Home equity ............... 1 18 4 98
Commercial loans .............. 3 178 3 414
Indirect auto loans ........... 33 223 40 435
Other consumer loans .......... 17 56 16 26
------ ------ ------ ------
Total ................... 75 $2,004 110 $5,965
====== ====== ====== ======
Delinquent loans to total loans 0.17% 0.50%
====== ======
OTHER REAL ESTATE OWNED. Compass classifies property acquired through
foreclosure or acceptance of a deed in lieu of foreclosure as OREO in its
financial statements. When a property is placed in OREO, the excess of the loan
balance over the estimated fair market value of the collateral is charged to the
allowance for loan losses. Estimated fair value usually represents the sales
price a buyer would be willing to pay on the basis of current market conditions,
including normal loan terms from other financial institutions, less estimated
costs to sell the property. Management inspects all OREO properties
periodically. Subsequent write down in the carrying value of OREO are charged to
expense if the carrying value exceeds the OREO's fair value less estimated
selling costs.
At December 31, 1999, OREO totaled $552,000, the majority of which
consisted of properties sold by Compass from its OREO portfolio to buyers,
financed by Compass, whose cash down payments were insufficient to permit such
transactions to be accounted for as a sale under GAAP. There were six loans in
this category five of which were substantially current at December 31, 1999.
12
CLASSIFICATION OF ASSETS AND LOAN REVIEW. Compass uses an internal
rating system to monitor and evaluate the credit risk inherent in its loan
portfolio. At the time of loan approval, all commercial, commercial real estate
and commercial construction loans are assigned a rating based on all of the
factors considered in originating the loan. The initial loan rating is
recommended by the loan officer who originated the loan and approved by the
individuals or committee responsible for approving it.
Loan quality ratings are utilized as major criteria in the compilation
of Compass's Asset Watch List. All loans with loan ratings of 4 (Special
Mention), 5 (Substandard) or 6 (Doubtful) are included in a monthly Asset Watch
List. Watch List ratings are an integral part of the evaluation of the adequacy
of Compass's loan loss reserve. Loan officers are expected to submit appropriate
rating changes to the Lending Administration Officer when facts come to their
attention that warrant an upgrade or downgrade in a loan rating. In addition,
loan ratings are generally reviewed on an annual basis.
Loans that are rated Substandard or Doubtful coincide with the
classifications used by federal regulators in their examination of financial
institutions. Generally, a loan is considered Substandard if it is inadequately
protected by the current net worth and paying capacity of the obligors and/or
the collateral pledged. Substandard loans include those characterized by the
distinct possibility that Compass will sustain some loss if the deficiencies are
not corrected. Loans classified as Doubtful have all the weaknesses inherent in
those classified Substandard with the added characteristic that the weaknesses
present make collection or liquidation in full, on the basis of currently
existing facts, highly questionable and improbable. Loans classified as Loss are
those considered uncollectible and of such little value that their continuance
as assets without establishment of a specific loss reserve and/or charge-off is
not warranted. Loans which do not currently expose Compass to sufficient risk to
warrant classification in one of the aforementioned categories but possess
weaknesses are designated "Special Mention."
Compass also utilizes an independent third party to conduct periodic
(generally semi-annual) credit analysis of its commercial and commercial real
estate loan portfolios and to analyze trends in loan delinquency and
non-performing loans. The level of Classified Loans as determined by Compass is
reconciled to the level of Classified Loans as determined by the independent
loan review.
On a quarterly basis, a management group comprised of the Senior Vice
President and Treasurer, the Executive Vice President of Lending and other key
officers reviews the status and classification of each loan assigned a rating of
Substandard, Doubtful or Loss. Loans, or portions of loans, classified Loss are
charged off against the reserve for loan losses. This group also assesses the
overall adequacy of the allowance for loan losses, including the general
valuation allowance established to recognize the inherent risk associated with
each specific category of lending.
Compass's classification of its loans and the amount of the valuation
allowances it sets aside for estimated losses is subject to review by the FDIC
and the Commissioner. Based on their reviews, these agencies can order the
establishment of additional general or specific loss allowances. The FDIC, in
conjunction with the other federal banking agencies, has adopted an interagency
policy statement on allowances for loan and lease losses. The policy statement
provides guidance for banks on both the responsibilities of management for the
assessment and establishment of adequate allowances and guidance for banking
agency examiners to use in determining the adequacy of a bank's valuation
methodology. Generally, the policy statement recommends that banks have
effective systems and controls to identify, monitor and address asset quality
problems; that management analyze all significant factors that affect the
collectibility of loans in a reasonable manner; and that management establish
acceptable valuation processes that meet the objectives set forth in the policy
statement. While Compass believes that it has established adequate specific and
general allowances for losses on loans, actual losses are dependent upon future
events and, as such, further additions to the allowance for loan losses may
become necessary. See "-- Allowance for Loan Losses."
At December 31, 1999, loans designated as Substandard and Special
Mention totaled $3.7 million and $4.3 million, respectively. One loan with a
balance of $75,000 was designated Doubtful. The Substandard loans include 4
commercial loans with individual borrower balances ranging from $3,000 to
$289,000 and a total outstanding principal balance of $459,000; 19 commercial
real estate loans with individual borrower balances ranging from $30,000 to
$759,000 and a total outstanding principal balance of $3.2 million, and one
construction loan with a balance of $32,000. The delinquency status of the
commercial real estate loans classified as Substandard was as follows: current
- -- $1.3 million; 30-60 days past due -- $1.2 million; 60-90 days past due -- $0;
and >90 days past due -- $765,000.
13
Included in Special Mention loans at December 31, 1999 were 6
commercial loans with individual borrower balances ranging from $9,000 to
$61,000 and a total outstanding principal balance of $211,000. There were 17
commercial real estate loans with individual borrower balances ranging from
$30,000 to $1.2 million and a total outstanding principal balance of $4.1
million classified as Special Mention at December 31, 1999. Of these, all but
$871,000 were current.
NON-ACCRUAL LOANS, NON-PERFORMING ASSETS AND RESTRUCTURED LOANS
The following table sets forth information regarding non-accrual loans,
other real estate owned and restructured loans:
AT DECEMBER 31, AT OCTOBER 31,
--------------- --------------------------------------
1999 1998 1997 1996 1995
(DOLLARS IN THOUSANDS)
Non-accrual loans (1):
Mortgage loans:
Residential ............................ $ 2,591 $ 3,685 $ 4,286 $ 4,650 $ 6,071
Commercial real estate ................. 2,613 2,330 8,957 7,953 5,340
Construction ........................... 56 42 220 230 172
Home equity ............................ -- 42 82 195 196
Commercial loans .............................. 474 415 919 1,294 1,260
Indirect auto loans (4) ....................... -- -- -- -- --
Other consumer loans (4) ...................... -- -- -- -- --
------- ------- ------- ------- -------
Total non-accrual loans ................ 5,734 6,514 14,464 14,322 13,039
Other real estate owned ............................. 552 1,299 2,303 3,063 4,285
------- ------- ------- ------- -------
Total non-performing assets ............ $ 6,286 $ 7,813 $16,767 $17,385 $17,324
======= ======= ======= ======= =======
Restructured loans (2) .............................. $ -- $ -- $ 235 $ 4,525 $ 4,181
======= ======= ======= ======= =======
Allowance for loan losses as a percent of total loans 0.96% 1.14% 1.24% 1.32% 1.42%
Allowance for loan losses as a percent of total
non-performing loans (3) ...................... 293.48% 232.07% 101.92% 98.28% 103.72%
Non-performing loans as a percent of total loans .... 0.33% 0.49% 1.21% 1.34% 1.37%
Non-performing assets as a percent of total assets .. 0.30% 0.43% 1.03% 1.17% 1.23%
(1) Non-accrual loans include all loans 90 days or more past due and other
loans which have been identified by Compass as presenting uncertainty with
respect to the collectibility of interest or principal. See Note 4 for
exception to this policy.
(2) Restructured loans represent performing loans for which concessions (such
as reductions of interest rates to below market terms and/or extension of
repayment terms) have been granted due to borrower's financial condition.
The balances presented exclude restructured loans on non-accrual status.
(3) Non-performing loans are comprised of non-accrual loans.
(4) Consumer loans, including indirect auto loans, are not placed on
non-accrual status due to the expedited manner in which these loans are
resolved and the immaterial balance of individual loans.
During 1998, the balance of non-accrual loans decreased by $8.0
million. The majority of this decrease was attributable to two loan
relationships. In one instance, the loan was repaid and, in the other, the
borrower, whose payments had been current, also had shown improved operating
performance sufficient to warrant an upgrade in loan classification and
placement on accrual status.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through provisions for
loan losses based on management's on-going evaluation of the risks inherent in
Compass's loan portfolio. Factors considered in the evaluation process include
growth of the loan portfolio, the risk characteristics of the types of loans in
the portfolio, geographic and large borrower concentrations, current regional
economic and real estate market conditions that could affect the ability of
borrowers to pay, the value of underlying collateral and trends in loan
delinquencies and charge-offs. The allowance for loan losses is maintained at an
amount management considers adequate to cover estimated losses in its loan
portfolio which are deemed probable and estimable based on information currently
known to management. See "-Delinquent Loans, Other Real Estate Owned,
Classification of Assets and Loan Review."
14
The following table sets forth the activity in Compass's allowance for loan
losses for the periods indicated:
YEAR ENDED
DECEMBER 31, YEAR ENDED OCTOBER 31,
------------ ----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(IN THOUSANDS)
Balance at beginning of period .................... $ 15,914 $ 14,742 $ 14,075 $ 13,524 $ 10,257
Provision for loan losses ......................... 2,000 1,736 2,615 1,431 246
Acquired allowance ................................ -- -- -- -- 3,541
Charge-offs:
Mortgage loans:
Residential .......................... -- 229 196 180 944
Commercial ........................... -- 371 785 342 186
Home equity .......................... -- 49 -- 121 21
Construction ......................... -- -- -- -- --
Commercial loans ......................... 379 213 688 156 59
Indirect auto loans ...................... 1,116 614 546 373 227
Other consumer loans ..................... 143 124 199 164 156
-------- -------- -------- -------- --------
Total charge-offs ........... 1,638 1,600 2,414 1,336 1,593
-------- -------- -------- -------- --------
Recoveries:
Mortgage loans:
Residential .......................... 5 32 73 33 402
Commercial ........................... 6 41 134 204 506
Home equity .......................... -- 3 -- -- --
Construction ......................... -- -- -- -- --
Commercial loans ............................ 300 213 75 100 5
Indirect auto loans ......................... 185 113 144 70 93
Other consumer loans ........................ 56 114 40 49 67
-------- -------- -------- -------- --------
Total recoveries ............ 552 516 466 456 1,073
-------- -------- -------- -------- --------
Net charge-offs ................................... (1,086) (1,084) (1,948) (880) (520)
-------- -------- -------- -------- --------
Effect of difference in year-ends ................. -- (277) -- -- --
-------- -------- -------- -------- --------
Balance at end of period .......................... $ 16,828 $ 15,117 $ 14,742 $ 14,075 $ 13,524
======== ======== ======== ======== ========
Ratio of net charge-offs
to average loans ............................ 0.07% 0.09% 0.17% 0.09% 0.06%
======== ======== ======== ======== ========
15
The following tables set forth the allocation of Compass's allowance
for loan losses, the percent of allowance by loan category and the percent of
loans to total loans in each of the categories listed at the dates indicated:
AT DECEMBER 31, AT OCTOBER 31,
--------------------------------- ------------------------------------
1999 1998
--------------------------------- ------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO GROSS TO TOTAL TO GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential ................................... $ 4,455 26.5% 51.3% $ 3,548 23.5% 47.7%
Commercial real estate ........................ 5,311 31.6 12.8 5,434 35.9 15.8
Construction .................................. 547 3.3 4.1 818 5.4 4.8
Home equity ................................... 197 1.2 1.5 220 1.5 2.1
Commercial loans ................................... 1,933 11.5 3.8 1,767 11.7 3.8
Indirect auto loans ................................ 3,855 22.9 24.2 2,837 18.8 23.2
Other consumer loans ............................... 530 3.0 2.3 493 3.2 2.6
------- ----- ----- ------- ----- -----
Total ......................................... $16,828 100.0% 100.0% $15,117 100.0% 100.0%
======= ===== ===== ======= ===== =====
AT OCTOBER 31,
-------------------------------
1997
-------------------------------
PERCENT
OF LOANS
PERCENT OF IN EACH
ALLOWANCE CATEGORY
TO TOTAL TO GROSS
AMOUNT ALLOWANCE LOANS
------ --------- -----
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential ................................... $ 3,542 24.0% 51.9%
Commercial real estate ........................ 5,968 40.5 17.0
Construction .................................. 716 4.8 5.0
Home equity ................................... 217 1.5 2.3
Commercial loans ................................... 2,021 13.7 3.7
Indirect auto loans ................................ 1,837 12.5 17.5
Other consumer loans ............................... 441 3.0 2.6
------- ----- -----
Total ......................................... $14,742 100.0% 100.0%
======= ===== =====
AT OCTOBER 31,
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
PERCENT PERCENT
OF LOANS OF LOANS
PERCENT OF IN EACH PERCENT OF IN EACH
ALLOWANCE CATEGORY ALLOWANCE CATEGORY
TO TOTAL TO GROSS TO TOTAL TO GROSS
AMOUNT ALLOWANCE LOANS AMOUNT ALLOWANCE LOANS
------ --------- ----- ------ --------- -----
(DOLLARS IN THOUSANDS)
Mortgage loans:
Residential ................................... $ 3,484 24.8% 51.5% $ 4,160 30.8% 53.1%
Commercial real estate ........................ 5,719 40.6 18.9 4,321 31.9 18.5
Construction .................................. 535 3.8 4.6 585 4.3 3.2
Home equity ................................... 239 1.7 2.8 508 3.8 3.4
Commercial loans ................................... 2,197 15.6 3.9 2,113 15.6 4.2
Indirect auto loans ................................ 1,498 10.6 15.5 1,403 10.4 14.7
Other consumer loans ............................... 403 2.9 2.8 434 3.2 2.9
------- ----- ----- --------- ----- -----
Total ......................................... $14,075 100.0% 100.0% $ 13,524 100.0% 100.0%
======= ===== ===== ========= ===== =====
INVESTMENT ACTIVITIES
The investment policy of Compass is reviewed and updated by senior
management and submitted to the Board of Directors for their approval on an
annual basis. The primary objective of the investment portfolio is to achieve a
competitive rate of return on the investments over a reasonable period of time
based on prudent management practices and sensible risk taking. In view of
Compass's lending capacity and generally higher rates of return on loans,
management prefers lending activities as its primary source of revenue with the
securities portfolio serving a secondary role. The investment portfolio,
however, is expected to continue to represent a relatively stable portion of
Compass's assets, with such portfolio consisting of U.S. Government and Agency
securities, mortgage-backed securities, collateralized mortgage obligations,
high quality corporate debt obligations and a limited amount of corporate
equities. The portfolio will continue to serve Compass's liquidity needs as
projected by management and as required by regulatory authorities.
Compass's current investment strategy, developed with the assistance of
an outside professional advisor, has emphasized the purchase of U.S. Government
and Agency obligations and corporate debt obligations generally maturing within
two to three years and with weighted average lives of 7-10 years. Compass's
investment policy permits investments in mortgage-backed securities which are
traditionally long-term assets. However, the policy limits Compass's investment
in these types of securities to 25% of total assets.
16
The investment policy prohibits the use of hedging with such
instruments as financial futures, interest rate options and swaps without
specific approval from Compass's Board of Directors. The President and Chief
Executive Officer, the Executive Vice President and Chief Operating Officer and
the Senior Vice President and Treasurer are authorized to execute portfolio
transactions but are limited in the amount they can purchase without Board
approval. Portfolio sales require the approval of any two of these three
officers regardless of the amount. It is the responsibility of Compass's Board
of Directors to ensure compliance with the investment policy and report such
activity to Seacoast Financial's Board. The status of Compass's investment
portfolio is reviewed by Compass's Board of Directors on a monthly basis and by
Seacoast Financial's Board on a quarterly basis.
At December 31, 1999, Compass had $272.9 million, or 12.9% of total
assets, in securities consisting primarily of U.S. Government and Agency
obligations ($126.1 million), corporate bonds ($39.1 million), mortgage-backed
securities ($67.8 million), collateralized mortgage obligations ($15.1 million),
and marketable common and preferred equity securities ($10.0 million). Also
included in investments is $14.9 million in restricted equity securities, $14.5
million of which is in the stock of the FHLB. To avail itself of services
offered by that organization, in particular the ability to borrow funds, Compass
is required to invest in the stock of the FHLB in an amount determined on the
basis of Compass's residential mortgage loans and borrowings from the FHLB. The
stock is redeemable at par and earns dividends at the discretion of the FHLB.
SFAS No. 115 requires Compass to designate its securities as held to
maturity, available for sale or trading depending on Compass's intent regarding
its investments at the time of purchase. As of December 31, 1999, $245.6, or
90.0% of the portfolio, was classified as available for sale, $12.4 million, or
4.5% of the portfolio, was classified as held to maturity and $14.9 million, or
5.5% of the portfolio, was invested in restricted equity securities. The net
unrealized loss on securities classified as available for sale was $3.7 million,
consisting of net unrealized losses of $5.9 million on debt securities partially
offset by $2.2 million of net unrealized gains on marketable equity securities
as of December 31, 1999.
U.S. GOVERNMENT AND AGENCY OBLIGATIONS. At December 31, 1999, Compass's
U.S. Government and Agency securities portfolio totaled $126.1 million, $113.7
million of which was classified as available for sale and $12.4 million of which
was classified as held to maturity. There were no structured notes in the
portfolio.
CORPORATE BONDS. At December 31, 1999, Compass's portfolio of corporate
bonds totaled $39.1 million, all of which was classified as available for sale.
Compass policy requires that investments in corporate bonds be restricted only
to those obligations rated "A" or better by a nationally recognized rating
agency at the time of purchase and are confined only to those that are readily
marketable. As of December 31, 1999, all corporate bonds were rated "A" or
better.
MORTGAGE-BACKED SECURITIES. At December 31, 1999, Compass's portfolio
of mortgage-backed securities totaled $67.8 million. Such securities include
issues guaranteed by either the Government National Mortgage Association, FNMA
or FHLMC and securities issued by private entities which are not guaranteed
("non-agency issues"). All mortgage-backed securities were classified as
available for sale. Mortgage-backed securities generally yield less than the
loans that underlie such securities because of the cost of payment guarantees or
credit enhancements that reduce credit risk. Mortgage-backed securities are more
liquid than individual mortgage loans and may be used to collateralize
borrowings.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS). At December 31, 1999,
Compass's portfolio of CMOs totaled $15.1 million. Such securities are issued by
FNMA and FHLMC as well as non-agency issuers and are a form of mortgage-backed
security. CMOs are structured with various payment tranches each with different
maturities and cash flow patterns. Non-agency issues owned by Compass, which
totaled $8.8 million at December 31, 1999, are generally collateralized by the
issuer to achieve a credit rating of AA or better.
MARKETABLE EQUITY SECURITIES. At December 31, 1999, Compass's
marketable equity securities portfolio totaled $10.0 million, $7.0 million of
which was in common stock, $2.3 million in preferred stock and $738,000 in
mutual funds. Compass's policy requires that investments in common stock be
confined to quality issuers that have a past record of profitability and growth
with the prospect of continued performance. The policy requires that Compass
invest in common stocks that are liquid and traded on major exchanges, and that
a reasonable and prudent industry distribution of common stocks be maintained in
the portfolio and be held for the long-term. Compass does not view short-term
trading, short sales, margin transactions and option speculation as prudent
investment policy objectives and does not permit them. Investments in preferred
stocks, including money market preferred, auction preferred and adjustable-rate
preferred, are subject to similar quality ratings and activities as common
stocks.
17
The following table sets forth certain information regarding the
amortized cost and market value of the investment portfolio at the dates
indicated:
AT DECEMBER 31, AT OCTOBER 31,
---------------------------------------- ----------------------------------------
1999 1998 1998 1997
---------------------------------------- ----------------------------------------
AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE COST VALUE COST VALUE
--------- ------ --------- ------ --------- ------ --------- ------
(IN THOUSANDS)
Securities available for sale:
Debt securities:
U.S. Government and
Agency obligations ................ $117,937 $113,644 $123,390 $124,450 $109,128 $110,796 $128,711 $129,006
Corporate bonds ....................... 39,604 39,055 46,888 47,362 47,771 48,425 45,774 45,967
Mortgage-backed securities ............ 68,642 67,850 84,641 85,146 93,117 93,459 90,401 91,156
Collateralized mortgage obligations ... 15,359 15,071 26,698 26,748 29,819 30,052 50,209 50,255
-------- -------- -------- -------- -------- -------- -------- --------
Total debt securities .......... 241,542 235,620 281,617 283,706 279,835 282,732 315,095 316,384
-------- -------- -------- -------- -------- -------- -------- --------
Marketable equity securities:
Common stocks ......................... 4,656 6,975 6,184 7,977 1,118 2,332 792 2,207
Preferred stocks ...................... 2,400 2,250 2,400 2,417 5,400 5,400 1,000 1,000
Mutual funds .......................... 708 738 395 400 472 468 305 305
-------- -------- -------- -------- -------- -------- -------- --------
Total marketable
equity securities .............. 7,764 9,963 8,979 10,794 6,990 8,200 2,097 3,512
-------- -------- -------- -------- -------- -------- -------- --------
Total securities available for sale $249,306 $245,583 $290,596 $294,500 $286,825 $290,932 $317,192 $319,896
======== ======== ======== ======== ======== ======== ======== ========
Securities held to maturity:
U.S. Government and
Agency obligations ................ $ 12,408 $ 12,312 $ 12,693 $ 12,897 $ 13,694 $ 13,980 $ 12,633 $ 12,694
======== ======== ======== ======== ======== ======== ======== ========
Restricted equity securities:
Federal Home Loan Bank
of Boston stock ................... $ 14,478 $ 14,478 $ 8,605 $ 8,605 $ 8,605 $ 8,605 $ 8,475 $ 8,475
Massachusetts Savings Bank
Life Insurance Company stock ...... 251 251 251 251 251 251 251 251
Depositors Insurance Fund ............. 179 179 179 179 179 179 179 179
Other ................................. 28 28 27 27 27 27 -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total restricted equity securities $ 14,936 $ 14,936 $ 9,062 $ 9,062 $ 9,062 $ 9,062 $ 8,905 $ 8,905
======== ======== ======== ======== ======== ======== ======== ========
18
The following table sets forth certain information regarding the
relative composition of the investment portfolio at the dates indicated:
AT DECEMBER 31,
------------------------------------------------
1999 1998
--------------------- ----------------------
CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL
----- -------- ----- --------
(DOLLARS IN THOUSANDS)
Debt securities:
U.S. Government and agency obligations ................... $126,052 46.2% $137,143 43.4%
Corporate bonds .......................................... 39,055 14.3 47,362 15.0
Mortgage-backed securities ............................... 67,850 24.9 85,146 26.9
Collateralized mortgage obligations ...................... 15,071 5.5 26,748 8.4
-------- ----- -------- -----
Total debt securities ................... 248,028 90.9 296,399 93.7
-------- ----- -------- -----
Marketable equity securities ................................... 9,963 3.6 10,794 3.4
Restricted equity securities ................................... 14,936 5.5 9,062 2.9
-------- ----- -------- -----
Total securities ........................ $272,927 100.0% $316,255 100.0%
======== ===== ======== =====
Debt and equity securities
available for sale ....................................... $245,583 90.0% $294,500 93.1%
Debt securities held to maturity ............................... 12,408 4.5 12,693 4.0
Restricted equity securities ................................... 14,936 5.5 9,062 2.9
-------- ----- -------- -----
Total securities ........................ $272,927 100.0% $316,255 100.0%
======== ===== ======== =====
AT OCTOBER 31,
-----------------------------------------------------
1998 1997
-------------------- -------------------------
CARRYING PERCENT CARRYING PERCENT
VALUE OF TOTAL VALUE OF TOTAL
----- -------- ----- --------
(DOLLARS IN THOUSANDS)
Debt securities:
U.S. Government and agency obligations $124,490 39.7% $141,639 41.5%
Corporate and other obligations ...... 48,425 15.4 45,967 13.5
Mortgage-backed securities ........... 93,459 29.8 91,156 26.7
Collateralized mortgage obligations .. 30,052 9.6 50,255 14.7
-------- ----- -------- -----
Total debt securities 296,426 94.5 $329,017 96.4
-------- ----- -------- -----
Marketable equity securities ............... 8,200 2.6 3,512 1.0
Restricted equity securities ............... 9,062 2.9 8,905 2.6
-------- ----- -------- -----
Total securities .... $313,688 100.0% $341,434 100.0%
======== ===== ======== =====
Debt and equity securities
available for sale ................... $290,932 92.7% $319,896 93.7%
Debt securities held to maturity ........... 13,694 4.4 12,633 3.7
Restricted equity securities ............... 9,062 2.9 8,905 2.6
-------- ----- -------- -----
Total securities .... $313,688 100.0% $341,434 100.0%
======== ===== ======== =====
19
The following table sets forth certain information regarding the
carrying value, weighted average yield and contractual maturities of the
investment portfolio as of December 31, 1999:
AFTER ONE YEAR AFTER FIVE YEARS
ONE YEAR OR LESS THROUGH FIVE YEARS THROUGH TEN YEARS AFTER TEN YEARS TOTAL
------------------ ------------------ ----------------- ----------------- -------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED WEIGHTED
CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE CARRYING AVERAGE
VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD VALUE YIELD
-------- --------- ------- ------ -------- -------- -------- -------- -------- ---------
(DOLLARS IN THOUSANDS)
Securities available for sale:
Debt securities:
U.S. Government and
Agency obligations ....... $32,722 5.69% $18,602 7.19 % $62,320 7.75% $ -- $113,644 7.07%
Corporate obligations ........ 16,522 6.29 17,280 7.05 5,253 7.14 -- 39,055 6.74
Mortgage-backed securities
and CMOs ................ 1,429 6.30 4,006 6.85 8,425 6.44 69,061 6.05% 82,921 6.13
------- ------- ------- ------- --------
Total debt securities .... 50,673 5.90 39,888 7.10 75,998 7.56 69,061 6.05 235,620 6.68
Marketable equity securities:
Common stocks ................ 6,975 2.32
Preferred stocks ............. 2,250 7.40
Mutual funds ................. 738 1.96
--------
Total marketable
equity securities ... 9,963 3.44
------- ------- ------- ------- -------- ----
Total securities available
for sale ............ 50,673 5.90 39,888 7.10 75,998 7.56 69,061 6.05 245,583 6.55
------- ------- ------- ------- --------
Securities held to maturity:
U.S. Government and
Agency obligations ....... 1,000 5.54 11,408 5.71 -- -- -- -- 12,408 5.70
------- ------- ------- ------- --------
Total securities held to
maturity ................. 1,000 5.54 11,408 5.71 -- -- -- -- 12,408 5.70
------- ------- ------- ------- --------
Restricted equity securities:
Federal Home Loan
Bank of Boston stock ..... 14,478 6.55
Massachusetts Savings
Bank Life Insurance
Company stock ............ 251 2.99
Depositors Insurance Fund .... 179 6.60
Other ........................ 28 0.41
--------
Total restricted equity
securities ......... 14,936 6.48
------- ------- ------- ------- -------- ----
Total securities ............. $51,673 5.89% $51,296 6.79% $75,998 7.56% $69,061 6.05% $272,927 6.51%
======= ======= ======= ======= ========
SOURCES OF FUNDS
GENERAL. Compass uses deposits, repayments and prepayments of loans,
proceeds from sales of loans and securities and proceeds from maturing
securities, borrowings and cash flows generated by operations to fund its
lending, investing and general operations. Deposits have historically
represented Compass's primary source of funds. During 1999, Compass relied, to a
greater extent, on borrowings to fund its lending, investing and general
operations.
DEPOSITS. Compass offers a variety of deposit accounts with a range of
interest rates and other terms. The accounts include passbook savings accounts,
NOW accounts (checking), demand deposit accounts, money market deposit accounts,
club accounts and certificates of deposit. Compass also offers IRA's, Roth/IRA,
Education IRA and Simple IRA accounts and SEP accounts. Both individuals and
commercial enterprises maintain accounts with Compass. The FDIC insures deposits
up to certain limits (generally, $100,000 per depositor). The DIF fully insures
amounts in excess of such limits.
20
At December 31, 1999, Compass's deposits of $1,515.6 million were
comprised of $101.2 million of non-interest-bearing checking accounts and
$1,414.4 million of interest-bearing deposit accounts, of which $736.9 million,
or 52.1% were certificates of deposit. Of the total of certificates of deposit
at December 31, 1999, $584.2 million, or 79.3% were scheduled to mature within
one year. Based on Compass's monitoring of historical trends, its current
pricing strategy for deposits and its general avoidance of brokered deposits,
management believes that Compass will retain a significant portion of its
certificates of deposit accounts upon maturity.
Deposit flows are influenced greatly by economic conditions, the
general level of interest rates and the relative attractiveness of competing
deposit and investment alternatives. During the past few years, the strength of
the stock market has adversely affected deposit flows within the banking
industry as some customers have opted to place their funds in instruments, such
as mutual funds, not directly offered by Compass (other than through its
contractual relationship with INVEST Financial Corporation), rather than in
deposit accounts which they perceive to have less attractive returns. During the
last half of 1999, due to increases in interest rates initiated by the Federal
Reserve Board, several area financial institutions have substantially increased
the rates they pay for certificates of deposit. Such aggressive pricing has also
adversely affected Compass's retention of this type of deposit.
Compass competed for deposits in five distinct market areas during 1999
- -- New Bedford, Fall River, Plymouth, Cape Cod and Martha's Vineyard. Compass
has generally experienced steady deposit inflows during the last three years,
primarily influenced by regional bank consolidations and its strong community
bank image. Compass's strategy has been to grow deposit levels through targeted
promotions, branch expansion and bank acquisition. Compass has expanded its
presence in Plymouth with one new branch opened in 1995 and another in May 1998
and on Cape Cod with the opening of a new branch in Hyannis in September 1999.
In addition, Compass improved its presence in the town of Westport with an
upgraded branch in July 1998. Two new branches, as well as a new main office,
are scheduled to be opened in 2000. In addition, one branch will undergo a major
renovation in 2000.
Compass places emphasis on sales of its products and quality of its
service to attract and retain customers. During 1999, all branch managers and
staff completed extensive sales training. Management measures the sales
performance of customer service personnel based on the cross-sales of additional
products and services above the initial product that the customer requests.
In the interest of customer convenience and product alternatives,
Compass maintains a "call center" with extended hours, staffed with individuals
trained to answer telephone inquiries about customer accounts and about
Compass's various products and services. Compass also utilizes a 24-hour
automated touch-tone telephone voice response system, which allows customers to
obtain information about their accounts, to make account transfers, to pay bills
and to receive information about Compass's products and services. Compass offers
relationship-based checking account products, entitled Flagship Checking,
Compass 50 Checking and Preferred Checking, respectively, which offer packages
of select benefits. Services to commercial customers also include a Sweep
Account, Simple IRA accounts, a touch tone telephone electronic tax filing
service and merchant credit card services.
Compass uses direct mail and customer service personnel at each of its
branches and at its main office to solicit deposits and advertises its deposits
through the print media, on billboards and through radio and television. Compass
began to offer its on-line banking services, including a new bill payment
service, over the Internet in October 1998.
Compass has a contract with INVEST Financial Corporation ("Invest")
pursuant to which Invest offers Compass's customers investments in mutual funds
and securities. Invest representatives work out of Compass's main office and
branches and Compass's customer service personnel refer to Invest customers who
are looking for such investments. Compass receives a portion of commissions
earned by Invest from Invest's operations on Compass's premises. Such
commissions amounted to $176,400 in 1999.
21
The following table sets forth certain information regarding the
distribution of the average balance of Compass's deposit accounts and the
weighted average interest rate on each category of deposits during the periods
indicated:
YEAR ENDED DECEMBER 31, 1999 YEAR ENDED OCTOBER 31, 1998
---------------------------- ---------------------------
PERCENT PERCENT
OF TOTAL WEIGHTED OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE BALANCE DEPOSITS RATE
------- -------- -------- ------- -------- --------
(DOLLARS IN THOUSANDS)
NOW accounts .................. $ 151,180 10.0% 0.97% $ 129,956 9.2% 1.27%
Savings accounts .............. 215,088 14.2 2.31 199,874 14.1 2.51
Money market savings accounts . 295,393 19.4 2.92 261,212 18.5 2.99
Non-interest-bearing demand
checking accounts ........ 118,956 7.9 -- 102,047 7.2 --
---------- ----- ---------- -----
Total transaction deposit
accounts ............ 780,617 51.5 1.93 693,089 49.0 2.09
Certificate of deposit accounts 734,995 48.5 5.19 720,590 51.0 5.70
---------- ----- ---------- -----
Total average deposits ... $1,515,612 100.0% 3.51% $1,413,679 100.0% 3.93%
========== ===== ========== =====
YEAR ENDED OCTOBER 31, 1997
------------------------------
PERCENT
OF TOTAL WEIGHTED
AVERAGE AVERAGE AVERAGE
BALANCE DEPOSITS RATE
------- --------- --------
(DOLLARS IN THOUSANDS)
NOW accounts .................. $ 115,507 8.8% 1.32%
Savings accounts .............. 194,995 14.9 2.53
Money market savings accounts . 228,761 17.5 2.88
Non-interest-bearing demand
checking accounts ............ 97,136 7.4 --
---------- -----
Total transaction deposit
accounts .................... 636,399 48.6 2.05
Certificate of deposit accounts 672,652 51.4 5.69
---------- -----
Total average deposits ........ $1,309,051 100.0% 3.92%
========== =====
Compass had $157.1 million in certificates of deposit of $100,000 or
more outstanding as of December 31, 1999, maturing as follows:
WEIGHTED
AVERAGE
MATURITY PERIOD AMOUNT RATE
-------- ---------
(DOLLARS IN THOUSANDS)
Three months or less ................................ $ 30,019 4.97%
Over three months through six months ................ 44,643 5.15
Over six months through twelve months ............... 48,155 5.39
Over twelve months .................................. 34,296 5.58
--------
$157,113 5.28%
========
BORROWINGS. Compass borrows funds from the FHLB. FHLB loans finance Compass's
loans to low- and moderate-income borrowers and other funding needs. FHLB loans
are collateralized primarily by certain of Compass's mortgage loans and
mortgage-backed securities and by Compass's holdings of FHLB stock. The maximum
amount that the FHLB will loan fluctuates from time to time based on the FHLB's
policies. At December 31, 1999, Compass had approximately $394 million in
available borrowing capacity with the FHLB that is contingent upon the purchase
of additional FHLB stock.
22
Compass had $271.9 million in advances from the FHLB as of December 31,
1999. The FHLB charges a fixed rate of interest on its loans.
The following table sets forth certain information regarding borrowed funds
during the periods indicated:
YEAR ENDED
-------------------------------
DECEMBER 31, OCTOBER 31,
1999 1998 1997
------- ----- -----
(DOLLARS IN THOUSANDS)
SHORT TERM BORROWINGS:
FHLB line of credit:
Average balance ..................................... $ 11,964 $ -- $ --
Maximum month end amount ............................ 22,430 -- --
Balance at end of period ............................ 17,661 -- --
Weighted average interest rate during the period..... 5.93% -- --
Weighted average interest rate at end of period...... 4.90% -- --
Securities sold under agreements to repurchase:
Average balance ..................................... $ 16,971 $ 10,875 $ 3,923
Maximum month end amount ............................ 22,466 14,830 9,533
Balance at end of period ............................ 21,126 14,830 9,533
Weighted average interest rate during the period .... 4.01% 4.73% 4.70%
Weighted average interest rate at end of period ..... 4.00% 4.20% 4.75%
Treasury Tax and Loan Notes:
Average balance ..................................... $ 1,144 $ 1,186 $ 1,163
Maximum month end amount ............................ 2,112 2,070 2,117
Balance at end of period ............................ 2,000 971 164
Weighted average interest rate during the period .... 4.37% 5.21% 5.00%
Weighted average interest rate at end of period ..... 4.52% 5.04% 5.41%
Total short term borrowings:
Average balance ..................................... $ 30,079 $ 12,061 $ 5,086
Maximum month end amount ............................ 46,895 15,801 9,742
Balance at end of period ............................ 40,787 15,801 9,697
Weighted average interest rate during the period .... 4.79% 4.78% 4.77%
Weighted average interest rate at end of period ..... 4.42% 4.25% 4.76%
FEDERAL HOME LOAN BANK OF BOSTON ADVANCES:
Average balance ..................................... $147,486 $103,066 $102,731
Maximum month end amount ............................ 271,900 116,879 126,457
Balance at end of period ............................ 271,900 85,111 96,607
Weighted average interest rate during the period .... 5.86% 6.23% 6.25%
Weighted average interest rate at end of period ..... 5.81% 6.16% 6.25%
SUBSIDIARY ACTIVITIES
LIGHTHOUSE SECURITIES CORPORATION. Lighthouse Securities Corporation
("Lighthouse") is a wholly-owned subsidiary of Seacoast Financial established
in 1998 as a Massachusetts securities corporation. Lighthouse engages
exclusively in buying, selling and holding investment securities on its own
behalf and not as a broker. The income earned on Lighthouse investments
securities is subject to a significantly lower rate of state tax than that
assessed on income earned on investment securities owned by Compass. At
December 31, 1999, Lighthouse had total assets of $25.1 million, consisting
primarily of certificates of deposit maintained at Compass.
CB SECURITIES CORPORATION. CB Securities Corporation ("CBS
Corporation") is a wholly-owned subsidiary of Compass established in 1990 as a
Massachusetts securities corporation. CBS Corporation engages exclusively in
buying, selling and holding investment securities on its own behalf and not as a
broker. The income earned on CBS Corporation's investment securities is subject
to a significantly lower rate of state tax than that assessed on income earned
on investment securities owned by Compass. At December 31, 1999, CBS Corporation
had total assets of $138.2 million, consisting primarily of cash maintained at
Compass and investment securities.
23
SANDWICH SECURITIES CORPORATION. Sandwich Securities Corporation
("Sandwich Corporation") is a wholly-owned subsidiary of Compass established in
1993 as a Massachusetts securities corporation. Sandwich Corporation engages
exclusively in buying, selling and holding investment securities on its own
behalf and not as a broker. The income earned on Sandwich Corporation's
investment securities is subject to a significantly lower rate of state tax than
that assessed on income earned on investment securities owned by Compass. At
December 31, 1999, Sandwich Corporation had total assets of $45.5 million,
consisting primarily of cash maintained at Compass and investment securities.
SEXTANT SECURITIES CORPORATION. Sextant Securities Corporation ("SSC"
)is a wholly-owned subsidiary of Compass established in 1995 as a Massachusetts
securities corporation. SSC engages exclusively in buying, selling and holding
investment securities on its own behalf and not as a broker. The income earned
on SSC's investment securities is subject to a significantly lower rate of state
tax than that assessed on income earned on investment securities owned by
Compass. At December 31, 1999, SSC had total assets of $34.7 million, consisting
primarily of cash maintained at Compass and investment securities.
COMPASS CREDIT CORP. Compass Credit Corp. ("CC Corp.") is a
wholly-owned subsidiary of Compass established in 1997 as a Massachusetts
corporation. Through December 31, 1999, CC Corp. originated auto loans in Rhode
Island through a network of auto dealers. CC Corp. is a licensed lender in Rhode
Island. On December 31, 1999, CC Corp. sold its loan portfolio to Compass and is
not expected to engage in auto loan origination activities in the future. At
December 31, 1999, CC Corp. had total assets of $43.6 million, consisting
primarily of an intercompany receivable.
BUFFINTON BROOK REALTY CORPORATION. Buffinton Brook Realty Corporation
("BBR Corporation") is a wholly-owned subsidiary of Compass established in 1977
as a Massachusetts corporation. BBR Corporation purchases and holds real estate
and is the owner of 100% of the common stock of Compass Preferred Capital
Corporation ("Compass Preferred"). At December 31, 1999, BBR Corporation had
total assets of $419.6 million, consisting primarily of its investment in
Compass Preferred.
COMPASS PREFERRED CAPITAL CORPORATION. Compass Preferred Capital
Corporation ("Compass Preferred") is a subsidiary of BBR Corporation. It was
established in 1998 to engage in real estate business activities (including the
acquisition and holding of securities and real estate loans) that enable it to
be taxed as a "real estate investment trust" under federal and Massachusetts tax
laws. Compass Preferred had total assets of $421.2 million at December 31, 1999,
$374.9 million of which were mortgage loans originated by Compass.
THE SEXTANT CORPORATION. The Sextant Corporation (Sextant) is a
wholly-owned subsidiary of Compass originally formed to purchase equipment on
behalf of the Bank for tax favored purposes. Since then, Sextant was involved in
real estate development activities and, at December 31, 1999, is holding for
sale commercial condominium units with a carrying value of $672,000.
THE 1855 CORPORATION. The 1855 Corporation ("1855 Corporation") is a
wholly-owned subsidiary of Compass established in 1971 as a Massachusetts
corporation. 1855 Corporation is principally engaged in the acquisition and
holding of real estate used for banking purposes. At December 31, 1999, 1855
Corporation had total assets of $6.7 million of which $1.8 million consisted of
real estate used for banking purposes and $3.5 million consisted of investments
in subsidiaries.
PURCHASE CORPORATION. Purchase Corporation, a wholly-owned subsidiary
of 1855 Corporation, was established in 1981 as a Massachusetts corporation.
Purchase Corporation acquires, manages and develops real estate, purchases
equipment and makes investments. At December 31, 1999, Purchase Corporation had
total assets of $2.4 million which consisted solely of cash maintained at
Compass.
NORTH FRONT STREET, INC. North Front Street, Inc. ("NFS, Inc.") is a
wholly-owned subsidiary of 1855 Corporation established in 1991 as a
Massachusetts corporation. NFS, Inc. acquires, manages, develops, rehabilitates,
leases, finances, holds and makes real estate investments. At December 31, 1999,
NFS, Inc. had total assets of $1.1 million which consisted solely of cash
maintained at Compass.
24
SUPERVISION AND REGULATION
GENERAL
As a Massachusetts-chartered stock savings bank, Compass is subject to
extensive regulation by the Massachusetts Division of Banks (the "Division"),
and by the FDIC. Compass is required to file reports with, and is periodically
examined by, the FDIC and the Division concerning its activities and financial
condition and must obtain regulatory approvals prior to entering into certain
transactions, including, but not limited to, mergers with or acquisitions of
other financial institutions. Compass is a member of the FHLB and is subject to
certain limited regulation by the FRB. Seacoast Financial, as a bank holding
company, is subject to regulation by the FRB and is required to file reports
with the FRB.
MASSACHUSETTS BANK REGULATION
GENERAL. As a Massachusetts-chartered savings bank, Compass is subject
to supervision, regulation and examination by the Division and to various
Massachusetts statutes and regulations which govern, among other things,
investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and
payment of dividends. In addition, Compass is subject to Massachusetts consumer
protection and civil rights laws and regulations. The Commissioner's approval is
required for a Massachusetts bank to establish or close branches, merge with
other banks, organize a holding company, issue stock, engage in insurance agency
activities and undertake certain other activities.
In response to a Massachusetts law enacted in 1996, the Commissioner
adopted rules that generally give Massachusetts banks powers equivalent to those
of national banks. The Commissioner also has adopted procedures reducing
regulatory burdens and expense and expediting branching by well-capitalized and
well-managed banks.
REGULATORY ENFORCEMENT AUTHORITY. Any Massachusetts bank that does not
operate in accordance with the regulations, policies and directives of the
Commissioner may be subject to sanctions for non-compliance, including seizure
of the property and business of the bank and suspension or revocation of its
charter. The Commissioner may under certain circumstances suspend or remove
officers or directors who have violated the law, conducted Compass's business in
a manner which is unsafe, unsound or contrary to the depositors' interests or
been negligent in the performance of their duties. In addition, upon finding
that a bank has engaged in an unfair or deceptive act or practice, the
Commissioner may issue an order to cease and desist and impose a fine on the
bank concerned. Finally, Massachusetts consumer protection and civil rights
statutes applicable to Compass permit private individual and class action
lawsuits and provide for the rescission of consumer transactions, including
loans, and the recovery of statutory and punitive damages and attorney's fees in
the case of certain violations of those statutes.
DIF. All Massachusetts-chartered savings banks are required to be
members of the DIF, a corporation that insures savings bank deposits not covered
by federal deposit insurance. The DIF is authorized to charge an annual
assessment of up to 1/16th of 1% of a savings bank's deposits.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
As an insurer, the FDIC charges deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions. It also may prohibit any FDIC-insured institution from engaging in
any activity that the FDIC determines by regulation or order to pose a risk to
the insurance fund. The FDIC also has the authority to initiate enforcement
actions against savings banks, after giving the Commissioner an opportunity to
take such action, and may terminate deposit insurance if it determines that the
institution has engaged or is engaging in unsafe or unsound practices or is in
an unsafe or unsound condition. Based upon its assessable deposits, Compass
expensed $225,000 in FDIC insurance premiums during 1999.
25
REGULATORY CAPITAL REQUIREMENTS
FDIC-insured savings banks are subject to risk-based capital guidelines
that establish a framework for making regulatory capital requirements more
sensitive to the risk profiles of each institution. Compass is required to
maintain certain levels of regulatory capital in relation to risk-weighted
assets. The ratio of such regulatory capital to risk-weighted assets is referred
to as Compass's "risk-based capital ratio." Risk-based capital ratios are
determined by allocating assets and specified off-balance sheet items to four
risk-weighted categories ranging from 0% to 100%, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide a bank's capital into two tiers. The first tier
("Tier 1") includes common equity, retained earnings, certain non-cumulative
perpetual preferred stock (excluding auction rate issues) and minority interests
in equity accounts of consolidated subsidiaries, less goodwill and other
intangible assets (except mortgage servicing rights and purchased credit card
relationships subject to certain limitations). Supplementary ("Tier 2") capital
includes, among other items, cumulative perpetual and long-term limited-life
preferred stock, mandatory convertible securities, certain hybrid capital
instruments, term subordinated debt and the allowance for loan and lease losses,
subject to certain limitations, less required deductions. Banks are required to
maintain a total risk-based capital ratio equal to at least 8% of risk-weighted
assets, and at least half of such capital must be Tier 1 capital.
In addition, the FDIC has established regulations prescribing a minimum
Tier 1 leverage capital ratio (Tier 1 capital to adjusted total assets as
specified in the regulations). These regulations provide for a minimum Tier 1
leverage ratio of 3% plus an additional cushion of at least 100 to 200 basis
points. The FDIC may, however, set higher leverage and risk-based capital
requirements on individual institutions when particular circumstances warrant.
Savings banks experiencing or anticipating significant growth are expected to
maintain capital ratios, including tangible capital positions, well above the
minimum levels.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS
The FDIC has the authority to use its enforcement powers to prohibit a
bank from paying dividends if, in its opinion, the payment of dividends would
constitute an unsafe or unsound practice. Federal law also prohibits the payment
of dividends by a bank that will result in the bank failing to meet its
applicable capital requirements on a pro forma basis. Massachusetts law also
restricts Compass from declaring a dividend which would reduce its capital below
(i) the amount required to be maintained by state and federal law and
regulations or (ii) the amount of Compass's liquidation account established in
connection with the conversion of the Company from mutual to stock form.
PROMPT CORRECTIVE ACTION
The federal banking agencies have promulgated regulations to implement
a system of prompt corrective action required by federal law. Under the
regulations, a bank is deemed to be: (i) "well capitalized" if it has total
risk-based capital of 10.0% or more, has a Tier 1 risk-based capital ratio of
6.0% or more, has a Tier 1 leverage capital ratio of 5.0% or more and is not
subject to any written capital order or directive; (ii) "adequately capitalized"
if it has a total risk-based capital ratio of 8.0% or more, a Tier 1 risk-based
capital ratio of 4.0% or more and Tier 1 leverage capital ratio of 4.0% or more
(3.0% under certain circumstances) and does not meet the definition of "well
capitalized"; (iii) "undercapitalized" if it has a total risk-based capital
ratio that is less than 8.0%, a Tier 1 risk-based capital ratio that is less
than 4.0% or a Tier 1 leverage capital ratio that is less than 4.0% (3.0% under
certain circumstances); (iv) "significantly undercapitalized" if it has a total
risk-based capital ratio that is less than 6.0%, a Tier 1 risk-based capital
ratio that is less than 3.0% or a Tier 1 leverage capital ratio that is less
than 3.0%; and (v) "critically undercapitalized" if it has a ratio of tangible
equity to total assets that is equal to or less than 2.0%. Federal law and
regulations also specify circumstances under which a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution to comply with supervisory actions
as if it were in the next lower capitalization category (except that the FDIC
may not reclassify a significantly undercapitalized institution as critically
undercapitalized).
Based on the foregoing, Compass is currently classified as a "well
capitalized" bank.
26
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS
Federal law generally limits the activities and equity investments of
FDIC-insured, state-chartered banks to those that are permissible for national
banks, notwithstanding state laws. Under regulations dealing with equity
investments, an insured state bank generally may not, directly or indirectly,
acquire or retain any equity investment of a type, or in an amount, that is not
permissible for a national bank. Federal law and FDIC regulations permit certain
exceptions to this restriction. For example, certain state-chartered banks, such
as Compass, may continue to invest, up to certain limits, in common or preferred
stock listed on a national securities exchange or the National Market System of
Nasdaq, and in the shares of an investment company registered under the
Investment Company Act of 1940, as amended. Such banks may also continue to sell
savings bank life insurance. As of December 31, 1999, Compass held marketable
equity securities with a carrying value of $9.2 million pursuant to this
exception.
HOLDING COMPANY REGULATION
GENERAL. Seacoast Financial, as a bank holding company, is subject to
comprehensive regulation and regular examinations by the FRB. The FRB also has
extensive enforcement authority over bank holding companies, including, among
other things, the ability to assess civil money penalties, to issue cease and
desist or removal orders and to require that a holding company divest
subsidiaries (including its bank subsidiaries). In general, enforcement actions
may be initiated for violations of law and regulations and unsafe or unsound
practices.
Seacoast Financial is subject to capital adequacy guidelines for bank
holding companies (on a consolidated basis) which are substantially similar to
those of the FDIC for Compass.
Under FRB policy, a bank holding company must serve as a source of
strength for its subsidiary banks. Under this policy, the FRB may require, and
has required in the past, a holding company to contribute additional capital to
an undercapitalized subsidiary bank.
Seacoast Financial must obtain Massachusetts Board of Bank
Incorporation and FRB approval before: (i) acquiring, directly or indirectly,
ownership or control of any voting shares of another bank or bank holding
company if, after such acquisition, it would own or control more than 5% of such
shares (unless it already owns or controls the majority of such shares); (ii)
acquiring all or substantially all of the assets of another bank or bank holding
company; or (iii) merging or consolidating with another bank holding company.
The BHCA also prohibits a bank holding company, with certain
exceptions, from acquiring direct or indirect ownership or control of more than
5% of the voting shares of any company which is not a bank or bank holding
company, or from engaging directly or indirectly in activities other than those
of banking, managing or controlling banks, or providing services for its
subsidiaries. The principal exceptions to these prohibitions involve certain
non-bank activities which, by statute or by FRB regulation or order, have been
identified as activities closely related to the business of banking or managing
or controlling banks. The list of activities permitted by the FRB includes,
among other things: (i) operating a savings institution, mortgage company,
finance company, credit card company or factoring company; (ii) performing
certain data processing operations; (iii) providing certain investment and
financial advice; (iv) underwriting and acting as an insurance agent for certain
types of credit-related insurance; (v) leasing property on a full-payout,
non-operating basis; (vi) selling money orders, travelers' checks and United
States Savings Bonds; (vii) appraising real estate and personal property; (viii)
providing tax planning and preparation services; and (ix) subject to certain
limitations, providing securities brokerage services for customers.
INTERSTATE BANKING AND BRANCHING. Federal law allows the FRB to approve
an application of an adequately capitalized and adequately managed bank holding
company to acquire control of, or acquire all or substantially all of the assets
of, a bank located in a state other than such holding company's home state,
without regard to whether the transaction is prohibited by the laws of any
state. The FRB may not approve the acquisition of a bank that has not been in
existence for the minimum time period (not exceeding five years) specified by
the statutory law of the host state. The FRB is prohibited from approving an
application if the applicant (and its depository institution affiliates)
controls or would control more than 10% of the insured deposits in the United
States or 30% or more of the deposits in the target bank's home state or in any
state in which the target bank maintains a branch. Individual states continue to
have authority to limit the percentage of total insured deposits in the state
which may be held or controlled by a bank or bank holding company to the extent
such limitation does not discriminate against out-of-state banks or bank holding
companies. Individual states may also waive the 30% state-wide concentration
limit referred to above.
27
Additionally, beginning on June 1, 1997, the federal banking agencies
were authorized to approve interstate merger transactions without regard to
whether such transactions are prohibited by the law of any state, unless the
home state of one of the banks "opted out" by adopting a law which applies
equally to all out-of-state banks and expressly prohibits merger transactions
involving out-of-state banks. Interstate acquisitions of branches are permitted
only if the law of the state in which the branch is located permits such
acquisitions.
In 1996, the Massachusetts legislature enacted a new interstate banking
statute pursuant to which an out-of-state bank may (subject to various
regulatory approvals and to reciprocity in its home state) establish and
maintain bank branches in Massachusetts by (i) merging with a Massachusetts bank
that has been in existence for at least three years, (ii) acquiring a branch or
branches of a Massachusetts bank without acquiring the entire bank or (iii)
opening such branches de novo. Massachusetts banks' ability to exercise similar
interstate banking powers in other states depend upon the laws of those other
states.
DIVIDENDS. The FRB has issued a policy statement on the payment of cash
dividends by bank holding companies, which expresses the FRB's view that a bank
holding company should pay cash dividends only to the extent that the holding
company's net income for the past year is sufficient to cover both the cash
dividends and a rate of earning retention that is consistent with the holding
company's capital needs, asset quality and overall financial condition. The FRB
also indicated that it would be inappropriate for a company experiencing serious
financial problems to borrow funds to pay dividends. Furthermore, under the
prompt corrective action regulations adopted by the FRB, the FRB may prohibit a
bank holding company from paying any dividends if the holding company's bank
subsidiary is classified as "undercapitalized."
Bank holding companies are required to give the FRB prior written
notice of any purchase or redemption of its outstanding equity securities if the
gross consideration for the purchase or redemption, when combined with the net
consideration paid for all such purchases or redemptions during the preceding 12
months, is equal to 10% or more of the consolidated net worth of the bank
holding company. The FRB may disapprove such a purchase or redemption if it
determines that the proposal would constitute an unsafe or unsound practice or
would violate any law, regulation, FRB order or any condition imposed by, or
written agreement with, the FRB.
This notification requirement does not apply to any company that meets
the well-capitalized standard for banks, is "well managed" within the meaning of
the FRB regulations and is not subject to any unresolved supervisory issues.
FEDERAL RESERVE SYSTEM
The FRB requires all depository institutions to maintain
noninterest-bearing reserves at specified levels against their transaction
accounts (primarily checking, NOW and Super NOW checking accounts). Banks are
authorized to borrow from the Federal Reserve Bank's "discount window," but FRB
regulations require banks to exhaust other reasonable alternative sources of
funds, including FHLB borrowings, before borrowing from the Federal Reserve
Bank.
COMMUNITY REINVESTMENT ACT
Under the Community Reinvestment Act, as amended (the "CRA"), as
implemented by FDIC regulations, a bank has a continuing and affirmative
obligation, consistent with its safe and sound operation, to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA does
require the FDIC, in connection with its examination of a bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications by such
institution, including applications to acquire or build branches and to acquire
other financial institutions. The CRA requires the FDIC to provide a written
evaluation of an institution's CRA performance utilizing a four-tiered
descriptive rating system. Compass's latest FDIC CRA rating was "satisfactory".
Massachusetts has its own statutory counterpart to the CRA which is
also applicable to Compass. The Massachusetts version is generally similar to
the CRA but utilizes a five-tiered descriptive rating system. Massachusetts law
requires the Commissioner of Banks to consider, but not be limited to, a bank's
record of performance under Massachusetts law in considering any application by
the bank to establish a branch or other deposit-taking facility, to relocate an
office or to merge or consolidate with or acquire the assets and assume the
liabilities of any other banking institution. Compass's most recent rating under
Massachusetts law was "outstanding".
28
CONSUMER PROTECTION AND FAIR LENDING REGULATIONS
Compass is subject to a variety of federal and Massachusetts statutes
and regulations that are intended to protect consumers and prohibit
discrimination in the granting of credit. These statutes and regulations provide
for a range of sanctions for non-compliance with their terms, including
imposition of administrative fines and remedial orders, and referral to the
Attorney General for prosecution of a civil action for actual and punitive
damages and injunctive relief. Certain of these statutes authorize private
individual and class action lawsuits and the award of actual, statutory and
punitive damages and attorneys' fees for certain types of violations.
FEDERAL HOME LOAN BANK SYSTEM
Compass is a member of the FHLB, which is one of 12 regional Federal
Home Loan Banks, that administer the home financing credit function of savings
institutions. Each Federal Home Loan Bank serves as a reserve or central bank
for its members within its assigned region. It is funded primarily from proceeds
derived from the sale of consolidated obligations of the Federal Home Loan Bank
system. It makes loans to members (i.e., advances) in accordance with policies
and procedures established by the board of directors of each Federal Home Loan
Bank. These policies and procedures are subject to the regulation and oversight
of the Federal Housing Finance Board. All advances to Compass from the FHLB are
required to be fully secured by sufficient collateral as determined by the FHLB
.
As a member, Compass is required to purchase and maintain stock in the
FHLB. At December 31, 1999, Compass owned $14.5 million of FHLB stock.
29
ITEM 2. PROPERTIES
At December 31, 1999 Compass conducted its business through 35 full-service
branches, two seasonal high school offices, 37 branch and remote ATMs and three
non-branch properties, including its corporate headquarters, an operations
center and a mortgage origination office.
In the Greater New Bedford market, Compass operates eight full service
branches, including six branches in the City of New Bedford (five of which are
owned by Compass or a subsidiary and one of which is operated under a land
lease), one owned branch in the town of Fairhaven and one leased branch and an
operations center in the town of Dartmouth. Compass's corporate headquarters are
also located in the City of New Bedford, as are two other back-office
facilities. All of these buildings are owned by Compass or a subsidiary. Two of
Compass's remote ATMs are located in the City of New Bedford. One of Compass's
limited service high school branches is located in the City of New Bedford.
In the Greater Fall River market, Compass operates six full service
branches, including one owned and one leased branch in the City of Fall River,
one leased branch in Assonet and owned branches in each of Somerset, Swansea and
Westport. One of Compass's remote ATMs is also located in the City of Fall
River, as is one of Compass's limited service high school branches.
In the Greater Plymouth market, Compass operates six full service branches,
including two owned and two leased branches in the town of Plymouth and leased
branches in each of Carver and Wareham. Compass also leases a non-branch
mortgage office in the town of Lakeville, located in the Greater Plymouth
market.
In the Martha's Vineyard market, Compass operates five full service
branches, including one owned and one leased branch in the town of Edgartown,
and three owned branches in the towns of Chilmark, Vineyard Haven and Oak
Bluffs. One of Compass's remote ATMs is located in the Martha's Vineyard town of
West Tisbury.
In the Cape Cod market, Compass operates ten full-service branches,
including two leased offices in Sandwich, leased offices in Buzzards Bay and
South Yarmouth and owned offices in Pocasset, Falmouth, Hyannis (two), Chatham
and Orleans. Compass also owns commercial condominiums in Sandwich previously
used for loan operations which are currently being marketed for sale.
In December 1998, Compass acquired several parcels of land in downtown New
Bedford from the New Bedford Redevelopment Authority on which a five story
office building with approximately 147,000 square feet of space is being
constructed to house all employees other than retail branch and regional lending
personnel. Compass's New Bedford main banking office will be located in the
lobby of the new building. Construction of this new corporate headquarters is
proceeding on schedule and on budget (approximately $20 million) with a planned
occupancy of early summer of 2000. See Note 5 of the Notes to Consolidated
Financial Statements included herein for additional information.
ITEM 3. LEGAL PROCEEDINGS
Compass is not involved in any pending legal proceedings other than routine
legal proceedings occurring in the ordinary course of business. Management
believes that those routine proceedings involve, in the aggregate, amounts which
are immaterial to the consolidated financial condition and results of operations
of Seacoast Financial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
30
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Seacoast Financial's common stock is traded on the Nasdaq National Market
System under the symbol "SCFS". At March 17, 2000, there were 25,467,036 shares
of common stock outstanding and approximately 6,216 shareholders of record. This
does not reflect the number of persons or entities who hold their stock in
nominee or street name through various brokerage firms. As of that date, the
closing sales price, as reported by Nasdaq, was $9 5/8.
Seacoast Financial completed its conversion from mutual to stock form and
initial public offering of common stock on November 20, 1998, and issued
additional shares of common stock on December 4, 1998 in connection with the
consummation of its acquisition of Sandwich. Prior to November 20, 1998,
Seacoast Financial had no stockholders and, accordingly, has no historical stock
price or dividend information to report for the fiscal year ended October 31,
1998 or earlier.
High and low sales prices and dividends declared, stated on a per share
basis, since Seacoast Financial's initial public offering are as follows:
Dividends
High Low Declared
----------- ----------- -----------
2000
First quarter (through March 17, 2000).............. $ 10 1/8 $8 3/4 $0.06
1999
First quarter....................................... 11 1/4 9 3/4 --
Second quarter...................................... 11 5/8 9 1/2 --
Third quarter....................................... 12 5/16 9 11/16 0.05
Fourth quarter...................................... 11 1/4 9 9/16 0.05
1998
November 20 to December 31.......................... 10 3/8 9 1/2 --
31
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below are the selected consolidated financial data of Seacoast
Financial. The financial data are derived in part from, and should be read in
conjunction with, the Consolidated Financial Statements of Seacoast Financial
and Subsidiaries and notes thereto presented elsewhere herein.
At December 31, At October 31
--------------------------------------------------
1999 (1) 1998 1997 1996 1995
----------------- ----------- ----------- ------------ ------------
(In thousands)
SELECTED FINANCIAL CONDITION DATA:
Total assets................................... $ 2,122,785 $ 1,806,523 $ 1,625,260 $ 1,491,906 $ 1,410,480
Loans (2)...................................... 1,747,206 1,320,680 1,190,939 1,068,957 950,102
Allowance for loan losses...................... 16,828 15,117 14,742 14,075 13,524
Debt securities (3):
Available for sale........................ 235,620 282,732 316,384 308,395 100,609
Held to maturity.......................... 12,408 13,694 12,633 11,752 243,273
Marketable equity securities................... 9,963 8,200 3,512 4,229 3,699
Deposits....................................... 1,515,622 1,531,663 1,360,962 1,270,857 1,237,696
Borrowed funds................................. 314,622 102,906 108,042 82,021 49,326
Stockholders' equity/Surplus................... 274,021 153,570 140,128 123,137 110,268
Net unrealized gain (loss) on securities
available for sale, net of taxes,
included in equity........................ (2,430) 2,558 1,741 (143) 44
Non-performing loans........................... 5,734 6,514 14,464 14,322 13,039
Non-performing assets.......................... 6,286 7,813 16,767 17,385 17,324
SELECTED OPERATING DATA:
Interest income................................ $ 137,952 $ 122,934 $ 115,949 $ 106,435 $ 97,145
Interest expense............................... 63,510 62,692 58,025 52,935 49,372
------------ ----------- ----------- ------------ -------------
Net interest income....................... 74,442 60,242 57,924 53,500 47,773
Provision for loan losses...................... 2,000 1,736 2,615 1,431 246
------------ ----------- ----------- ------------ -------------
Net interest income after provision
for loan losses........................... 72,442 58,506 55,309 52,069 47,527
Gains (losses) on sales of securities, net..... 164 67 92 60 (84)
Gains on sales of loans, net................... 56 1,755 717 431 134
Gain on pension plan termination............... 1,472 -- -- -- --
Other non-interest income...................... 8,302 8,220 7,727 7,392 7,071
Other real estate owned expense, net........... 54 265 520 690 1,224
Other non-interest expense..................... 44,462 39,542 36,516 35,801 35,822
------------ ----------- ----------- ------------ -------------
Income before income taxes..................... 37,920 28,741 26,809 23,461 17,602
Provision for income taxes..................... 13,394 10,651 10,165 9,169 6,680
------------ ----------- ----------- ------------ -------------
Net income..................................... $ 24,526 $ 18,090 $ 16,644 $ 14,292 $ 10,922
============ =========== =========== ============ =============
Earnings per share - diluted(9)................ $ 0.97
============
Cash dividends per share (9)................... $ 0.10
============
32
Year Ended Year Ended October 31,
-------------------------------------------
December 31, 1999 (1) 1998 1997 1996 1995
--------------------- -------- -------- -------- ---------
SELECTED FINANCIAL RATIOS AND OTHER DATA (4):
Performance Ratios:
Return on average assets........................ 1.23% 1.06% 1.07% .99% .82%
Return on average stockholders'
equity/surplus............................... 8.97 12.00 12.66 12.27 10.45
Stockholders' equity/surplus to total
assets at end of period...................... 12.91 8.50 8.62 8.25 7.82
Net interest rate spread (5).................... 3.26 3.20 3.38 3.45 3.39
Net interest margin (6)......................... 3.93 3.72 3.88 3.92 3.78
Average interest-earning assets to average
interest-bearing liabilities................. 120.12 113.36 113.03 111.91 110.09
Total non-interest expense to average assets.... 2.24 2.34 2.37 2.54 2.77
Efficiency ratio (7)............................ 52.72 56.64 55.73 59.45 67.49
Regulatory Capital Ratios (4):
Tier 1 leverage capital......................... 13.11 8.34 8.38 8.21 7.53
Tier 1 risk-based-capital....................... 18.98 12.45 12.94 12.74 11.65
Total risk-based capital........................ 20.17 13.70 14.19 13.99 12.90
Asset Quality Ratios (4):
Non-performing loans as a percent of
loans (8).................................... .33 .49 1.21 1.34 1.37
Non-performing assets as a percent of
total assets................................. .30 .43 1.03 1.17 1.23
Allowance for loan losses as a percent
of loans..................................... .96 1.14 1.24 1.32 1.42
Allowance for loan losses as a percent of
total non-performing loans................... 293.48 232.07 101.92 98.28 103.72
Number of Full-Service Customer Facilities (10)...... 35 34 33 33 33
(1) In January 1999, the Board of Directors voted to change the Company's
year-end to December 31. Selected consolidated financial data for the two
month transition period ended December 31, 1998 is not presented herein.
See the audited financial statements contained herein for the balance
sheet as of December 31, 1998 and the results of operations for the two
month period then ended.
(2) Loans are comprised of gross loan balances, less unearned discounts, loans
held for sale and net unadvanced funds on loans plus net deferred loan
origination costs and fees.
(3) In November 1995, Compass reclassified securities having a market value of
$228.1 million from its held-to-maturity portfolio to its
available-for-sale portfolio pursuant to a Financial Accounting Standards
Board (the "FASB") interpretation of SFAS No. 115.
(4) Asset Quality Ratios and Regulatory Capital Ratios are end-of-period
ratios. With the exception of end-of-period ratios, all ratios are based
on average daily balances during the periods indicated.
(5) The net interest rate spread represents the difference between the
weighted average yield on average interest-earning assets and the weighted
average cost of average interest-bearing liabilities.
(6) The net interest margin represents net interest income as a percentage of
average interest-earning assets.
(7) The efficiency ratio represents the ratio of non-interest expenses to the
sum of net interest income and non-interest income.
(8) Non-performing loans consist of all loans 90 days or more past due and
other loans which have been identified by Compass as presenting
uncertainty with respect to the collectibility of interest or principal.
It is Compass's policy to generally cease accruing interest on all such
loans, except indirect auto loans and other consumer loans.
(9) Diluted earnings and cash dividends per share are inapplicable for periods
prior to the Company's mutual to stock conversion in November 1998.
(10) In February 2000, Compass opened its 36th full service branch at Braley
Road in New Bedford.
33
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Form 10-K 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. These and other factors that might cause differences
between actual and anticipated results, performance and achievements are
discussed in greater detail in this Form 10-K under "Management's Dicussion and
Analysis of Financial Condition and Results of Operations" and "Business".
GENERAL
Seacoast Financial's results of operations depend primarily on its net
interest income, which is the difference between the income earned on its loan
and securities portfolios and its cost of funds, consisting of the interest paid
on deposits and borrowings. Results of operations are also affected by Seacoast
Financial's provision for loan losses, as well as noninterest income and
expenses. Seacoast Financial's noninterest income consists principally of gains
and losses from sales of loans and securities, deposit and other banking fees.
Seacoast Financial's non-interest expenses consist principally of compensation
and employee benefits, occupancy, data processing, marketing and professional
services costs and other operating expenses. Results of operations are also
significantly affected by general economic and competitive conditions and
changes in interest rates as well as government policies and actions of
regulatory authorities. Future changes in applicable law, regulations or
government policies may materially affect Seacoast Financial and Compass.
STOCK CONVERSION AND MERGER
On November 20, 1998, the Company completed its mutual-to-stock conversion
and initial public offering of common stock whereby 14,000,000 shares were sold
at a purchase price of $10 per share. Net proceeds of the stock offering were
$121.4 million.
On December 4, 1998, the Company merged with Sandwich and issued 12,758,136
shares of its common stock in exchange for all of the outstanding common stock
of Sandwich (other than shares owned by Seacoast Financial and fractional
shares) based on an exchange ratio of 6.385 shares of Seacoast Financial common
stock for each share of Sandwich common stock.
The consolidated financial statements give retroactive effect to the merger
in a transaction accounted for as a pooling of interests. The pooling of
interests method of accounting requires the restatement of all periods presented
as if Seacoast Financial and Sandwich had always been combined.
CHANGE IN FISCAL YEAR-END
In January 1999, the Board of Directors voted to change the Company's
year-end from October 31 to December 31. The accompanying Management's
Discussion and Analysis of Financial Condition and Results of Operations
includes a comparison of financial condition at December 31, 1998 and October
31, 1998. The results of operations for the two month transition period ended
December 31, 1998 are separately presented in the accompanying financial
statements at page 50 of this Form 10-K. Unless otherwise indicated, all
references to 1999 are for the calendar year ended December 31, 1999 and all
references to 1998 and 1997 are for the fiscal years ended October 31.
34
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1999 AND DECEMBER 31, 1998
Total assets increased by $234.7 million, or 12.4%, from $1,888.1 million
at December 31, 1998 to $2,122.8 million at December 31, 1999. This growth was
due to a $343.2 million, or 24.4%, increase in loans, partially offset by a
$43.3 million, or 13.7%, decrease in investment securities and a $72.0 million
decrease in cash, federal funds sold and other short-term investments. Asset
growth was funded primarily by a $215.8 million, or 218.4% increase in
borrowings and, to a lesser extent, a $18.4 million, or 1.2% , increase in
deposits.
The increase in loans occurred primarily in Compass's indirect auto and
residential mortgage loan portfolios. From December 31, 1998 to December 31,
1999, indirect auto loans (net of unearned discounts) increased by $101.7
million, or 31.7%. This growth is primarily attributable to the generally
favorable interest rate environment and economic conditions which prevailed
during the period and the continued emphasis of this area of lending.
Residential mortgage loans increased by $199.4 million, or 28.6%, during 1999.
Due to the favorable conditions cited above and the utilization of two loan
correspondents with whom Compass originated $74.2 million in residential
mortgage loans, Compass originated $323.9 million of residential mortgage loans
in 1999, a 3.3% increase over 1998. The net growth in this portion of the loan
portfolio was also affected by the strategy to retain in portfolio fixed rate
mortgage loan originations that in recent years were generally sold in the
secondary mortgage market.
Total deposits at December 31, 1999 were $1,515.6 million, an increase of
$18.4 million, or 1.2%, compared to $1,497.2 million at December 31, 1998. This
modest increase included an increase in core deposits of $26.8 million, or 3.6%,
partially offset by a decrease of $8.4 million, or 1.1%, in certificates of
deposit. The increase in core deposits was primarily due to the expansion of the
Compass brand to the Cape Cod market through the acquisition of the former
Sandwich Bank in December 1998, partially offset by a continuing low interest
rate environment wherein Compass competes against other instruments available to
the public such as mutual funds and annuities. The decline in certificates of
deposits reflects the same competitive factors which have impacted core deposit
growth and, in addition, reflects aggressive price competition for such accounts
among local financial institutions in reaction to rate increases initiated by
the Federal Reserve Bank during the second half of the year.
Total borrowed funds were $314.6 million at December 31, 1999 compared to
$98.8 million at December 31, 1998, an increase of $215.8 million, or 218.4%.
During the year ended December 31, 1999, Compass's net borrowings from the FHLB
increased by $205.6 million and its retail repurchase agreements increased by
$8.5 million. Management believes that it will continue to expand its FHLB
borrowings to fund loan growth which is expected to exceed deposit growth
throughout 2000.
The increase in stockholders' equity of $2.5 million to $274.0 million at
December 31, 1999 resulted from net income of $24.5 million for the year ended
December 31 1999, partially offset by a $4.8 million decrease in net unrealized
gains and losses (net of taxes) on securities available for sale, repurchases of
common stock totaling $15.9 million and cash dividends of $2.5 million. During
1999, the Company announced two stock repurchase programs aggregating 2,231,900
shares. As of January 27, 2000, 1,468,500 shares had been repurchased leaving up
to 763,400 shares for repurchase. Management expects to fully repurchase the
remaining 763,400 shares under these programs during 2000.
COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1998 AND OCTOBER 31, 1998
Total assets increased by $81.6 million, or 4.5%, from $1,806.5 million at
October 31, 1998 to $1,888.1 million at December 31, 1998. This growth was
entirely due to an $83.4 million, or 6.3% increase in loans. Asset growth was
funded by the net proceeds of the stock offering which amounted to $121.4
million, of which $33.5 million at October 31, 1998 was included in deposits
earmarked for the purchase of common stock in the stock offering.
The increase in loans occurred primarily in the residential mortgage and
indirect auto loan portfolios. From October 31, 1998 to December 31, 1998,
residential mortgage loans increased by $56.4 million (exclusive of a transfer
of loans previously classified as held-for-sale), or 9.0%, and indirect auto
loans (net of unearned discounts) increased by $13.7 million, or 4.5%. The
growth during the two months ended December 31, 1998 is generally attributable
to the favorable interest rate environment and economic conditions which
prevailed during this period and, more specifically, is due to the previously
disclosed temporary change in practice, which began in November 1998, to retain
in portfolio all fixed rate residential mortgage loan originations. The Company
has continued to emphasize the origination of indirect auto loans through its
network of automobile dealers causing the growth in this portfolio.
35
Total deposits at December 31, 1998 were $1,497.2 million, a decrease of
$34.5 million, or 2.3% compared to $1,531.7 million at October 31, 1998. As
indicated above, a portion of the proceeds of the stock offering was funded by
either deposit accounts of Bank customers or by non-customers who had funded
their stock subscription with the Bank at October 31, 1998. Of the $121.4
million of net proceeds of the stock offering, $24.6 million was funded from the
deposits of Bank customers and $31.9 million was funded from non-customer
subscription accounts, of which $18.0 was held by the Bank as deposits at
October 31, 1998. These funds, totaling $42.6 million, were transferred to
stockholders' equity in November 1998 when the stock offering was completed.
Exclusive of this transfer, deposits increased by less than 1% during the two
months ended December 31, 1998, a cyclical period which has historically been
one of modest deposit growth. Total borrowed funds were $98.8 million at
December 31, 1998 compared to $102.9 million at October 31, 1998, a decrease of
$4.1 million, or 4.0%.
The increase in stockholders' equity of $117.9 million to $271.5 million at
December 31, 1998 resulted from the net proceeds of the stock offering of $121.4
million partially offset by the net loss of $3.3 million for the two months
ended December 31, 1998. As discussed more fully in Notes 2 and 5 to the
accompanying consolidated financial statements, the net loss was caused by
certain one time charges including merger costs of $6.8 million associated with
the Sandwich acquisition and a writedown of banking premises and equipment of
$2.0 million necessitated by the decision to consolidate most banking functions
in a new corporate headquarters which will result in the ultimate disposal of
several buildings currently in use.
COMPARISON OF FINANCIAL CONDITION AT OCTOBER 31, 1998 AND OCTOBER 31, 1997
Total assets increased by $181.2 million, or 11.1%, from $1,625.3 million
at October 31, 1997 to $1,806.5 million at October 31, 1998. This growth was due
primarily to a $57.6 million, or 118.3%, increase in cash and cash equivalents
and a $129.7 million, or 10.9%, increase in loans, partially offset by a $27.7
million, or 8.1%, decrease in investment securities. Asset growth was funded
primarily by a $170.7 million, or 12.5%, increase in deposits.
The increase in cash and cash equivalents at October 31, 1998 was primarily
attributable to the receipt of significant funds being held in escrow in
connection with the Company's subscription offering of stock.
The increase in loans occurred primarily in Compass's indirect auto and
residential mortgage loan portfolios. From October 31, 1997 to October 31, 1998,
indirect auto loans (net of unearned discounts) increased by $98.7 million, or
47.5%. This growth is primarily attributable to the favorable interest rate
environment and economic conditions which prevailed during the period and the
continued emphasis of this area of lending. Residential mortgage loans increased
by $11.7 million, or 1.9%, during 1998. Due to the favorable interest rate
environment which prevailed, Compass originated $313.4 million of residential
mortgage loans in 1998, a 84.8% increase over 1997. As the Bank continued to
sell fixed rate loans with terms of 15 years or longer during 1998 and due to
the high volume of loan refinancing attributable to lower interest rates, the
net growth in this portion of the loan portfolio was constrained.
Total deposits at October 31, 1998 were $1,531.7 million, an increase of
$170.7 million, or 12.5%, compared to $1,361.0 million at October 31, 1997. The
increase in deposits was primarily due to favorable economic conditions and the
impact of escrowed deposits of $21.9 million received in the subscription
offering portion of the Company's initial public offering of stock, partially
offset by a continuing low interest rate environment wherein Compass competes
against other instruments available to the public such as mutual funds and
annuities. Total borrowed funds were $102.9 million at October 31, 1998 compared
to $108.0 million at October 31, 1997, a decrease of $5.1 million, or 4.7%.
During the year ended October 31, 1998, Compass's net borrowings from the FHLB
decreased by $11.5 million and its retail repurchase agreements increased by
$5.3 million.
The increase in surplus of $13.4 million to $153.6 million at October 31,
1998 resulted from net income of $18.1 million for the year ended October 31,
1998 and a $1.0 million increase in unrealized gains (net of taxes) on
securities available for sale, most of which pertained to the marketable equity
securities portfolio, partially offset by elimination of the portion of the
Company's pre-acquisition stock investment in Sandwich which had been purchased
in 1998.
36
RESULTS OF OPERATIONS
NET INTEREST INCOME
The Company's performance is primarily attributable to its level of net
interest income. General economic conditions, corporate strategies,
asset/liability management and the policies of regulatory authorities all have a
significant impact on the level of net interest income achieved.
During the period 1997 to 1999, the Company's net interest income increased
from $57.9 million for the year ended October 31, 1997 to $74.4 for the year
ended December 31, 1999, an increase of $16.5 million, or 28.5%. This
achievement has been attributable to the Company's growth in average
interest-earning assets and the increase in the ratio of interest-earning assets
to interest bearing liabilities over that same period. The increase in such
ratio is primarily attributable to the $121.4 of net proceeds from the Company's
initial public stock offering in November 1998.
During the period 1997 to 1999, the Company's interest rate spread (the
difference between the yield on interest-earning assets and the cost of
interest-bearing liabilities) has declined slightly from 3.38% in 1997 to 3.26%
in 1999. This decrease is primarily attributable to the relative increase in
Compass's utilization of borrowings, rather than lower cost deposits, to fund
asset growth.
37
The following table presents average balances, interest income and expense
and yields earned or rates paid on the major categories of assets and
liabilities for the years indicated.
Year Ended December 31 Years Ended October 31,
--------------------------------------------------------------------------------------------
1999 1998 1997
--------------------------------------------------------------------------------------------
Average Average Average
Average yield/ Average yield/ Average yield/
balance Interest cost balance Interest cost balance Interest cost
---------------------------------------------------------------------------------------------
(Dollars in thousands)
ASSETS:
Interest-earning assets:
Short-term investments............ $ 8,206 $ 377 4.59% $ 37,626 $ 2,198 5.84 % $ 27,983 $ 1,600 5.72%
Debt securities (1)............... 265,204 16,086 6.07 311,921 18,358 5.89 326,788 20,013 6.12
Equity securities (1)............. 21,875 1,271 5.81 17,259 796 4.61 11,000 632 5.75
Mortgage loans (2)................ 1,121,684 84,235 7.51 928,739 74,862 8.06 872,174 72,248 8.28
Commercial loans (2).............. 66,178 5,846 8.83 44,672 4,333 9.70 43,237 4,203 9.72
Indirect auto loans............... 373,088 27,017 7.24 245,679 19,423 7.91 180,600 14,497 8.03
Other consumer loans.............. 36,833 3,120 8.47 33,177 2,964 8.93 30,549 2,756 9.02
---------- -------- ---------- --------- ---------- --------
Total interest-earning assets.. 1,893,068 137,952 7.29 1,619,073 122,934 7.59 1,492,331 115,949 7.77
-------- -------- --------- ------- -------- --------
Allowance for loan losses......... (16,153) (14,696) (14,409)
Non-interest earning assets....... 109,540 96,320 84,777
---------- ---------- ----------
Total assets................... $1,986,455 $1,700,697 $1,562,699
========== ========== ==========
LIABILITIES AND EQUITY:
Interest-bearing liabilities:
Deposits:
NOW accounts................... $ 151,180 $ 1,466 0.97% $ 129,956 $ 1,650 1.27 % $ 115,507 $ 1,523 1.32%
Savings accounts............... 215,088 4,978 2.31 199,874 5,019 2.51 194,995 4,926 2.53
Money market savings
accounts..................... 295,393 8,638 2.92 261,212 7,823 2.99 228,761 6,597 2.88
Certificates of deposit........ 734,995 38,171 5.19 720,590 41,075 5.70 672,652 38,277 5.69
---------- -------- ---------- --------- ---------- --------
Total deposits............... 1,396,656 53,253 3.81 1,311,632 55,567 4.24 1,211,915 51,323 4.23
---------- -------- ---------- --------- ---------- --------
Borrowed funds:
Short-term borrowings (3)...... 31,896 1,610 5.05 13,744 723 5.26 5,670 283 4.99
FHLB advances.................. 147,486 8,647 5.86 102,843 6,402 6.23 102,732 6,419 6.25
---------- -------- ---------- --------- ---------- --------
Total borrowings............. 179,382 10,257 5.72 116,587 7,125 6.11 108,402 6,702 6.18
---------- -------- ---------- --------- ---------- --------
Total interest-bearing......
liabilities........... 1,576,038 63,510 4.03 1,428,219 62,692 4.39 1,320,317 58,025 4.39
-------- -------- --------- ------- -------- --------
Non-interest bearing demand
checking accounts.............. 117,416 102,270 97,131
Other liabilities................. 19,542 19,440 13,758
---------- ---------- ----------
Total liabilities.............. 1,712,996 1,549,929 1,431,206
Stockholders' equity / surplus.... 273,459 150,768 131,493
---------- ---------- ----------
Total liabilities and
stockholders' equity /
surplus...................... $1,986,455 $1,700,697 $1,562,699
========== ========== ==========
Net interest income/interest rate
spread (4)..................... $ 74,442 3.26% $ 60,242 3.20 % $ 57,924 3.38%
======== ======== ========= ======= ======== ========
Net interest margin (5)........... 3.93% 3.72 % 3.88%
======== ======= ========
Ratio of interest-earning assets
to interest-bearing
liabilities.................... 120.12% 113.36 % 113.03%
======== ======= ========
- ---------------------------
(1) Average balances include unrealized gains on securities available for sale.
Equity securities include marketable equity securities and restricted\
equity securities.
(2) Loans on non-accrual status are included in the average balances.
(3) Short-term borrowings include immaterial balances of other borrowings.
(4) Interest rate spread represents the difference between the yield on
interest-earning assets and the cost of interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average
interest-earning assets.
38
RATE/VOLUME ANALYSIS. The following table presents the extent to which
changes in interest rates and changes in volume of interest-earning assets and
interest-bearing liabilities have affected Seacoast Financial's interest income
and interest expense during the periods indicated. Information is provided in
each category with respect to: (i) changes attributable to changes in volume
(changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rate (changes in rate multiplied by prior volume); and (iii) the net
change. The changes attributable to the combined impact of volume and rate have
been allocated proportionately to the changes due to volume and the changes due
to rate.
Year Ended Year ended
December 31, 1999 October 31, 1998
compared to compared to
year ended year ended
October 31, 1998 October 31, 1997
------------------------------- -------------------------------
Increase (decrease) due to Increase (decrease) due to
------------------------------- -------------------------------
Volume Rate Net Volume Rate Net
--------- ---------- --------- --------- --------- --------
(In thousands)
Interest-earning assets:
Short-term investments........................ $ (1,430)$ (391) $ (1,821) $ 563 $ 35 $ 598
Debt securities............................... (2,819) 547 (2,272) (891) (764) (1,655)
Equity securities............................. 241 234 475 307 (143) 164
Mortgage loans................................ 14,753 (5,380) 9,373 4,597 (1,983) 2,614
Commercial loans.............................. 1,929 (416) 1,513 139 (9) 130
Indirect auto loans........................... 9,344 (1,750) 7,594 5,148 (222) 4,926
Other consumer loans.......................... 315 (159) 156 234 (26) 208
--------- ---------- --------- --------- --------- --------
Total interest-earning assets.............. $ 22,333 $ (7,315) $ 15,018 $ 10,097 $ (3,112) $ 6,985
--------- ---------- --------- --------- --------- --------
Interest-bearing liabilities:
Deposits:
NOW accounts............................... $ 243 $ (427) $ (184) $ 185 $ (58) $ 127
Savings accounts........................... 367 (408) (41) 123 (30) 93
Money market savings accounts.............. 1,003 (188) 815 964 262 1,226
Certificates of deposit.................... 808 (3,712) (2,904) 2,732 66 2,798
--------- ---------- --------- --------- --------- --------
Total deposits........................... 2,421 (4,735) (2,314) 4,004 240 4,244
--------- ---------- --------- --------- --------- --------
Borrowed funds:
Short-term borrowings...................... 917 (30) 887 424 16 440
FHLB advances.............................. 2,622 (377) 2,245 21 (38) (17)
--------- ---------- --------- --------- --------- --------
Total borrowings......................... 3,539 (407) 3,132 445 (22) 423
--------- ---------- --------- --------- --------- --------
Total interest-bearing liabilities....... 5,960 (5,142) 818 4,449 218 4,667
--------- ---------- --------- --------- --------- --------
Net change in net interest income............. $ 16,373 $ (2,173) $ 14,200 $ 5,648 $ (3,330) $ 2,318
========= ========== ========= ========= ========= ========
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND
OCTOBER 31, 1998
GENERAL. Net income was $24.5 million in 1999 compared to $18.1 million in
1998, an increase of $6.4 million or 35.4%. Due primarily to an increase in
average interest-earning assets of $274.0 million, or 16.9%, net interest income
increased by $14.2 million, or 23.6%, from $60.2 million in 1998 to $74.4
million in 1999. The other significant factors affecting the change in net
income was an increase of $264,000 in the provision for loan losses and an
increase of $4.7 million in non-interest expense. The Company's effective rate
declined to 35.3% in 1999 from 37.1% in 1998.
INTEREST INCOME. Interest income was $138.0 million in 1999, compared to
$122.9 million in 1998, an increase of $15.1 million, or 12.3%. This increase in
interest income resulted exclusively from average interest-earning asset growth
of $274.0 million or 16.9%. The yield on interest-earning assets decreased 30
basis points in 1999 from 7.59% in 1998 to 7.29% in 1999. A significant portion
of the increase in average interest-earning assets was attributable to the
indirect auto loan portfolio, which increased from $245.7 million at October 31,
1998 to $373.1 million at December 31, 1999, and the mortgage loan portfolio,
which increased from $928.7 million to $1,121.7 million, at those dates,
respectively.
39
The net proceeds of the November 1998 stock offering of $121.4 million had
a significant impact on the Company's interest income. Of the increase of $15.1
million in interest income in 1999, approximately $6.5 million was attributable
to the earnings on the use of the net proceeds of the stock offering after
consideration of the impact of stock repurchases.
INTEREST EXPENSE. Interest expense increased by $818,000, or 1.3%, from
$62.7 million in 1998 to $63.5 million in 1999. The increase resulted from a
$147.8 million, or 10.3%, increase in average interest-bearing liabilities
partially offset by a 36 basis point decrease in the average rate paid on such
liabilities. Total average interest-bearing deposits increased by $85.0 million,
or 6.5%, with most of the increase occurring in lower cost core deposits.
Because of the level of loan growth, Compass increased its advances from the
FHLB with the average amount of such borrowings outstanding increasing by $44.7
million, or 43.5%, from $102.8 million in 1998 to $147.5 million in 1999.
PROVISION FOR LOAN LOSSES. Compass establishes provisions for loan losses,
which are charged to operations, 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 the ultimate losses may vary from such estimates. Management assesses the
allowance for loan losses on a quarterly basis and makes provisions for loan
losses monthly in order to maintain the adequacy of the allowance.
The provision for loan losses increased by $264,000, or 15.2%, from $1.7
million in 1998 to $2.0 million in 1999. The total allowance of $16.8 million at
December 31, 1999 represented .96% of total loans, a decrease from 1.14% at
October 31, 1998. This decrease reflects the impact of the 24.4% growth in the
loan portfolio in 1999 which growth has occurred in the historically less risky
residential mortgage loan and indirect auto loan portfolios. At December 31,
1999, the allowance for loan losses as a percentage of non-performing loans was
293.5% compared to 232.1% at December 31, 1998.
NON-INTEREST INCOME. Non-interest income is comprised of fees and charges
for bank services, net interchange fees on the processing of merchant credit
card receipts, gains or losses from sales of assets, loan servicing fees and
other income resulting from various types of banking transactions. Total
non-interest income was $10.0 million in 1999 and 1998. Included in non-interest
income in 1999 is a $1.5 million gain on termination of the Bank's pension plan.
Exclusive of this non-recurring item, non-interest income declined $1.5 million
due entirely to a $1.6 million decrease in gains on the sale of loans and
investments. Such decline is a result of the change in practice, beginning in
November 1998, whereby Compass is no longer selling fixed rate residential
mortgage loans with terms of 15 years or longer in the secondary mortgage
market.
As a result of the decision to terminate its defined benefit pension plan
and to enhance its 401(k) plan, Compass expects to realize annual savings of
approximately $450,000 beginning in 2000 and a non-recurring settlement gain of
approximately $1.5 million in 2000.
NON-INTEREST EXPENSE. Non-interest expense increased by $4.7 million, or
11.8%, from $39.8 million for the year ended October 31, 1998 to $44.5 million
for the year ended December 31, 1999. Of this increase, $1.1 million related to
salaries and employee benefits, which rose 4.9% to $22.4 million in 1999. This
increase is attributable to overall salary increases averaging 4% in 1999, costs
associated with the ESOP established in November 1998 ($585,000) and restricted
stock awarded in July 1999 ($637,000), partially offset by elimination of
certain executive positions at the former Sandwich Bank.
Occupancy and equipment expenses increased $738,000, or 14.5%, to $5.8
million for the year ended December 31, 1999. This increase was due to an
increase in rent expense and depreciation attributable to the relocation of the
Bank's Operations and Consumer Lending Departments and the opening of new
branches in Plymouth and Hyannis.
Data processing expenses increased $1.2 million, or 37.8%, to $4.5 million
for the year ended December 31, 1999. This increase was due to a number of
factors such as new services, including imaging, 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.
40
Marketing expenses increased $382,000, or 18.4%, to $2.5 million for the
year ended December 31, 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 $669,000, or 51.2%, to $2.0
million for the year ended December 31, 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, implement the dividend reinvestment and stock
purchase plan and review the defined benefit pension plan.
Other non-interest expenses increased $441,000, or 6.5%, for the year ended
December 31, 1999. This increase was due primarily to certain nonrecurring costs
associated with the merger with Sandwich.
INCOME TAXES. Total income tax expense was $13.4 million in 1999 compared
to $10.7 million in 1998. The effective tax rate was lower in 1999 (35.3%) than
in 1998 (37.1%) primarily because of greater utilization of non-bank
subsidiaries that were taxed at a lower rate for state tax purposes and an
increase in federal low income housing tax credits.
COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED OCTOBER 31, 1998 AND
OCTOBER 31, 1997
GENERAL. Net income increased by $1.5 million or 8.7%, from $16.6 million
for the year ended October 31, 1997 to $18.1 million for the year ended October
31, 1998. The improvement was attributable to higher net interest income of $2.3
million, a $879,000 decrease in the provision for loan losses due to a
continuation of the favorable trends in the various factors considered by
management in evaluating the adequacy of the allowance for loan losses and an
increase in net gains on sales of loans of $1.0 million. Also impacting the
change in net income was an increase of $2.8 million in non-interest expense due
to higher salaries, occupancy and equipment expenses, data processing expenses
and marketing costs. The increase in net interest income was due to growth in
average interest-earning assets.
INTEREST INCOME. Interest income for the year ended October 31, 1998 was
$122.9 million, compared to $115.9 million for the year ended October 31, 1997,
an increase of $7.0 million, or 6.0%. All of the increase in interest income
resulted from growth in average interest-earning assets of $126.7 million, or
8.5% as the yield on interest-earning assets decreased 18 basis points in 1998
from 7.77% in 1997 to 7.59% in 1998. The principal areas of growth related to
real estate loans (up $56.6 million, or 6.5%) and indirect auto loans (up $65.1
million, or 36.1%). Most of the real estate loan growth resulted from increased
originations 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, the expansion of such lending into Rhode Island and the continued
emphasis of this area of lending.
INTEREST EXPENSE. Interest expense for the year ended October 31, 1998 was
$62.7 million, compared to $58.0 million for the year ended October 31, 1997, an
increase of $4.7 million, or 8.1%. This increase resulted entirely from a higher
average balance of interest-bearing liabilities (up $107.9 million, or 8.2%).
Average interest-bearing deposit balances increased $99.7 million, or 8.2%,
primarily as a result of the introduction and promotion of relationship-based
retail checking account products in 1996 and 1997.
Compass increased its average borrowings from both the FHLB and customers
under retail repurchase agreements during the year ended October 31, 1998.
Interest expense on borrowed funds increased $423,000, or 6.3%, in the year
ended October 31, 1998 due to an $8.2 million, or 7.6%, increase in the average
balance of such funds to $116.6 million, which was partially offset by an 7
basis point reduction in the average rate paid on borrowed funds to 6.11% in
1998 compared to 1997.
PROVISION FOR LOAN LOSSES. Compass provided $1.7 million for loan losses in
the year ended October 31, 1998 compared to $2.6 million in the year ended
October 31, 1997, a decrease of $879,000, or 33.6%. The total allowance of $15.1
million at October 31, 1998 represented 1.14% of total loans, a decrease from
1.24% at October 31, 1997. These decreases were primarily influenced by a
reduction in the balance of adversely classified loans and fewer delinquencies.
NON-INTEREST INCOME. Total non-interest income was $10.0 million for the
year ended October 31, 1998 compared to $8.5 million for the year ended October
31, 1997, an increase of $1.5 million, or 17.6%. The increase resulted primarily
from an increase of $1.0 million in the gain on sale of mortgage loans, from
$717,000 in the year ended October 31, 1997 to $1.8 million in the year ended
October 31, 1998. With the reduction in interest rates on 15- and
41
30-year fixed rate mortgages which occurred in 1997 and 1998, the volume of
fixed-rate mortgage loan originations increased which contributed to this
increase. Also, Compass earned $270,000 of fees in 1998 under a new relationship
with an outside vendor which processes its official checks. This fee is
determined based on the average length of time such checks, which are drawn on
the account of the outside vendor, remain outstanding. Prior to 1998, income on
such float was classified as interest income.
NON-INTEREST EXPENSE. Non-interest expense increased by $2.8 million, or
7.6%, from $37.0 million for the year ended October 31, 1997 to $39.8 million
for the year ended October 31, 1998. Of this increase, $1.4 million related to
compensation and employee benefits, which rose 7.2% to $21.3 million for the
year ended October 31, 1998. The higher level of compensation and employee
benefits was caused by overall salary increases averaging 4%, increased
commissions related to higher mortgage loan originations, an increase in
incentive compensation and other employee benefits as well as staffing increases
in the lending area and in a new branch opened in May 1998.
Occupancy and equipment expenses increased $239,000, or 4.9%, to $5.1
million for the year ended October 31, 1998. This increase was primarily due to
an increase in rent expense attributable to the relocation of the Bank's
Operations Department, the opening of a new branch, an upgraded branch and a
one-time reduction in rent expense in 1997 of $36,000 attributable to a leased
facility no longer utilized.
Data processing expenses increased $430,000, or 15.2%, to $3.3 million for
the year ended October 31, 1998. This increase was due to new services,
including laser printing and Internet services, and volume-related increases in
loans and deposits.
Marketing expenses increased $301,000, or 17.0%, to $2.1 million for the
year ended October 31, 1998. This increase was primarily attributable to
advertising campaigns related to the Roth IRA accounts allowed by changes in the
tax law, the advertising of Compass's Preferred Checking account and Flagship
Money Market programs, promotion of the new Plymouth branch and on-line banking
capabilities through the Internet.
Other non-interest expenses increased $423,000, or 6.7%, for the year ended
October 31, 1998. Included in other non-interest expense in 1997 and 1998 were
recoveries of life insurance premiums from an insurance company which emerged
from receivership in 1997. The net impact of the resolution of this matter
resulted in an unfavorable change in non-interest expense in 1998 compared to
1997 of $273,000. In addition, increases in office supplies, charitable
contributions and telephone expenses also caused the overall increase in
non-interest expenses in the year ended October 31, 1998. Partially offsetting
these increases was a decrease of $255,000 in OREO expense due to the
continuation of the decline in the number of properties held as OREO and stable
real estate market values.
INCOME TAXES. Income tax expense was $10.7 million for the year ended
October 31, 1998, an increase of $486,000, or 4.8%, compared to the 1997 period.
The effective tax rate was 37.1% in 1998 compared to 37.9% in 1997 which
decrease was caused by the greater utilization of non-bank subsidiaries that
were taxed at a lower rate 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 number of the FHLB of Boston, 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 December 31, 1999, Compass had $394 million in unused borrowing capacity that
is contingent upon the purchase of additional FHLB of Boston stock. Use of this
borrowing capacity may also be impacted by regulatory capital requirements.
42
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 December 31, 1999, the Company maintained cash
and due from banks, short-term investments and debt securities maturing within
one year of $112.1 million, or 5.3% of total assets. Compass invests excess
funds, if any, in federal funds sold which provides liquidity to meet lending
requirements.
At December 31, 1999, 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 $13.5 million. Compass believes it has adequate
sources of liquidity to fund these expenditures.
At December 31, 1999, Compass had commitments to originate loans, unused
outstanding lines of credit, standby letters of credit and undisbursed proceeds
of loans totaling $180.5 million. Compass anticipates that it will have
sufficient funds available to meet its current loan commitments. Certificates of
deposit maturing within one year from December 31, 1999 amounted to $584.2
million. Compass expects that substantially all maturing certificate accounts
will be retained by Compass 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 15.8% of risk-weighted assets at December
31, 1999. Total capital, including the Tier 2 allowance for loan losses, was
17.0% 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 19.0% of risk-weighted assets at
December 31, 1999. Total capital, including the Tier 2 allowance for loan
losses, was 20.2% of risk-weighted assets. The leverage ratio was 13.1%. These
ratios placed the Company in excess of regulatory standards set forth by the
Federal Reserve Board.
IMPACT OF INFLATION AND CHANGING PRICES
The consolidated financial statements and notes thereto presented herein
have been prepared in accordance with GAAP, which requires the measurement of
financial position and operating results in terms of historical dollar amounts
without considering changes in the relative purchasing power of money over time
due to inflation. The impact of inflation is reflected in the increased cost of
the Company's operations. Unlike industrial companies, nearly all of the
Company's assets and liabilities are monetary in nature. As a result, interest
rates have a greater impact on its performance than do the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or to the same extent as the prices of goods and services.
IMPACT OF NEW ACCOUNTING STANDARDS
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities- Deferral
of the Effective Date of FASB Statement No. 133" which is effective for fiscal
years beginning after June 15, 2000. The Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. Management does not anticipate
that the adoption of this statement will have a material impact on the financial
position or operating results of the Company.
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 was 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 Disclosure Act.
Compass took numerous remedial steps over the past several years to prepare
for the change of century. These steps included forming a Y2K Project Team to
develop and implement a Y2K Action Plan; replacing or upgrading noncompliant
hardware and software; working with third party service bureaus and other
vendors to ensure that
43
Compass's mission critical information systems were Y2K compliant; and
establishing contingency plans in the event that an unforseen problem were to
arise.
Compass has experienced no problems or issues relating to Y2K as of the
date of this report. Compass's technology infrastructure performed without any
disruption, loss of data or customer inconvenience during "rollover weekend",
which was the period from Friday, December 31, 1999 through the opening of
normal business activities on Monday, January 3, 2000. Extensive monitoring and
testing was performed with service bureaus and key outside vendors to satisfy
connectivity and performance requirements. There were no Y2K reportable
incidents that weekend or thereafter. All mission critical systems that included
hardware, software, program interfaces, operating systems as well as other
mechanical or computer-generated requirements, including Compass's main central
processing system and network performed normally, as expected. Bank customers
were able to make deposits to or withdrawals from deposit accounts, credit loan
payments, apply for new loans, etc., and engage in normal banking activities.
The Y2K Project Team will continue to monitor performance of mission critical
systems in 2000 for potential Y2K issues.
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 are being depreciated in accordance with Compass's policies.
Management expended approximately $1.1 million on its Year 2000 readiness
efforts through December 31, 1999 of which $907,000 was for capitalizable items.
Compass 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.
To date, Compass is not aware that any of its commercial loan customers have
encountered any material Y2K problems with their computer systems. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL. The chief market risk factor affecting the financial condition and
operating results of Seacoast Financial and Compass is interest rate risk. This
risk is managed by periodic evaluation of the interest rate 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
Compass's Board of Directors on a quarterly basis its activities and strategies,
the effect of those strategies on Compass's and Seacoast Financial'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 earnings.
The principal strategies Seacoast Financial and Compass 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 partially
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 majority of its investment portfolio as available for
sale so as to provide sufficient flexibility in liquidity management.
Seacoast Financial 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.
44
As of December 31, 1999, Seacoast Financial'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 (14.40%) (12.82%)
200 basis point decrease in rates (1.89%) (6.17%)
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 $524,000, assuming a 37% tax rate.
45
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
HISTORICAL FINANCIAL STATEMENTS: PAGE
Reports of Independent Public Accountants................................................................. 47
Consolidated Balance Sheets as of December 31, 1999 and 1998 and October 31, 1998......................... 49
Consolidated Statements of Income for the Year Ended December 31, 1999, the Two Months Ended December
31, 1998 and the Years Ended October 31, 1998 and 1997.................................................... 50
Consolidated Statements of Changes in Stockholders' Equity for the Year Ended December 31, 1999, the Two
Months Ended December 31, 1998 and the Years Ended October 31, 1998 and 1997..............................
51
Consolidated Statements of Cash Flows for the Year Ended December 31, 1999, the Two Months
Ended December 31, 1998 and the Years Ended October 31, 1998 and 1997..................................... 52
Notes to Consolidated Financial Statements................................................................ 54-83
All schedules are omitted because they are not required or applicable, or the
required information is shown in the financial statements or notes thereto.
46
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Audit Committee of
Seacoast Financial Services Corporation:
We have audited the accompanying consolidated balance sheets of Seacoast
Financial Services Corporation and subsidiaries (the Bank) as of December 31,
1999 and 1998 and October 31, 1998, and the related consolidated statements
of income, changes in stockholders' equity and cash flows for the year ended
December 31, 1999, the two months ended December 31, 1998, and the years
ended October 31, 1998 and 1997. These consolidated financial statements are
the responsibility of the Bank's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits. We
did not audit the separate consolidated balance sheet of Sandwich Bancorp,
Inc. and subsidiaries as of October 31, 1998 and the related consolidated
statements of income, changes in stockholders' equity and cash flows for each
of the years ended October 31, 1998 and December 31, 1997, which consolidated
statements reflect total assets of $546.9 million at October 31, 1998 and net
income of $4.6 million for the twelve months ended October 31, 1998 and $4.9
million for the year ended December 31, 1997. Those consolidated financial
statements were audited by other auditors whose report has been furnished to
us, and our opinion, insofar as it relates to the amounts included for
Sandwich Bancorp, Inc. for such periods, is based solely on the report of
such other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Seacoast Financial Services
Corporation and subsidiaries as of December 31, 1999 and 1998 and October 31,
1998, and the results of their operations and their cash flows for the year
ended December 31, 1999, the two months ended December 31, 1998 and the years
ended October 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
January 27, 2000
47
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Sandwich Bancorp, Inc.:
We have audited the consolidated balance sheet of Sandwich Bancorp, Inc. and
subsidiaries as of October 31, 1998 and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the years ended
October 31, 1998 and December 31, 1997. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sandwich Bancorp,
Inc. and subsidiaries as of October 31, 1998, and the results of their
operations and their cash flows for the years ended October 31, 1998 and
December 31, 1997, in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Boston Massachusetts
December 3, 1998
48
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
December 31,
------------------------- October 31,
1999 1998 1998
----------- ----------- ------------
ASSETS:
Cash and due from banks .................................................. $ 60,245 $ 54,006 $ 65,340
Federal funds sold ....................................................... 106 47,413 41,033
----------- ----------- ------------
Total cash and cash equivalents ........................................ 60,351 101,419 106,373
Other short-term investments ............................................. 231 31,119 10,015
Investment securities (Note 3)--
Available-for-sale, at fair value ...................................... 245,583 294,500 290,932
Held to maturity, at amortized cost .................................... 12,408 12,693 13,694
Restricted equity securities ........................................... 14,936 9,062 9,062
Loans held-for-sale ...................................................... 756 -- 13,495
Loans, net (Note 4) ...................................................... 1,730,378 1,388,140 1,305,563
Accrued interest receivable .............................................. 9,426 8,523 8,463
Banking premises and equipment, net (Note 5) ............................. 26,585 19,887 21,145
Other real estate owned .................................................. 552 1,391 1,299
Net deferred tax asset (Note 9) .......................................... 12,527 10,715 9,526
Other assets ............................................................. 9,052 10,631 16,956
----------- ----------- ------------
Total assets ......................................................... $ 2,122,785 $ 1,888,080 $ 1,806,523
=========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits (Note 6) ........................................................ $ 1,515,622 $ 1,497,215 $ 1,531,663
Short-term borrowings (Note 7) ........................................... 40,787 12,835 15,801
Federal Home Loan Bank advances (Note 8) ................................. 271,900 83,951 85,111
Other borrowings ......................................................... 1,935 1,987 1,994
Mortgagors' escrow payments .............................................. 3,829 3,411 2,527
Accrued expenses and other liabilities (Note 12) ......................... 14,691 17,169 15,857
----------- ----------- ------------
Total liabilities .................................................... 1,848,764 1,616,568 1,652,953
----------- ----------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 10 and 14)
Stockholders' equity (Notes 11, 13, 17, 18 and 19):
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 ............................................. 152,702 152,936 --
Surplus ................................................................ -- -- 151,012
Treasury stock, at cost, 898,500 shares in 1999 ........................ (9,310) -- --
Retained earnings ...................................................... 149,256 127,263 --
Accumulated other comprehensive income (loss) .......................... (2,430) 2,337 2,558
Unearned compensation - ESOP and restricted stock ...................... (16,326) (11,153) --
Shares held in employee trust .......................................... (139) (139) --
----------- ----------- ------------
Total stockholders' equity ........................................... 274,021 271,512 153,570
----------- ----------- ------------
Total liabilities and stockholders' equity ........................... $ 2,122,785 $ 1,888,080 $ 1,806,523
=========== =========== ============
The accompanying notes are an integral part of these
consolidated financial statements.
49
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Years Ended
Year Ended Two Months Ended October 31,
December 31, December 31, --------------------
1999 1998 1998 1997
--------- --------- --------- --------
INTEREST AND DIVIDEND INCOME:
Interest on loans ......................................... $ 120,218 $ 17,790 $ 101,582 $ 93,704
Interest and dividends on investments securities........... 17,357 3,067 19,154 20,645
Interest on federal funds sold and short-term investments.. 377 775 2,198 1,600
--------- --------- --------- ---------
Total interest and dividend income..................... 137,952 21,632 122,934 115,949
--------- --------- --------- ---------
INTEREST EXPENSE:
Interest on deposits....................................... 53,253 9,498 55,567 51,323
Interest on borrowed funds................................. 10,257 1,025 7,125 6,702
--------- --------- --------- ---------
Total interest expense................................. 63,510 10,523 62,692 58,025
--------- --------- --------- ---------
Net interest income.................................... 74,442 11,109 60,242 57,924
PROVISION FOR LOAN LOSSES (Note 4) ........................... 2,000 416 1,736 2,615
--------- --------- --------- ---------
Net interest income after provision
for loan losses...................................... 72,442 10,693 58,506 55,309
--------- --------- --------- ---------
NONINTEREST INCOME:
Deposit and other banking fees............................. 5,187 871 5,370 5,124
Loan servicing fees, net .................................. 587 121 759 821
Card fee income, net....................................... 712 90 572 524
Other loan fees............................................ 428 115 560 556
Gain on sales of investment securities, net (Note 3)....... 164 22 67 92
Gain on sales of loans, net................................ 56 244 1,755 717
Gain on pension plan termination (Note 12)................. 1,472 -- -- --
Other income............................................... 1,388 176 959 702
--------- --------- --------- ---------
Total noninterest income............................... 9,994 1,639 10,042 8,536
--------- --------- --------- ---------
NONINTEREST EXPENSE:
Salaries and employee benefits (Note 12)................... 22,362 3,963 21,316 19,876
Occupancy and equipment expenses (Notes 5 and 10).......... 5,824 924 5,086 4,847
Data processing expenses................................... 4,486 651 3,255 2,825
Marketing expenses......................................... 2,455 460 2,073 1,772
Professional services expenses............................. 1,976 307 1,307 1,369
Other operating expenses................................... 7,211 1,127 6,770 6,347
Merger-related expenses (Note 2)........................... -- 6,813 -- --
Write-down of banking premises and equipment (Note 5)...... 202 1,967 -- --
--------- --------- --------- ---------
Total noninterest expense.............................. 44,516 16,212 39,807 37,036
--------- --------- --------- ---------
Income (loss) before provision (benefit) for income taxes 37,920 (3,880) 28,741 26,809
PROVISION (BENEFIT) FOR INCOME TAXES (Note 9)................. 13,394 (544) 10,651 10,165
--------- --------- --------- ---------
Net income (loss)...................................... $ 24,526 $ (3,336) $ 18,090 $ 16,644
========= ========= ========= =========
EARNINGS (LOSS) PER SHARE (Note 1):
Basic...................................................... $ 0.97 $ (0.15)
========= =========
Diluted.................................................... $ 0.97 $ (0.15)
========= =========
Weighted average common shares outstanding................. 26,710,211 22,388,272
Weighted average unallocated ESOP shares
and unvested restricted stock ........................ (1,374,301) (771,148)
----------- -----------
Weighted average common shares outstanding - basic......... 25,335,910 21,617,124
Dilutive effect of common stock equivalents................ 19,669 9,543
----------- -----------
Weighted average common and common stock
equivalent shares outstanding - diluted.................. 25,355,579 21,626,667
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
50
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1999, THE TWO MONTHS ENDED DECEMBER 31, 1998
AND THE YEARS ENDED OCTOBER 31, 1998 AND 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Additional
Common Paid-In Retained Treasury
Stock Capital Surplus Earnings Stock
---------- ---------- ----------- -------- -------
Balance, October 31, 1996..................................... $ -- $ -- $123,280 $ -- $ --
Net income.................................................... -- -- 16,644 -- --
Other comprehensive income-- Change in unrealized gain on
securities available for sale, net of taxes................ -- -- -- -- --
Comprehensive income.....................................
Transactions with stockholders of acquired entity............. -- -- (1,537) -- --
Change in intercorporate investment........................... -- -- -- -- --
------ -------- -------- ------- -------
Balance, October 31, 1997..................................... -- -- 138,387 -- --
Net income.................................................... -- -- 18,090 -- --
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes................ -- -- -- -- --
Comprehensive income.....................................
Transactions with stockholders of acquired entity............. -- -- 496 -- --
Change in intercorporate investment........................... -- -- (4,254) -- --
Effect of difference in year-ends............................. -- -- (1,707) -- --
------ -------- -------- ------- -------
Balance, October 31, 1998..................................... -- -- 151,012 -- --
Transactions with stockholders of acquired entity............. -- 81 -- -- --
Stock offering, net of expenses of $7,290..................... 140 132,570 -- -- --
Reclassification of equity accounts due to merger with
Sandwich Bancorp, Inc. and mutual-to-stock conversion...... 128 20,285 (151,012) 130,599 --
Net loss...................................................... -- -- -- (3,336) --
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes................ -- -- -- -- --
Comprehensive income (loss)..............................
Amortization of unearned compensation......................... -- -- -- -- --
------ -------- -------- ------- -------
Balance, December 31, 1998.................................... 268 152,936 -- 127,263 --
Grant of restricted stock awards.............................. -- 6,370 -- -- --
Repurchase of common stock.................................... -- -- -- -- (15,939)
Issuance of restricted stock awards........................... -- (6,629) -- -- 6,629
Net income.................................................... -- -- -- 24,526 --
Other comprehensive income -- Change in unrealized gain (loss)
on securities available for sale, net of taxes............. -- -- -- --
Comprehensive income.....................................
Cash dividends - $.10 per share............................... -- -- -- (2,533) --
Amortization of unearned compensation......................... -- 25 -- -- --
------ -------- -------- ------- -------
Balance, December 31, 1999.................................... $ 268 $152,702 $ -- $149,256 $(9,310)
====== ======== ======== ======= =======
Unearned
Accumulated Other Compensation Shares Held
Comprehensive ESOP/Restricted in Employee
Income (Loss) Stock Trust Total
---------------- --------------- ----------- ---------
Balance, October 31, 1996..................................... $ (143) $ -- $ -- $123,137
Net income.................................................... -- -- -- 16,644
Other comprehensive income-- Change in unrealized gain on
securities available for sale, net of taxes................ 1,925 -- -- 1,925
---------
Comprehensive income..................................... 18,569
Transactions with stockholders of acquired entity............. -- -- -- (1,537)
Change in intercorporate investment........................... (41) -- -- (41)
------- --------- ------ ---------
Balance, October 31, 1997..................................... 1,741 -- -- 140,128
Net income.................................................... -- -- -- 18,090
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes................ 1,027 -- -- 1,027
---------
Comprehensive income..................................... 19,117
Transactions with stockholders of acquired entity............. -- -- -- 496
Change in intercorporate investment........................... (236) -- -- (4,490)
Effect of difference in year-ends............................. 26 -- -- (1,681)
------- --------- ------ ---------
Balance, October 31, 1998..................................... 2,558 -- -- 153,570
Transactions with stockholders of acquired entity............. -- -- -- 81
Stock offering, net of expenses of $7,290..................... -- (11,200) (139) 121,371
Reclassification of equity accounts due to merger with
Sandwich Bancorp, Inc. and mutual-to-stock conversion...... -- -- -- --
Net loss...................................................... -- -- -- (3,336)
Other comprehensive income -- Change in unrealized gain on
securities available for sale, net of taxes................ (221) -- -- (221)
---------
Comprehensive income (loss).............................. (3,557)
Amortization of unearned compensation......................... -- 47 -- 47
------- --------- ------ ---------
Balance, December 31, 1998.................................... 2,337 (11,153) (139) 271,512
Grant of restricted stock awards.............................. -- (6,370) -- --
Repurchase of common stock.................................... -- -- -- (15,939)
Issuance of restricted stock awards........................... -- -- -- --
Net income.................................................... -- -- -- 24,526
Other comprehensive income -- Change in unrealized gain (loss)
on securities available for sale, net of taxes............. (4,767) -- -- (4,767)
---------
Comprehensive income..................................... 19,759
Cash dividends - $.10 per share............................... -- -- -- (2,533)
Amortization of unearned compensation......................... -- 1,197 -- 1,222
------- --------- ------ ---------
Balance, December 31, 1999.................................... $(2,430) $ (16,326) $ (139) $274,021
======= ========= ====== =========
The accompanying notes are an integral part of these
consolidated financial statements.
51
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Years Ended
Year Ended Two Months Ended October 31,
December 31, December 31, ---------------------
1999 1998 1998 1997
-------------- ------------------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................... $ 24,526 $ (3,336) $ 18,090 $ 16,644
Adjustments to reconcile net income (loss) to net cash
provided by operating activities --
Amortization, depreciation and writedowns of premises
and equipment...................................................... 3,810 2,627 3,344 3,517
Merger-related expenses.............................................. -- 6,813 -- --
Stock-based compensation............................................. 1,222 47 -- --
Provision for loan losses............................................ 2,000 416 1,736 2,615
Gain on sale of investment securities, net........................... (164) (22) (67) (92)
Provision for other real estate losses............................... (63) 18 82 233
Gain on pension plan termination..................................... (1,472) -- -- --
Gain on sale of other real estate owned.............................. -- -- (62) (96)
Provision for deferred (prepaid) taxes............................... 1,209 (1,836) (221) (56)
Originations of loans held-for-sale.................................. (7,655) -- (166,481) (48,211)
Proceeds from sales of loans originated for resale................... 6,955 12,909 158,964 52,506
Gain on sales of loans, net.......................................... (56) (244) (1,755) (717)
(Gain) loss on sale of premises and equipment........................ (96) -- 42 --
Net (increase) decrease in accrued interest receivable............... (903) (60) 73 (539)
Net (increase) decrease in other assets.............................. 1,246 3,431 (2,119) (2,397)
Net increase (decrease) in accrued expenses and other liabilities.... (231) 1,003 938 (564)
---------- ----------- ---------- ----------
Net cash provided by operating activities...................... 30,328 21,766 12,564 22,843
---------- ----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of securities classified as available-for-sale.............. (68,183) (23,864) (135,992) (146,158)
Purchase of securities classified as held-to-maturity................ (5,078) -- (7,480) (7,050)
Purchase of restricted equity securities............................. (5,874) -- (130) (1,591)
Proceeds from sales, calls, paydowns and maturities of
securities classified as available-for-sale........................ 109,101 18,973 165,074 146,078
Proceeds from paydowns, maturities and calls of securities
classified as held-to-maturity..................................... 5,360 1,000 6,300 5,069
Purchase of premises and equipment................................... (10,331) (974) (4,654) (1,487)
Purchase of loans.................................................... (13,343) (4,158) (11,911) (22,803)
Net increase in loans................................................ (330,761) (78,021) (120,122) (111,767)
Recoveries of loans previously charged off........................... 552 395 516 466
Proceeds from sales of other real estate owned....................... 216 216 1,874 3,510
Net decrease in other real estate owned and real estate investments.. -- -- 132 94
Net (increase) decrease in short-term investments.................... 30,888 (21,104) (8,953) 535
Proceeds from sales of premises and equipment........................ 529 18 1,055 1,055
---------- ----------- ---------- ----------
Net cash used in investing activities.......................... (286,924) (107,519) (114,291) (134,049)
---------- ----------- ---------- ----------
The accompanying notes are an integral part of these
consolidated financial statements.
52
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Countinued)
(IN THOUSANDS)
Years Ended
Year Ended Two Months Ended October 31,
December 31, December 31, ----------------------
1999 1998 1998 1997
--------- --------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in NOW, money market deposit and
demand deposit accounts ............................ $ 17,946 $ (64) $ 83,431 $ 1,096
Increase (decrease) in passbook and other
savings accounts ................................... 8,831 (26,756) 42,989 30,038
Increase (decrease) in term certificates ............. (8,370) (7,548) 45,012 58,971
Advances from Federal Home Loan Bank ................. 230,000 -- 46,377 101,061
Repayments of Federal Home Loan Bank advances ........ (42,051) (1,160) (62,373) (81,902)
Proceeds of stock offering, net of expenses .......... -- 123,008 (1,637) --
Repurchase of common stock ........................... (15,939) -- -- --
Cash dividends ....................................... (2,533) -- -- --
Transactions with stockholders of acquired entity .... -- (649) 496 (1,537)
Payment of merger-related costs ...................... (674) (3,949) (1,824) --
Increase (decrease) in short-term and other borrowings 27,900 (2,967) 6,388 5,124
Increase in mortgagors' escrow payments .............. 418 884 221 801
--------- --------- --------- ---------
Net cash provided by financing activities ...... 215,528 80,799 159,080 113,652
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................. (41,068) (4,954) 57,353 2,446
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR .................................... 101,419 106,373 48,728 46,282
NET CHANGE IN CASH AND CASH EQUIVALENTS
DUE TO DIFFERENCE IN YEAR-ENDS ....................... -- -- 292 --
CASH AND CASH EQUIVALENTS,
--------- --------- --------- ---------
END OF YEAR .......................................... $ 60,351 $ 101,419 $ 106,373 $ 48,728
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid on deposits and borrowed funds ....... $ 62,731 $ 10,419 $ 62,859 $ 57,933
Income taxes paid .................................. 13,892 -- 10,316 11,417
SUPPLEMENTAL DISCLOSURE OF NONCASH
TRANSACTIONS:
Transfers from loans to other real estate owned .... 755 326 2,124 4,578
Financed other real estate owned sales ............. 1,441 -- 1,112 1,460
Loans securitized into mortgage-backed investments . -- -- -- 3,595
Transfer from loans held-for-sale to loans ......... -- 10,469 -- --
Stock offering proceeds funded by customer
deposit accounts ............................... -- 24,567 -- --
The accompanying notes are an integral part of these
consolidated financial statements.
53
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On November 20, 1998, Seacoast Financial Services Corporation (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 (see Note 17). On December 4, 1998, the Company completed its
acquisition of Sandwich Bancorp, Inc. (Sandwich) in a stock-for-stock exchange
and the merger of Sandwich's wholly-owned subsidiary, Sandwich Co-operative Bank
(Sandwich Bank), into Compass Bank for Savings (Compass or the Bank) (see Note
2). The consolidated financial statements give retroactive effect to the
acquisition in a transaction accounted for as a pooling of interests, with all
periods presented as if the Company and Sandwich had always been combined. The
following presentation summarizes the impact of the Company's acquisition of
Sandwich on its previously reported equity at October 31, 1998, 1997 and 1996
(in thousands):
1998 1997 1996
----------------------------- -------------------------- ----------------------------
Accumulated Accumulated Accumulated
other comprehensive other comprehensive other comprehensive
Surplus income Surplus income Surplus income (loss)
---------- ------------------ -------- ---------------- ---------- ------------------
Balance, as previously reported..........$ 110,020 $ 2,552 $ 96,527 $ 1,614 $ 84,743 $ 174
Effect of Sandwich merger................ 45,315 186 41,929 85 38,606 27
Elimination of intercorporate
investment............................ (4,323) (309) (69) (73) (69) (32)
Reclassification of Sandwich investment..
securities to available-for-sale...... -- 129 -- 115 -- (312)
---------- -------- --------- -------- ---------- ------
Balance, as restated.....................$ 151,012 $ 2,558 $138,387 $ 1,741 $ 123,280 $(143)
========== ======== ========= ======== ========== ======
Sandwich's fiscal year end was December 31. For periods prior to 1998, the
accompanying financial statements combine Sandwich's financial data as of
December 31 with the Company's financial data as of October 31. For 1998,
Sandwich's information is as of October 31, 1998 and the twelve months then
ended. The results of operations for the two month period ended December 31,
1997, which amounted to a $1,027,000 increase in equity, are included both in
surplus at October 31, 1997 and net income for the year ended October 31, 1998.
This amount has been included as part of the reduction of surplus due to
difference in year-ends in the accompanying statement of changes in
stockholders' equity.
On January 28, 1999, the Board of Directors voted to change the Company's
year end from October to December 31. The accompanying consolidated financial
statements include a balance sheet as of December 31, 1998 and the results of
operations, changes in stockholders' equity and cash flows for the two month
transition period then ended.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries, Compass and Lighthouse Securities
Corporation (collectively referred to as the Company). The Bank has seven wholly
owned subsidiaries-Compass Credit Corp. which engages in the origination of
automobile loans; The Sextant Corporation, which owns real estate which is
currently being marketed for sale; The 1855 Corporation which engages in leasing
of property primarily for Bank use; CB Securities Corporation, Sandwich
Securities Corporation and Sextant Securities Corporation, each of which engages
in the investment of securities; and Buffinton-Brook Realty Corporation, the
owner of Compass Preferred Capital Corporation which is involved in real estate
activities enabling it to be taxed as a real estate investment trust (REIT). The
1855 Corporation has two wholly-owned subsidiaries-Purchase Corporation and
North Front Street, Inc., which engage in the management of real estate acquired
from the Bank through foreclosure. All significant intercompany balances and
transactions have been eliminated in consolidation.
54
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Countinued)
All deposits of the Bank are insured by the Federal Deposit Insurance
Corporation (FDIC) or the Depositors Insurance Fund, an excess deposit insurer
for Massachusetts-chartered savings banks.
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of the date of the balance sheets and
income and expenses during the reporting periods. Actual results could differ
from those estimates. Material estimates that are particularly susceptible to
change relate to the determination of the allowance for loan losses.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash, amounts due from banks and federal funds sold.
INVESTMENT SECURITIES
Debt securities that the Bank has the positive intent and ability to hold
to maturity are classified as held-to-maturity and reported at cost, adjusted
for amortization of premiums and accretion of discounts, both computed by a
method that approximates the effective yield method; debt and equity securities
that are bought and held principally for the purpose of selling them in the near
term are classified as trading and reported at fair value, with unrealized gains
and losses included in earnings. Debt and equity securities not classified as
either held-to-maturity or trading are classified as available-for-sale and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of stockholders' equity, net of taxes. The
Bank classifies its securities based on the Bank's intention at the time of
purchase.
Restricted equity securities are reported at cost and consist principally
of the Bank's investment in stock of the Federal Home Loan Bank of Boston.
Unrealized losses deemed to be other than temporary declines in value are
charged to operations. When securities are sold, the adjusted cost of the
specific securities sold is used to compute gains or losses on the sale.
LOANS, DEFERRED COSTS AND FEES AND ALLOWANCE FOR LOAN LOSSES
Loans are stated at the amount of unpaid principal, reduced by amounts due
to borrowers on unadvanced loans, unearned discount and the allowance for loan
losses plus net deferred loan costs and fees.
Unearned discount is recognized on the level-yield method for discounted
indirect auto loans. All other interest on loans is recognized on a simple
interest basis. Beginning January 1, 1999 all indirect auto loans have been
originated on a simple interest basis. Accordingly, the balance of unearned
discount will decline significantly as the pre-1999 indirect auto loans are
repaid.
Deferred loan origination fees and certain deferred loan origination costs
are amortized over the contractual life of the related loan using the
level-yield method. At December 31, 1999, the Bank had net deferred loan costs
of $9,169,000, including $8,199,000 paid to auto dealers who assist the Bank in
the origination of indirect auto loans.
55
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Countinued)
It is the policy of the Bank to discontinue the accrual of interest on
loans, except consumer loans, delinquent in excess of 90 days or sooner if, in
the judgment of management, the ultimate collectibility of principal or interest
becomes doubtful and to reverse and charge against current earnings any interest
previously accrued. Interest income is subsequently recognized only to the
extent cash payments are received. When there is doubt regarding the ultimate
collectibility of principal, all cash receipts thereafter are applied to reduce
the recorded investment in the loan.
Loans are identified as impaired when it is probable that the Bank will not
be able to collect principal, interest and fees according to the contractual
terms of the loan agreement. Management considers the payment history, net worth
and earnings potential of a borrower, and the value and cash flow of the
collateral as factors to determine whether a loan will be paid in accordance
with its contractual terms. The amount judged to be impaired is the difference
between the present value of the expected future cash flows discounted at the
loan's original contractual effective interest rate and the net carrying amount
of the loan. If foreclosure on a collateralized loan is probable, impairment is
measured based on the fair value of the collateral compared to the net carrying
amount. If appropriate, a valuation reserve is established to recognize the
difference between the recorded investment and the present value. Impaired loans
are charged off when management believes that the collectibility of the loan is
remote. The Bank considers nonaccrual loans, except for smaller balance
homogeneous residential mortgage loans, and troubled debt restructurings to be
impaired.
The allowance for loan losses is maintained at a level considered adequate
to provide for potential loan losses. The allowance is increased by provisions
charged to operations, and realized losses, net of recoveries, are charged
directly to the allowance. The provision and the level of the allowance are
based on management's periodic review of the loan portfolio in light of
historical experience and prevailing economic conditions. The allowance is an
estimate, and ultimate losses may vary from current estimates. As adjustments
become necessary, they are reported in the results of operations of the period
in which they become known.
LOAN SALES AND SERVICING RIGHTS
Loans held for sale are valued at the lower of the recorded loan balance or
market value. The Bank periodically enters into forward commitments to sell
loans for the purpose of reducing interest rate risk associated with the
origination of loans for sale.
The Bank recognizes, as a separate asset, the right to service mortgage
loans for others. The amount capitalized is based on an allocation of the cost
of the loan based on the total relative fair value of the loan and the servicing
right. The amortization of servicing rights is recognized in proportion to
estimated net servicing revenue. The value of servicing rights is periodically
assessed for impairment based on the fair value of those rights. In measuring
for impairment, servicing assets are stratified by interest rate, which is the
predominant risk characteristic affecting the prepayment of loans. Included in
other assets in the accompanying consolidated balance sheets are mortgage
servicing rights of $1,278,000, $1,646,000 and $1,588,000 at December 31, 1999
and 1998 and October 31, 1998, respectively.
BANKING PREMISES AND EQUIPMENT
Land is stated at cost. Buildings, leasehold improvements and equipment are
stated at cost, less accumulated depreciation and amortization, computed on the
straight-line method over the estimated useful lives of the assets or the terms
of the leases, if shorter. Maintenance and repairs are expensed when incurred;
major expenditures for betterments are capitalized and depreciated.
Interest incurred during construction of the new corporate headquarters is
being capitalized based on the Bank's overall cost of funds. During the year
ended December 31, 1999, $107,000 of interest was capitalized.
56
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Countinued)
OTHER REAL ESTATE OWNED
Other real estate owned (OREO) is composed of properties acquired through
foreclosure or receipt of a deed in lieu of foreclosure. Foreclosed assets are
presumed to be held-for-sale and are recorded at the lower of the carrying value
of the related loan or the fair value of property, less estimated costs to sell.
The excess, if any, of the loan balance over the fair value of the property at
the time of transfer to OREO is charged to the allowance for loan losses.
Subsequent write-downs of the carrying value of the foreclosed assets are
charged to expense. Costs relating to the development and improvement of
foreclosed assets are capitalized while other costs are charged to expense.
Included in other operating expenses for the year ended December 31, 1999, the
two months ended December 31, 1998 and the years ended October 31, 1998 and 1997
are OREO-related expenses, including gains and losses on disposition, of
$54,000, $62,000, $265,000 and $520,000, respectively.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for
income taxes. Under this method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. Deferred tax assets are recognized
subject to management's judgment that realization is more likely than not.
CORE DEPOSIT INTANGIBLE ASSET
The core deposit intangible asset is being amortized over periods ranging
from six to ten years using accelerated and straight-line methods. Amortization
expense was $619,000, $110,000, $716,000 and $787,000 for the year ended
December 31, 1999, the two months ended December 31, 1998 and the years ended
October 31, 1998 and 1997, respectively. The core deposit intangible asset
amounted to $1,777,000, $2,396,000 and $2,506,000 at December 31, 1999 and 1998
and October 31, 1998, respectively.
STOCK-BASED COMPENSATION
Stock options issued to officers and directors are accounted for in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25) under which there is generally no charge
to earnings for stock option grants.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Unallocated ESOP
shares and unvested restricted stock awards are not considered outstanding in
computing basic earnings per share. Diluted earnings per share reflects the
potential dilution that could occur if contracts to issue common stock were
exercised and has been computed after giving consideration to the dilutive
effect of stock options, stock awards and the shares held in an employee trust.
Earnings per share is not presented for periods prior to the Company's
conversion from a mutual to a stock form of ownership in November 1998.
57
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Countinued)
COMPREHENSIVE INCOME
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. As of December 31, 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 for comparative purposes.
Included in net income are gains on the sale of investment securities, net of
taxes, of $39,000 and $53,000 for the years ended October 31, 1998 and 1997,
respectively, $13,000 for the two months ended December 31, 1998 and $95,000 for
the year ended December 31, 1999 that had previously been classified with other
comprehensive income.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998 financial
statements to conform to the 1999 presentation. Such reclassifications have no
effect on previously reported net income (loss).
(2) ACQUISITION OF SANDWICH
On February 2, 1998 the Company and the Bank entered into a definitive
agreement under which the Bank agreed to acquire Sandwich, a one-bank holding
company with $518.7 million in total assets at December 31, 1997. On February
24, 1998, Sandwich announced that its Board of Directors determined that it was
appropriate to request additional information and a clarification of renewed
expressions of interest that it had received from other parties subsequent to
February 2, 1998.
Following a review of the other expressions of interests for Sandwich, the
Company and Sandwich jointly announced on March 23, 1998 that they had signed an
amendment to their previously announced agreement of February 2, 1998 (the
Amended Agreement) by which the Company would acquire Sandwich. Under the terms
of the Amended Agreement, the Company would convert to a 100% publicly owned
stock holding company and, thereafter, issue stock having a value of $64.00 per
share to Sandwich shareholders in a tax-free exchange of common stock. The value
to be received by Sandwich shareholders was subject to adjustment pursuant to a
formula based on the value of the Company's stock near the transaction date.
On December 4, 1998, the Company completed its acquisition of Sandwich.
Pursuant to the Amended 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. As set forth in the preceding paragraph, the exchange
ratio was adjusted 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 12,758,136 shares were issued in connection with the acquisition. The
transaction was accounted for as a pooling of interests.
58
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(2) ACQUISITION OF SANDWICH (Countinued)
The following table sets forth the results of operations for the separate
companies and the combined amounts for periods prior to the acquisition of
Sandwich.
YEARS ENDED OCTOBER 31,
---------------------------------
1998 1997
---------- ---------
(IN THOUSANDS)
Revenues (interest and non-interest income):
Seacoast.................................................... $ 94,210 $ 85,975
Sandwich.................................................... 38,898 38,638
Reclassification............................................ (132) (128)
---------- ----------
$ 132,976 $ 124,485
========== ==========
Net Income:
Seacoast.................................................... 13,493 11,784
Sandwich.................................................... 4,597 4,860
---------- ----------
$ 18,090 $ 16,644
========== ==========
In connection with the Sandwich transaction, certain costs were incurred
which have been classified in the statement of income as merger-related costs.
Merger-related 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 integration of the operations of Compass and Sandwich and
which do not generally benefit the on-going activities of the banks.
Merger-related costs consisted 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 by the Company in the two-month period ended December
31, 1998.
59
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(3) INVESTMENT SECURITIES
The amortized cost and fair value of securities available-for-sale at
December 31, 1999 and 1998 and October 31, 1998 are as follows:
December 31, 1999
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
U.S. Government and agency obligations..........................$ 117,937 $ 8 $ 4,301 $ 113,644
Corporate bonds................................................. 39,604 15 564 39,055
Mortgage-backed investments..................................... 68,642 158 950 67,850
Collateralized mortgage obligations............................. 15,359 80 368 15,071
---------- -------- ------- ----------
Total debt securities...................................... 241,542 261 6,183 235,620
---------- -------- ------- ----------
Marketable equity securities and mutual funds................... 7,764 2,561 362 9,963
---------- -------- ------- ----------
Total securities available-for-sale........................$ 249,306 $ 2,822 $ 6,545 $ 245,583
========== ======== ======= ==========
December 31, 1998
----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
U.S. Government and agency obligations..........................$ 123,390 $ 1,171 $ 111 $ 124,450
Corporate bonds................................................. 46,888 488 14 47,362
Mortgage-backed investments..................................... 84,641 729 224 85,146
Collateralized mortgage obligations............................. 26,698 127 77 26,748
---------- -------- ------ ----------
Total debt securities...................................... 281,617 2,515 426 283,706
---------- -------- ------ ----------
Marketable equity securities and mutual funds................... 8,979 1,880 65 10,794
---------- -------- ------ ----------
Total securities available-for-sale........................$ 290,596 $ 4,395 $ 491 $ 294,500
========== ======== ====== ==========
October 31, 1998
-----------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
U.S. Government and agency obligations..........................$ 109,128 $ 1,670 $ 2 $ 110,796
Corporate bonds................................................. 47,771 683 29 48,425
Mortgage-backed investments..................................... 93,117 596 254 93,459
Collateralized mortgage obligations............................. 29,819 264 31 30,052
---------- -------- ------ ----------
Total debt securities...................................... 279,835 3,213 316 282,732
---------- -------- ------ ----------
Marketable equity securities and mutual funds................... 6,990 1,248 38 8,200
---------- -------- ------ ----------
Total securities available-for-sale........................$ 286,825 $ 4,461 $ 354 $ 290,932
========== ======== ====== ==========
60
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(3) INVESTMENT SECURITIES (Countinued)
A schedule of the maturity distribution of debt securities available-for-sale at
December 31, 1999 is as follows:
Carrying Percent of Amortized
Amount Total Cost
---------- ----------- ----------
(Dollars in thousands)
One year or less................................................ $ 50,673 21.5% $ 50,757
Over 1 year to 5 years.......................................... 39,888 16.9 40,617
Over 5 years to 10 years........................................ 75,998 32.3 80,188
Over 10 years................................................... 69,061 29.3 69,980
--------- ------ ----------
$ 235,620 100.0% $ 241,542
========= ====== ==========
Mortgage-backed investments and collateralized mortgage obligations are
shown at their contractual maturity dates, but actual maturities may differ as
borrowers have the right to prepay obligations without incurring prepayment
penalties.
The amortized cost and fair value of securities held-to-maturity,
consisting of U.S. Government and agency obligations, at December 31, 1999 and
1998 and October 31, 1998 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- -------- -------- ---------
(In thousands)
December 31, 1999................................... $ 12,408 $ -- $ 96 $ 12,312
========= ====== ====== =========
December 31, 1998................................... $ 12,693 $ 204 $ -- $ 12,897
========= ====== ====== =========
October 31, 1998.................................... $ 13,694 $ 286 $ -- $ 13,980
========= ====== ====== =========
A schedule of the maturity distribution of debt securities held-to-maturity
at December 31, 1999 is as follows:
Carrying Percent of
Amount Total Fair Value
--------- --------- ----------
(Dollars in thousands)
One year or less................................................ $ 1,000 8.1% $ 1,000
Over 1 year to 5 years.......................................... 11,408 91.9 11,312
--------- ------- ---------
$ 12,408 100.0% $ 12,312
========= ======= =========
61
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(3) INVESTMENT SECURITIES (Countinued)
Proceeds from the sales of investment securities and related gains and
losses for the year ended December 31, 1999, the two months ended December 31,
1998 and the years ended October 31, 1998 and 1997 (all classified as
available-for-sale) were as follows:
Years Ended October 31,
Year Ended Two Months Ended -----------------------
December 31, 1999 December 31, 1998 1998 1997
------------------------ ---------------------- -------- ---------
(In thousands)
Proceeds from sales..................... $ 24,191 $ 6,001 $ 6,488 $ 24,927
Gross gains............................. 165 23 89 124
Gross losses............................ 1 1 22 32
At December 31, 1999, investment securities carried at $35,141,000 were
pledged to secure public deposits under the Treasury, Tax and Loan program, as
required by law, deposits held by various municipalities and retail repurchase
agreements. Pledged investment securities are maintained under the Bank's
control.
(4) LOANS
The Bank's loan portfolio consisted of the following:
December 31,
------------ October 31,
1999 1998 1998
----------- ----------- ------------
(In thousands)
Real estate loans:
Residential (one-to-four family)................... $ 896,479 $ 697,031 $ 629,779
Commercial......................................... 223,500 201,636 209,366
Home equity lines of credit........................ 26,076 25,984 27,471
Construction....................................... 71,735 66,373 63,189
----------- ----------- -----------
Total real estate loans....................... 1,217,790 991,024 929,805
----------- ----------- -----------
Commercial loans........................................ 66,360 58,829 50,344
----------- ----------- -----------
Consumer loans:
Indirect auto loans................................ 439,753 358,101 343,910
Less: Unearned discount............................ 17,370 37,394 37,201
----------- ----------- -----------
Indirect auto loans, net...................... 422,383 320,707 306,709
Other.............................................. 40,673 33,494 33,822
----------- ----------- -----------
Total consumer loans, net..................... 463,056 354,201 340,531
----------- ----------- -----------
Total loans................................... 1,747,206 1,404,054 1,320,680
Less--Allowance for loan losses.......................... 16,828 15,914 15,117
----------- ----------- -----------
Total loans, net.............................. $ 1,730,378 $ 1,388,140 $ 1,305,563
=========== =========== ===========
At December 31, 1999 and 1998 and October 31, 1998, troubled debt
restructurings, all of which are included in nonaccrual loans, totaled
$1,573,000 , $1,427,000 and $1,681,000 respectively. There are no commitments to
extend additional credit on these loans. Non-accrual loans, amounted to
$5,734,000, $5,841,000 and $6,514,000 at December 31, 1999 and 1998 and October
31, 1998, respectively.
62
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(4) LOANS (Countinued)
The following table presents information about impaired loans:
December 31,
---------------- October 31,
1999 1998 1998
------ ------ ----------
(In thousands)
At year-end--
Impaired loans at year end ................. $2,220 $1,946 $1,966
Impaired loans with valuation allowance .... 960 716 728
Total valuation allowances (included in
allowance for loan losses) ............ 170 79 79
During the period--
Average balance of impaired loans .......... 2,346 1,954 6,271
Interest income recognized on impaired loans 163 39 484
For the year ended October 31, 1997, the average balance of impaired loans
was $10,339,000 and the interest income recognized on impaired loans was
$601,000.
In the ordinary course of business, the Bank makes loans to its executive
officers, directors and related parties at substantially the same terms as loans
made to unrelated borrowers. The Bank rarely extends credit to its officers. An
analysis of related party loans for the year ended December 31, 1999, the two
months ended December 31, 1998 and the year ended October 31, 1998 is as
follows:
Year Ended Two Months Ended Year Ended
December 31, 1999 December 31, 1998 October 31, 1998
-------------------- -------------------- -----------------
(In thousands)
Balance, beginning of year.......................... $1,203 $ 2,208 $ 5,816
New loans...................................... 484 37 40
Payments....................................... (973) (41) (134)
Other (due primarily to director resignations). (100) (1,001) (3,514)
------- -------- --------
Balance, end of year................................ $ 614 $ 1,203 $ 2,208
======= ======== ========
Loans serviced for others on a non-recourse basis at December 31, 1999 and
1998 and October 31, 1998 amounted to $339,897,000, $394,463,000 and
$405,940,000, respectively.
An analysis of the allowance for loan losses follows:
Years Ended
October 31,
Year Ended Two Months Ended ---------------------
December 31, 1999 December 31, 1998 1998 1997
------------------- -------------------- ---------- --------
(In thousands)
Balance, beginning of year...................... $ 15,914 $ 15,117 $ 14,742 $ 14,075
Provision for loan losses....................... 2,000 416 1,736 2,615
Charge-offs..................................... (1,638) (14) (1,600) (2,414)
Recoveries...................................... 552 395 516 466
Effect of difference in year-ends............... -- -- (277) --
--------- --------- ---------- ---------
Balance, end of year............................ $ 16,828 $ 15,914 $ 15,117 $ 14,742
========= ========= ========== =========
63
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(5) BANKING PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of
banking premises and equipment and their estimated useful lives is as follows:
December 31,
---------------------- October 31, Estimated
1999 1998 1998 Useful Lives
---------- -------- ------------- --------------
(In thousands)
Land and improvements................................. $ 3,691 $ 3,628 $ 3,714
Buildings and improvements............................ 11,670 12,199 13,714 30 to 50 years
Property under capital lease.......................... 1,738 1,738 1,738 20 years
Leasehold improvements................................ 2,394 2,394 2,384 8 to 10 years
Furniture and equipment............................... 12,671 10,910 11,083 3 to 20 years
Construction-in-progress.............................. 8,167 1,264 403
---------- --------- ---------
40,331 32,133 33,036
Less-Accumulated depreciation and
amortization..................................... 13,746 12,246 11,891
---------- --------- ---------
$ 26,585 $ 19,887 $ 21,145
========== ========= =========
Total depreciation and amortization of banking premises and equipment for
the year ended December 31, 1999, the two months ended December 31, 1998 and the
years ended October 31, 1998 and 1997 amounted to $2,464,000, $391,000,
$2,142,000 and $2,084,000, respectively, and is included in occupancy and
equipment expenses in the accompanying consolidated statements of income.
On December 1, 1998, the Bank acquired several parcels of land in downtown
New Bedford, Massachusetts for $550,000 to be used for the development of the
Company's and the Bank's corporate headquarters and main banking office. 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 new
corporate headquarters. Based on estimates by its architectural consultants, the
Bank expects to expend approximately $20 million in the construction of the
building and the purchase of land, furniture, fixtures and equipment. At
completion, 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 in return for the Bank's investment, through
this project, in downtown New Bedford. The tax incentives extend over a twenty
year period and could 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 construction of the Bank's new corporate headquarters will result in
the disposal of several buildings currently in use. One location is currently
being marketed for sale. Two other buildings will continue to be utilized by the
Bank until it relocates to its new corporate headquarters (title to one of which
will be transferred to the City of New Bedford at that time as part of the
transaction). 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 recognized a write-down of $1,967,000 in December 1998.
64
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(6) DEPOSITS
A summary of deposit balances is as follows:
December 31,
------------------------- October 31,
1999 1998 1998
----------- ----------- ------------
(In thousands)
Demand deposit accounts ................... $ 101,218 $ 116,104 $ 116,106
NOW and money market deposit accounts ..... 463,152 430,320 430,462
Passbook and other savings accounts ....... 214,317 205,486 232,217
---------- ---------- ----------
Total noncertificate accounts ..... 778,687 751,910 778,785
---------- ---------- ----------
Term certificates-
Term certificates of $100,000 and over 157,113 154,589 159,460
Term certificates less than $100,000 . 579,822 590,716 593,418
---------- ---------- ----------
Total term certificate accounts ... 736,935 745,305 752,878
---------- ---------- ----------
$1,515,622 $1,497,215 $1,531,663
========== ========== ==========
In connection with the Company's stock offering completed in November 1998,
certain funds used to purchase shares were held by the Bank in deposit accounts
at October 31, 1998. Of the $121.4 million of net proceeds of the stock
offering, $24.6 million was funded from the deposit accounts of customers and
$31.9 was funded from a non-customer escrow savings account, of which $18.0
million was held on October 31, 1998.
The maturity distribution of term certificates with weighted average
interest rates is as follows as of December 31, 1999:
Weighted
Average
Amount Rate
-------------- -----------
(In thousands)
Within 1 year.................................. $ 584,169 5.12%
Over 1 to 2 years.............................. 113,060 5.47
Over 2 to 3 years.............................. 28,458 5.55
Over 3 to 5 years.............................. 11,248 5.32
----------
$ 736,935 5.19
==========
65
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(7) SHORT-TERM BORROWINGS
Short-term borrowings consisted of the following:
December 31,
------------------ October 31,
1999 1998 1998
------- -------- --------
(In thousands)
Federal Home Loan Bank line of credit ........ $17,661 $ -- $ --
Securities sold under agreements to repurchase 21,126 12,584 14,830
Treasury tax and loan note account ........... 2,000 251 971
------- ------- -------
$40,787 $12,835 $15,801
======= ======= =======
The weighted average interest rates on short-term borrowings during the
year ended December 31, 1999, the two months ended December 31, 1998 and the
years ended October 31, 1998 and 1997 were 4.79%, 4.69%, 4.78% and 4.77%,
respectively.
The Bank's line of credit with the Federal Home Loan Bank (FHLB) amounted
to $38,000,000 at December 31, 1999. The interest on borrowings under this line
of credit adjust daily based on a formula.
(8) FEDERAL HOME LOAN BANK ADVANCES
FHLB advances are collateralized by a blanket-type pledge agreement on the
Bank's FHLB stock, certain qualified investment securities, deposits at the FHLB
and first mortgages on residential property. As a member of the FHLB, the Bank
is required to invest in stock of the FHLB at an amount equal to the greater of
1% of its outstanding first mortgage residential loans, .3% of total assets or
5% of its outstanding advances from the FHLB. When such stock is redeemed, the
Bank will receive from the FHLB an amount equal to the par value of the stock.
The maturity distribution of FHLB advances (based on final maturity dates)
with weighted average interest rates is as follows:
December 31,
-------------------------------------------------- October 31,
1999 1998 1998
------------------------- ----------------------- ------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
---------- ---------- --------- ----------- ----------- ------------
(Dollars in thousands)
Within 1 year...................... $ 129,000 5.84% $ 3,250 6.01% $ 3,296 6.15%
Over 1 to 5 years.................. 73,756 5.76 41,298 5.91 45,731 6.03
Over 5 to 10 years................. 55,405 5.54 20,061 5.72 16,612 5.42
Over 10 years...................... 13,739 6.53 19,342 7.15 19,472 7.12
--------- --------- ----------
$ 271,900 5.81% $ 83,951 6.15% $ 85,111 6.16%
========= ========= ==========
Outstanding advances of $82,000,000 at December 31, 1999 are callable, at
the option of FHLB, of which $67,000,000 are initially callable in 2000 and
$15,000,000 become callable in 2002. The Bank is generally subject to a
substantial penalty upon prepayment of FHLB advances.
66
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(9) INCOME TAXES
The components of the provision (benefit) for income taxes and the
reconciliation between the statutory federal income tax rate and the effective
income tax rate for the year ended December 31, 1999, the two months ended
December 31, 1998 and the years ended October 31, 1998 and 1997 are as follows:
Years Ended
October 31,
Year Ended Two Months Ended -----------------------
December 31, 1999 December 31, 1998 1998 1997
-------------------- ---------------------- -------- ---------
(Dollars in thousands)
Current--
Federal................................... $ 11,735 $ 1,152 $ 9,267 $ 8,145
State..................................... 450 140 1,605 2,076
--------- --------- -------- ---------
Total current........................ 12,185 1,292 10,872 10,221
--------- --------- -------- ---------
Deferred (prepaid)--
Federal................................... 924 (1,455) (221) (195)
State..................................... 285 (381) -- 139
--------- --------- -------- ---------
Total deferred (prepaid)............. 1,209 (1,836) (221) (56)
--------- --------- -------- ---------
$ 13,394 $ (544) $10,651 $ 10,165
========= ========= ======== =========
Statutory tax rate........................... 35.0% (35.0)% 35.0% 35.0%
State taxes, net of federal benefit.......... 1.3 (4.0) 3.6 5.4
Tax credits.................................. (0.5) -- -- --
Non-deductible merger costs.................. -- 25.7 -- --
Change in valuation allowance................ -- -- (1.2) (2.1)
Other, net................................... (0.5) (0.7) (0.3) (0.4)
------ ------ ----- ------
Effective tax rate................... 35.3% (14.0)% 37.1% 37.9%
====== ====== ===== ======
67
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(9) INCOME TAXES (Countinued)
The Company's net deferred tax asset consisted of the following components:
December 31, October 31,
----------------------------
1999 1998 1998
------------ --------- ------------
(In thousands)
Gross deferred tax assets:
Allowance for loan losses.................................... $ 6,600 $ 6,217 $ 5,734
Deferred compensation and benefits........................... 3,236 3,802 3,662
Core deposit intangible...................................... 928 849 825
Acquired NOL carryforward.................................... 488 673 760
Merger costs................................................. -- 69 --
Reserves for asset impairment................................ 679 717 --
Other real estate owned...................................... 78 164 179
Deferred interest............................................ 485 473 579
Deferred gain on sale/leaseback.............................. 224 238 235
Restricted stock............................................. 271 -- --
Unrealized loss on available-for-sale securities............. 1,318 -- --
Other........................................................ 169 8 148
--------- --------- --------
14,476 13,210 12,122
--------- --------- --------
Gross deferred tax liabilities
Unrealized gain on available-for-sale securities............. -- (1,668) (1,416)
REIT dividend................................................ (1,079) (55) --
Gain on sale of loans........................................ (535) (681) (653)
Depreciation................................................. -- -- (240)
Other........................................................ (335) (91) (287)
--------- --------- --------
(1,949) (2,495) (2,596)
--------- --------- --------
Net deferred tax asset................................... $ 12,527 $ 10,715 $ 9,526
========= ========= ========
In August 1996, Congress passed the Small Business Job Protection Act of
1996. One effect of this legislation was to suspend the Bank's bad debt reserve
for income tax purposes as of its base year (October 31, 1988). Any bad debt
reserve in excess of the base year amount is subject to recapture over a
six-year period. The suspended (i.e., base year) amount is subject to recapture
only upon the occurrence of certain events, such as excess distributions to
stockholders or if the Bank ceases to qualify as a bank for income tax purposes.
Since the Bank does not intend to use the suspended bad debt reserve for
purposes other than to absorb the losses for which it was established, deferred
taxes in the amount of $6,100,000 have not been recorded with respect to such
reserve.
68
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(10) COMMITMENTS AND CONTINGENCIES
Pursuant to the terms of noncancellable agreements pertaining to banking
premises and equipment, future minimum lease payment commitments for both
operating and capital leases are as follows:
Years Ending Operating Capital
December 31, Leases Lease
- ------------------- ---------------- -----------------------------
(In thousands)
2000............... $ 718 $ 182
2001............... 518 182
2002............... 430 182
2003............... 361 182
2004............... 284 182
Thereafter......... 1,400 2,406
--------
3,316
Less: interest
included above (1,653)
--------
$ 1,663
========
Certain leases contain renewal options for periods ranging from 8 to 85
years, the effect of which is not included above. Rent expense for the year
ended December 31, 1999, the two months ended December 31, 1998 and the years
ended October 31, 1998 and 1997 amounted to $882,000, $149,000, $662,000 and
$450,000 respectively, and is included in occupancy and equipment expenses in
the accompanying consolidated statements of income.
The Bank has actual and expected commitments in connection with the
construction of its corporate headquarters building, currently in progress,
totaling $13.5 million.
Aggregate cash reserves (in the form of deposits with the Federal Reserve
Bank and vault cash) of $16,362,000 were maintained to satisfy regulatory
requirements at December 31, 1999.
In the ordinary course of business, the Bank is a defendant in litigation
matters. Although there can be no assurance, based on its review of current
litigation and discussion with legal counsel, management believes that the
ultimate resolution of these legal proceedings would not be likely to have a
material adverse impact on its financial position, results of operations or
liquidity.
(11) REGULATORY CAPITAL REQUIREMENTS
The Company and Bank are subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory, and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Company's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities and certain off-balance-sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgements by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the Bank to maintain minimum amounts and ratios (set
forth in the following table) of total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined).
69
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(11) REGULATORY CAPITAL REQUIREMENTS (Countinued)
Management believes, as of December 31, 1999, that the Company and the Bank met
all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the Federal
Reserve Bank of Boston classified the Company's capital as satisfactory, and the
most recent notification from the FDIC categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be categorized
as well capitalized, an insured depository institution must maintain minimum
total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the accompanying table and not be subject to a directive, order, or written
agreement to meet and maintain specific capital levels. There are no conditions
or events since such notifications that management believes would have changed
these classifications. The Company's and the Bank's actual capital amounts and
ratios are as follows:
To Be Well
Capitalized
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions
------------------ ---------------------- -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- -------- ------------ -------- -------- --------
(Dollars in thousands)
As of December 31, 1999:
Company (consolidated)-
Total capital (to risk weighted assets).......................$291,705 20.17% > $115,706 > 8.0% N/A N/A
= =
Tier 1 capital (to risk weighted assets)...................... 274,523 18.98 > 57,853 > 4.0 N/A N/A
= =
Tier 1 capital (to average assets)............................ 274,523 13.11 > 83,760 > 4.0 N/A N/A
Bank - = =
Total capital (to risk weighted assets).......................$245,605 16.98 > $115,706 > 8.0% > $144,633 > 10.0%
= = = =
Tier 1 capital (to risk weighted assets)...................... 228,777 15.82 > 57,853 > 4.0 > 86,780 > 6.0
= = = =
Tier 1 capital (to average assets)............................ 228,777 10.93 > 83,724 > 4.0 > 104,655 > 5.0
As of December 31, 1998: = = = =
Company (consolidated) -
Total capital (to risk weighted assets).......................$282,725 22.96% > $ 98,528 > 8.0% N/A N/A
= =
Tier 1 capital (to risk weighted assets)...................... 266,783 21.66 > 49,263 > 4.0 N/A N/A
= =
Tier 1 capital (to average assets)............................ 266,783 14.13 > 75,522 > 4.0 N/A N/A
Bank - = =
Total capital (to risk weighted assets).......................$143,832 11.69% > $ 98,407 > 8.0% > $123,009 > 10.0
= = = =
Tier 1 capital (to risk weighted assets)...................... 128,447 10.44 > 49,215 > 4.0 > 73,823 > 6.0
= = = =
Tier 1 capital (to average assets)............................ 128,447 7.03 > 73,085 > 4.0 > 91,356 > 5.0
As of October 31, 1998: = = = =
Company (consolidated) -
Total capital (to risk weighted assets).......................$161,510 13.70% > $ 94,373 > 8.0% N/A N/A
= =
Tier 1 capital (to risk weighted assets)...................... 146,764 12.45 > 47,187 > 4.0 N/A N/A
= =
Tier 1 capital (to average assets)............................ 146,764 8.34 > 70,400 > 4.0 N/A N/A
Bank - = =
Total capital (to risk weighted assets).......................$155,650 13.28% > $ 93,796 > 8.0% > $117,245 > 10.0
= = =
Tier 1 capital (to risk weighted assets)...................... 141,118 12.03 > 46,898 > 4.0 > 70,347 > 6.0
= = = =
Tier 1 capital (to average assets)............................ 141,118 8.01 > 70,501 > 4.0 > 88,126 > 5.0
= = = =
70
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(12) EMPLOYEE BENEFITS
Through October 31, 1999, the Bank provided basic and supplemental pension
benefits for eligible employees through the Savings Bank's Employees Retirement
Association Pension Plan (the SBERA Plan). Each employee having reached the age
of 21 and having completed at least 1,000 hours of service in two consecutive
12-month periods beginning with such employee's date of employment automatically
became a participant in the SBERA Plan. Benefits were based on an employee's
years of service and annual compensation, as defined. The Bank's funding policy
was to contribute annually the maximum amount that can be deducted for federal
income tax purposes.
In September 1999, the Board of Directors voted to freeze benefits under
the SBERA Plan effective October 31, 1999 and to terminate the SBERA Plan on or
about December 31, 1999. In connection with this decision, the SBERA Plan was
also amended to improve the benefit formula for current employees and permit
payment of lump sums. Excess assets of the SBERA Plan, after considering the
impact of Plan amendments, are expected to be less than $500,000. Such excess
will be refunded to the Bank upon final settlement of the SBERA Plan's
obligations.
The following tables summarize the components of net periodic pension cost
and the funded status of the SBERA Plan for the plan years ended October 31.
1999 1998
--------- --------
(In thousands)
Benefit obligation at beginning of year ......... $ 11,339 $ 10,273
Service cost ................................. 698 651
Interest cost ................................ 765 745
Actuarial loss (gain) ........................ 72 (95)
Benefits paid ................................ (186) (235)
Plan amendments .............................. 3,492 --
Plan curtailment ............................. (4,964) --
-------- --------
Benefit obligation at end of year ............... $ 11,216 $ 11,339
======== ========
Accumulated benefit obligation (all vested) ..... $ 11,216 $ 6,067
======== ========
Change in plan assets:
Fair value of plan assets at beginning of year $ 9,779 $ 8,369
Actual return on plan assets ................. 1,372 698
Contributions ................................ 644 947
Benefits paid ................................ (186) (235)
-------- --------
Fair value of plan assets at end of year ... $ 11,609 $ 9,779
======== ========
Funding status:
Transition asset ............................. $ (345) $ (372)
Deferred gain ................................ (1,356) (874)
Accrued expense .............................. 1,308 2,806
-------- --------
Net amount recognized ...................... $ 393 $ 1,560
======== ========
71
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(12) EMPLOYEE BENEFITS (Countinued)
Years Ended October 31,
-----------------------------
1999 1998 1997
------- ------ -------
(In thousands)
Components of net periodic benefit cost:
Service cost ..................... $ 698 $ 651 $ 517
Interest cost .................... 765 745 656
Expected return on plan assets ... (782) (670) (544)
Amortization of transition asset . (27) (26) (27)
Recognized net actuarial gain/loss (36) (33) (30)
----- ----- -----
Net periodic benefit cost ...... $ 618 $ 667 $ 572
===== ===== =====
Weighted average assumptions:
Discount rate .................... 5.00% 7.25% 7.50%
Expected return on plan assets ... 5.00 8.00 8.00
Rate of compensation increase .... N/A 5.00 5.00
As a result of the decision to terminate the SBERA Plan, the Bank
recognized a curtailment gain of $1,472,000 in 1999, representing the difference
between the estimated benefit obligation and the accumulated benefit obligation
at the effective date of termination. The Bank will also recognize a settlement
gain, estimated at $1.5 million, upon receipt of all necessary regulatory
approvals and settlement of plan obligations which are expected to occur in
2000.
Prior to the acquisition of Sandwich Bank in December 1998, its employees
participated in a multi-employer, non-contributory defined benefit plan which
was accounted for as a defined contribution plan. Pension expense for the years
ended October 31, 1998 and 1997 amounted to $295,000 and $317,000, respectively.
No liability arose as a result of Sandwich Bank's withdrawal from that plan.
The Bank also sponsors a postretirement life insurance plan (the Life
Insurance Plan) that primarily covers pre-1996 retirees and a postretirement
medical insurance plan that covers certain retirees of the former Sandwich Bank.
In total, 57 individuals are covered by these plans. The Life Insurance Plan
generally provides lifetime coverage to retired employees equal to their final
rate of pay, but not more than $50,000, and to active employees equal to three
times the employee's annual salary, but not more than $350,000. Annual expense
for these plans has averaged $60,000 during the past three years. At December
31, 1999, the accrued liability was $561,000, while the accumulated benefit
obligation was $729,000 measured using a 7.25% discount rate.
The Bank has entered into agreements with certain officers to provide
supplemental retirement benefits based on 25% of average compensation at normal
retirement computed over a three-year period. The present value of these future
payments is being accrued over the estimated remaining terms of employment. The
accrued supplemental retirement liability is $1,572,000, $1,376,000 and
$1,366,000 December 31, 1999 and 1998 and at October 31, 1998 respectively. The
agreements are being funded through a life insurance program with policy
benefits accruing to the Bank. The cash surrender value of the policies is
$2,234,000, $1,795,000 and $1,746,000 at December 31, 1999 and 1998 and October
31, 1998 respectively, and is included in other assets in the accompanying
consolidated balance sheets. Net expense for these supplemental retirement
benefits for the year ended December 31, 1999, the two months ended December 31,
1998 and the years ended October 31, 1998 and 1997 amounted to $206,000,
$26,000, $128,000 and $70,000 respectively, and is included in salaries and
employee benefits in the accompanying consolidated statements of income.
72
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(12) EMPLOYEE BENEFITS (Countinued)
The Bank has an Employee Bonus and Management Incentive Compensation Plan
(the Bonus Plan) in which employees are eligible to participate. The Bonus Plan
provides for awards based on a combination of Bank and individual performance
objectives being met, subject to the approval of the Board of Directors. Amounts
charged to operations under the Bonus Plan amounted to $1,045,000, $200,000
$1,410,000 and $1,272,000 for the year ended December 31, the two months ended
December 31, 1998 and the years ended October 31, 1998 and 1997, respectively.
The Bank offers a 401(k) Retirement Savings Plan for employees.
Participating employees are able to contribute up to 15% of their W-2
compensation, and the Bank matches 50% of a participant's deferral contribution
on the first 6% of the deferral amount subject to the maximum allowable under
federal regulations. Beginning in November 1999, this plan was amended to
include a 3% automatic contribution for all eligible participants based on their
W-2 compensation. The Bank's 401(k) expense was $437,000, $78,000 $287,000 and
$256,000 for the year ended December 31,1999, the two months ended December 31,
1998 and for the years ended October 31, 1998 and 1997 respectively, which is
included in salaries and employee benefits in the accompanying consolidated
statements of income.
In connection with its conversion from mutual-to-stock form and initial
public offering, the Bank established an Employee Stock Ownership Plan ("ESOP")
which acquired 8%, or 1,120,000, of the shares which were sold at a price of $10
per share. The purchase of the shares by the ESOP was funded by a loan of
$11,200,000 from the Company. The loan is to be repaid in eighty equal quarterly
installments of $276,580. Interest on the loan is fixed at 7.75%. The loan is
secured by the unallocated shares of the ESOP. ESOP expense for the year ended
December 31, 1999 amounted to $585,000.
ESOP expense is based on the market value of the Company's common stock at
the time shares are allocated to employees, which may differ from the $10 cost
of those shares. Such changes in market value impact the Company's results of
operations but have no impact on stockholders' equity.
Sandwich Bank maintained certain employee and director benefit programs
including an ESOP, directors deferred compensation plan and supplemental
executive retirement plans which have been discontinued. During the years ended
October 31, 1998 and 1997 the cost of such plans amounted to $495,000 and
$518,000, respectively. Included in accrued expenses and other liabilities are
$3,241,000, $3,231,000 and $3,009,000 related to such plans at December 31, 1999
and 1998 and October 31, 1998, respectively.
(13) 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 was approved at
the adjourned annual meeting of stockholders in June 1999. The Stock Incentive
Plan 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 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, 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).
73
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(13) STOCK INCENTIVE PLAN (Countinued)
Incentive stock options shall have an exercise price that is not less than
the fair market value at the date of grant and shall not be exercisable more
than ten years after the date of grant. All incentive stock options and
non-qualified options shall vest and become exercisable based on the
determination of the Compensation Committee. Payment of the exercise price for
option shares may be made (1) by cash or check, (2) with the consent of the
Compensation Committee, by delivery of shares of common stock, (3) with the
consent of the Compensation Committee, by reducing the number of option shares
otherwise issuable upon exercise of the option or (4) by other means acceptable
to the Compensation Committee, including any combination of the foregoing. At
the discretion of the compensation Committee, options may include a so-called
"reload" feature whereby an optionee exercising an option by delivery of shares
of common stock would automatically be granted an additional option at the fair
market value of stock when such additional option is granted equal to the number
of shares so delivered.
The Stock Incentive Plan also provides for the issuance of unrestricted
stock awards, performance share awards and stock appreciation rights (SARs).
SARs may be granted, at the discretion of the Compensation Committee, in
conjunction with the grant of a stock option, subsequent to and in conjunction
with the grant 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 SAR exceeds the
exercise price on such date. The amount paid upon exercise may be in additional
stock or, in the discretion of the Compensation Committee, in cash.
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 cost
in the period in which they occur. No forfeitures have occurred since the award
date. For the year ended December 31, 1999, the Company expensed $637,000 in
connection with its conditioned stock award grants.
In July 1999, the Compensation Committee also approved the grant of stock
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. An additional
grant of stock options to acquire 15,000 shares at $11.375 per share was
approved in December 1999. Such options will become exercisable at a rate of 20%
per year over the next five years. No stock options were forfeited in 1999.
As disclosed in Note 1, the Company accounts for its stock-based
compensation plan in accordance with APB No. 25 and, under such accounting
rules, no compensation cost was recognized in 1999 in connection with the
granting of stock options. Alternatively, FASB rules (SFAS No. 123) would permit
a method under which a compensation cost for all stock awards would be
calculated and recognized over the service period (generally equal to the
vesting period). This compensation cost would be determined in a manner
prescribed by the FASB using option pricing models intended to estimated the
fair value of the stock awards at the grant date. Such alternative accounting
would not result in additional compensation cost recorded for the conditioned
stock awarded in 1999.
74
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(13) STOCK INCENTIVE PLAN (Continued)
Had the Company applied SFAS No. 123 in accounting for its stock option
grants, net income and earning per share (basic and diluted) for the year ended
December 31, 1999 would have been the pro-forma amounts indicated below (in
thousands):
Earnings
Net income per share
---------------- --------------
Actual....................................... $ 24,526 $ 0.97
========= =======
Pro forma.................................... $ 24,294 $ 0.96
========= =======
The fair value of stock options is estimated on the grant date using the
Black-Scholes option pricing models using the following valuation assumptions:
Expected volatility.................. 21%
Risk-free interest rate.............. 5.8%
Expected annual forfeitures.......... 5%
Expected dividend yield.............. 2.5%
Expected life of options............. 7 years
The weighted average fair value of stock options granted in 1999, based on
the above assumptions, was $3.00 per share.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK
The Bank is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. Those instruments may involve, to varying degrees, elements
of credit and interest rate risk in excess of the amounts recognized in the
accompanying consolidated balance sheets. The contract amounts of those
instruments reflect the extent of involvement the Bank has in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
Off-balance-sheet financial instruments whose contract amounts present
credit risk included the following:
December 31, October 31,
-----------------------
1999 1998 1998
---------- ---------- ---------------
(In thousands)
Unused portion of existing lines of credit................. $ 78,021 $ 68,200 $ 61,771
Standby letters of credit.................................. 1,391 1,872 1,960
Unadvanced construction loans.............................. 41,429 42,555 30,449
Firm commitments to extend credit.......................... 59,650 70,785 63,138
75
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK AND CONCENTRATION OF
CREDIT RISK (Continued)
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since some of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
require future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained upon
extension of the credit is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment and income-producing commercial real estate.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. Most
guarantees extend for one year. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The collateral supporting those commitments varies and may include
real property, accounts receivable or inventory.
The Bank originates primarily residential and commercial real estate loans
as well as auto loans to customers primarily located in southeastern
Massachusetts and, to a lesser extent, Rhode Island. The Bank estimates that
approximately 90% of its loan portfolio is based in Massachusetts, the majority
of which is located in southeastern Massachusetts.
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
The reported fair values of financial instruments are based on a variety of
valuation techniques. In some cases, fair values represent quoted market prices
for identical or comparable instruments. In other cases, fair values have been
estimated based on assumptions concerning the amount and timing of estimated
future cash flows, assumed discount rates reflecting varying degrees of risk and
future expected loss assumptions. These estimates involve a high degree of
judgment. The estimates do not reflect any premium or discount that could result
from offering significant holdings of financial instruments at bulk sale. Tax
implications of unrealized gains and losses can also have a significant effect
on fair value of the financial instruments that could have been realized as of
December 31, 1999 and 1998 and October 31, 1998 or that will be realized in the
future. Changes in economic conditions may dramatically affect the fair value of
financial instruments.
The following methods and assumptions were used to estimate the fair value
of the Bank's financial instruments:
For cash and due from banks and federal funds sold, the carrying amount
approximates fair value due to the short maturity of those instruments.
The fair values of investment securities are based on published market
prices or quotations received from securities dealers.
The fair values of loans are estimated for loan portfolios with similar
financial characteristics. Loans are segregated by type, fixed- and
adjustable-rate interest terms and by performing and nonperforming status. The
fair values of performing residential real estate loans are estimated by
discounting the anticipated future cash flows at rates currently required by the
secondary mortgage market for the purchase of similar loans. For performing
commercial real estate loans and performing commercial loans, fair values are
estimated by discounting the anticipated future cash flows using estimated
market discount rates that reflect the credit and interest rate risk inherent in
the loan as determined by the loan's terms and credit rating. For home equity
loans and consumer loans, fair values are estimated by discounting the
anticipated cash flows using current interest rates.
76
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (Continued)
The fair value of noncertificate deposits does not include the value of the
Bank's long-term relationships with its depositors and does not reflect the
value associated with possessing this relatively inexpensive source of funds
that may be available for a considerable length of time. The reported fair value
of noncertificate deposits is equal to the amount payable on demand at the
reporting date. The fair values of fixed-maturity certificates of deposit are
estimated by discounting the contractual future cash flows at rates currently
offered for certificates of deposit with similar remaining maturities.
The fair values of FHLB advances are determined by discounting the
anticipated future cash payments by using the rates currently available to the
Bank for advances with similar terms and remaining maturities. For other
borrowings, the carrying amount approximates fair value due to the short
maturity of those instruments.
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties. For fixed rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates. The
fair value of financial standby letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counter parties. The Bank has
estimated the fair value of all such commitments to be immaterial.
Certain items are excluded from disclosure requirements, including banking
premises and equipment, the value of the Bank's portfolio of loans serviced for
others, the intangible value inherent in the Bank's deposit relationships (i.e.,
core deposits), leases and pension benefit obligations, among others.
Accordingly, the aggregate fair value amounts presented in the accompanying
table do not include all data integral to a full assessment of the Company's
financial position and the value of its net assets.
The estimated fair values of the Bank's financial instruments are as
follows:
December 31,
------------------------------------------------
1999 1998 October 31, 1998
------------------------- ---------------------- -----------------------
Carrying Estimated Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value Amount Fair Value
------------- ----------- ----------- ---------- ----------- -----------
(In thousands)
Financial assets:
Cash and due from banks.................. $ 60,245 $ 60,245 $ 54,006 $ 54,006 $ 65,340 $ 65,340
Federal funds sold....................... 106 106 47,413 47,413 41,033 41,033
Short-term investments................... 231 231 31,119 31,119 10,015 10,015
Investment securities.................... 272,927 272,831 316,255 316,459 313,688 313,974
Loans held-for-sale...................... 756 756 -- -- 13,495 13,567
Loans.................................... 1,747,206 1,404,054 1,320,680
Less: Allowance for loan losses.......... (16,828) (15,914) (15,117)
---------- ----------- -----------
Total loans, net......................... 1,730,378 1,721,071 1,388,140 1,390,822 1,305,563 1,317,695
========== =========== ===========
Financial liabilities:
Noncertificate deposits.................. 778,687 778,687 751,910 751,910 778,785 778,785
Term certificates........................ 736,935 736,008 745,305 748,598 752,878 755,896
Borrowings............................... 42,722 42,774 13,118 13,118 16,085 16,085
FHLB advances............................ 271,900 274,243 83,951 86,156 85,111 88,599
77
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Company are as follows:
December 31, October 31,
------------------------
1999 1998 1998
----------- ----------- -----------
(In thousands)
BALANCE SHEETS
ASSETS:
Cash and due from banks (primarily in Compass)............ $ 8,175 $ 126,434 $ 4,788
Investment securities available-for-sale.................. 2,133 2,058 2,052
ESOP loan................................................. 10,840 11,200 --
Investment in subsidiaries................................ 253,008 132,332 147,067
Other assets.............................................. 270 207 117
----------- ----------- ----------
Total assets....................................... $ 274,426 $ 272,231 $ 154,024
=========== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accrued expenses and other liabilities.................... $ 405 $ 719 $ 454
Stockholders' equity...................................... 274,021 271,512 153,570
----------- ----------- ----------
Total liabilities and stockholders'
equity.......................................... $ 274,426 $ 272,231 $ 154,024
=========== =========== ==========
Two Months
Year Ended Ended Years Ended
December 31, December 31, October 31,
--------------------
1999 1998 1998 1997
--------------- -------------- ---------- ---------
(In thousands)
STATEMENTS OF INCOME
INCOME:
Interest and dividends on investment securities..... $ 88 $ 40 $ 191 $ 217
Interest on ESOP loan............................... 856 96 -- --
Dividends from subsidiaries......................... -- 731 2,108 768
Gain on sales of investment securities.............. -- -- 2 --
--------- ---------- ---------- ---------
Total income..................................... 944 867 2,301 985
--------- ---------- ---------- ---------
NONINTEREST EXPENSE 1,123 78 306 120
INTEREST EXPENSE........................................ -- 52 -- --
--------- ---------- ---------- ---------
Total expenses 1,123 130 306 120
--------- ---------- ---------- ---------
Income (loss) before income taxes and equity in
undistributed net income (loss) of subsidiaries.. (179) 737 1,995 865
PROVISION (BENEFIT) FOR INCOME TAXES.................... (106) (3) (32) 18
--------- ---------- ---------- ---------
Income (loss) before equity in undistributed net
income (loss) of subsidiaries.................... (73) 740 2,027 847
EQUITY IN UNDISTRIBUTED NET INCOME
(LOSS) OF SUBSIDIARIES.................................. 24,599 (4,076) 16,063 15,797
--------- ---------- ---------- ---------
Net income (loss).................................. $ 24,526 $ (3,336) $ 18,090 $ 16,644
========= ========== ========== =========
78
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(16) CONDENSED PARENT COMPANY FINANCIAL STATEMENTS (Continued)
Two Months
Year Ended Ended Years Ended
December 31, December 31, October 31,
----------------------
1999 1998 1998 1997
--------------- -------------- ---------- ----------
(In thousands)
STATEMENTS OF CASH FLOWS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 24,526 $ (3,336) $ 18,090 $ 16,644
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Gain on sales of investments............................ -- -- (2) --
Net (accretion) amortization............................ 13 2 4 (2)
Stock-based compensation................................ 131 -- -- --
Equity in undistributed (earnings) loss of subsidiaries. (24,599) 4,076 (16,063) (15,797)
Net (increase) decrease in other assets................. (80) (90) 1 (70)
Net increase (decrease) in other liabilities............ (200) 265 (486) 32
----------- ---------- ---------- ----------
Net cash provided by (used in) operating activities. (209) 917 1,544 807
----------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in subsidiaries................................ (100,000) -- -- --
Proceeds from sales and maturities of securities.......... -- -- 2,494 --
Purchase of securities.................................... (332) -- (586) (96)
Repayments on ESOP loan................................... 360 -- -- --
----------- ---------- ---------- ----------
Net cash provided by (used in) investing activities. (99,972) -- 1,908 (96)
----------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Transactions with stockholders of acquired entity, net.... -- (649) 496 (422)
Proceeds of stock offering, net........................... -- 121,378 -- --
Repurchase of common stock................................ (15,939) -- -- --
Stock award reimbursement by Compass...................... 506 -- -- --
Cash dividends............................................ (2,645) -- -- --
----------- ---------- ---------- ----------
Net cash provided by (used in) financing activities. (18,078) 120,729 496 (422)
----------- ---------- ---------- ----------
Net increase (decrease) in cash and due from banks.. (118,259) 121,646 3,948 289
CASH AND DUE FROM BANKS,
BEGINNING OF YEAR......................................... 126,434 4,788 400 111
NET CHANGE IN CASH AND DUE FROM BANKS
DUE TO DIFFERENCE IN YEAR-ENDS............................ -- -- 440 --
CASH AND DUE FROM BANKS,
----------- ---------- ---------- ----------
END OF YEAR............................................... $ 8,175 $ 126,434 $ 4,788 $ 400
=========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid..................................... $ 18 $ -- $ 2 $ 27
=========== ========== ========== ==========
79
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(17) STOCK CONVERSION
On April 23, 1998, the Board of Trustees of the Company adopted a Plan of
Conversion (the Conversion) pursuant to which the Company would convert to a
stock form of ownership and offer for sale 100% of its common stock in a
subscription offering initially to Bank depositors, employee benefit plans of
the Bank and certain other eligible subscribers. Any shares of stock not sold in
the subscription offering were to be sold to the public in a community offering.
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 the Company 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 $121.4 million which excludes the sale of ESOP shares which were
internally funded. At October 31, 1998, the Company had deferred offering costs
of $2,280,000, included in other assets in the accompanying consolidated balance
sheet, that were subsequently recorded as a reduction of the proceeds received.
As part of the Conversion, the Bank established a liquidation account in
an amount equal to the net worth of the Bank as of May 31, 1998, the date of the
latest consolidated balance sheet which appeared in the prospectus. The
liquidation account will be maintained for the benefit of eligible account
holders and supplemental eligible account holders who maintain their accounts at
the Bank after the Conversion. The liquidation account will be reduced annually
to the extent that such account holders have reduced their qualifying deposits
as of each anniversary date. Subsequent increases will not restore an account
holder's interest in the liquidation account. In the event of a complete
liquidation, each eligible account holder will be entitled to receive balances
for accounts then held.
(18) STOCK REPURCHASE PROGRAM
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 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
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 January 27, 2000, the Company had repurchased 1,468,500 shares of its
common stock under these programs at a total cost of $16,031,920, of which
1,458,500 shares at a cost of $15,939,420 had been repurchased as of December
31, 1999.
(19) DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
In October 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 of
all of their cash dividends. Participants may also make optional cash payments
from $100 to $5,000 maximum per quarter to purchase additional common stock.
This plan commenced upon the Board's declaration of the Company's quarterly cash
dividend in January 2000.
80
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(20) BUSINESS SEGMENT INFORMATION
On November 1, 1998, the Company adopted SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes standards
for reporting operating segments of a business enterprise. The new rules
establish revised standards for public companies relating to the reporting of
financial and descriptive information about their operating segments in
financial statements. Operating segments are components of an enterprise which
are evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is its President and Chief Executive Officer. The adoption of
SFAS No. 131 did not have a material effect on the Company's primary financial
statements, but did result in the disclosure of segment information contained
herein. The Company has identified its reportable operating business segment as
"Community Banking" based on how the business is strategically managed.
The Company's community banking business segment consists of commercial and
retail banking. The community banking business 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 Company 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 (Note 16).
The accounting policies used in the disclosure of business segments are the
same as those described in the summary of significant accounting policies. The
consolidation adjustments reflect certain eliminations of intersegment revenue,
cash and the Parent Company investments in subsidiaries.
Reportable segment specific information and reconciliation to
consolidated financial information is as follows (in thousands):
Community Other Adjustments
Banking Other and Eliminations Consolidated
---------------- ----------- --------------------- --------------
December 31, 1999
Investment securities.................. $ 270,794 $ 2,133 $ -- $ 272,927
Net loans.............................. 1,730,378 10,840 (10,840) 1,730,378
Total assets........................... 2,120,382 249,293 (246,890) 2,122,785
Total deposits......................... 1,515,622 -- -- 1,515,622
Total borrowings....................... 314,622 -- -- 314,622
Total liabilities...................... 1,848,359 405 -- 1,848,764
Net interest income.................... 74,354 944 (856) 74,442
Provision for loan losses.............. 2,000 -- -- 2,000
Total noninterest income............... 9,994 -- -- 9,994
Total noninterest expense.............. 43,393 1,123 -- 44,516
Net income............................. 24,599 24,526 (24,599) 24,526
81
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(20) BUSINESS SEGMENT INFORMATION (Continued)
Other
Community Adjustments
Banking Other and Eliminations Consolidated
------------ ----------- ---------------- ------------
December 31, 1998
Investment securities.................. 314,197 2,058 -- 316,255
Net loans.............................. 1,388,140 11,200 (11,200) 1,388,140
Total assets........................... 1,885,815 272,231 (269,966) 1,888,080
Total deposits......................... 1,497,215 -- -- 1,497,215
Total borrowings....................... 98,773 -- -- 98,773
Total liabilities...................... 1,615,849 719 -- 1,616,568
Net interest income.................... 11,069 84 (44) 11,109
Provision for loan losses.............. 416 -- -- 416
Total noninterest income............... 1,639 -- -- 1,639
Total noninterest expense.............. 16,134 78 -- 16,212
Net income (loss)...................... (3,249) (3,336) (3,249) (3,336)
October 31, 1998
Investment securities.................. 311,636 2,052 -- 313,688
Net loans.............................. 1,305,563 -- -- 1,305,563
Total assets........................... 1,804,354 154,024 (151,855) 1,806,523
Total deposits......................... 1,531,663 -- -- 1,531,663
Total borrowings....................... 102,906 -- -- 102,906
Total liabilities...................... 1,652,499 454 -- 1,652,953
Net interest income.................... 60,051 191 -- 60,242
Provision for loan losses.............. 1,736 -- -- 1,736
Total noninterest income............... 10,040 2 -- 10,042
Total noninterest expense.............. 39,501 306 -- 39,807
Net income............................. 18,171 18,090 (18,171) 18,090
October 31, 1997
Investment securities.................. 336,548 4,856 -- 341,404
Net loans.............................. 1,176,197 -- -- 1,176,197
Total assets........................... 1,620,228 140,730 (135,698) 1,625,260
Total deposits......................... 1,360,962 -- -- 1,360,962
Total borrowings....................... 108,042 -- -- 108,042
Total liabilities...................... 1,484,557 575 -- 1,485,132
Net interest income.................... 57,707 217 -- 57,924
Provision for loan losses.............. 2,615 -- -- 2,615
Total noninterest income............... 8,536 -- -- 8,536
Total noninterest expense.............. 36,916 120 -- 37,036
Net income............................. 16,565 16,644 (16,565) 16,644
82
SEACOAST FINANCIAL SERVICES CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(21) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes the operating results on a quarterly basis
for the year ended December 31, 1999:
Fourth Third Second First
Quarter Quarter Quarter Quarter
------------- ----------- ----------- -----------
(Dollars in thousands, except for per share amounts)
Interest income............................................. $ 36,504 $ 35,142 $ 33,580 $ 32,726
Interest expense............................................ 17,084 16,092 15,482 14,852
--------- --------- -------- ---------
Net interest income.................................... 19,420 19,050 18,098 17,874
--------- --------- -------- ---------
Provision for loan losses................................... 775 650 350 225
Gain on pension plan termination............................ -- 1,472 -- --
Other non-interest income................................... 2,285 2,248 2,127 1,862
Non-interest expenses....................................... 11,565 11,295 11,052 10,604
--------- --------- -------- ---------
Income before income taxes............................. 9,365 10,825 8,823 8,907
Provision for income taxes.................................. 3,206 3,880 3,018 3,290
--------- --------- -------- ---------
Net income............................................. $ 6,159 $ 6,945 $ 5,805 $ 5,617
========= ========= ======== =========
Diluted earnings per share.................................. $ 0.25 $ 0.27 $ 0.23 $ 0.22
========= ========= ======== =========
Cash dividends per share.................................... $ 0.05 $ 0.05 $ -- $ --
========= ========= ======== =========
83
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of this Form is incorporated by reference
herein from the Company's Proxy Statement relating to the 2000 Annual Meeting of
Stockholders of the Company.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 of this Form is incorporated by reference
herein from the Company's Proxy Statement relating to the 2000 Annual Meeting of
Stockholders of the Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by Item 12 of this Form is incorporated by reference
herein from the Company's Proxy Statement relating to the 2000 Annual Meeting of
Stockholders of the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 of this Form is incorporated by reference
herein from the Company's Proxy Statement related to the 2000 Annual Meeting of
Stockholders of the Company.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Contents:
1. Financial Statements: All financial statements are included in
Item 8. of Part II to this report.
2. Financial Statement Schedules: All financial statement schedules
have been omitted because they are either not required, not
applicable or are included in the consolidated financial
statements or related notes.
3. 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+
84
10.4* Form of Change in Control Agreement by and among
Seacoast Financial Services Corporation, Compass Bank
for Savings and certain Officers of Compass Bank for
Savings+
10.5* Form of Executive Salary Continuation Agreements made
and entered into by and between Compass Bank for
Savings and Kevin G. Champagne, Arthur W. Short, John
D. Kelleher and Francis S. Mascianica and forms of
amendments thereto+
10.6* Trust Agreement, made as of December 18, 1992, by and
between Compass Bank for Savings and Shawmut Bank,
N.A.+
10.7* Compass Bank for Savings January 2000 Incentive
Compensation Plan
10.12* Compass Bank for Savings Executive Deferred
Compensation Plan+
10.13* Rabbi Trust for Compass Bank for Savings Executive
Deferred Compensation Plan+
10.17* Sandwich Co-operative Bank 1992 Directors Deferred
Compensation Plan+
10.20* Seacoast Financial Services Corporation 1999 Stock
Incentive Plan++++
11 A statement regarding earnings per share is included
in Item 8, Note 1, of this report.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of KPMG LLP
27 EDGAR Financial Data Schedule
-----------------
* Management compensatory plan or arrangement.
+ Incorporated by reference to the Company's Registration
Statement on Form S-1 (333-52889), filed with the
Securities and Exchange Commission under the Company's
prior name, "The 1855 Bancorp", on May 15, 1998.
++ Incorporated by reference to Amendment No. 1 to the
Company's Registration Statement on Form S-1
(333-52889), filed with the Securities and Exchange
Commission under the Company's prior name, "The 1855
Bancorp", on August 14, 1998.
+++ Incorporated by reference to the Company's Registration
Statement on Form 8-A filed with the Securities and
Exchange Commission on November 18, 1998.
++++ Incorporated by reference to the Company's Proxy
Statement on Schedule 14A filed with the Securities and
Exchange Commission on April 16, 1999.
(b) Reports on Form 8-K: No reports have been filed during the fourth
quarter and through the date of filing of this Form 10-K.
85
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
DATE: March 23, 2000 By: /s/ KEVIN G. CHAMPAGNE
--------------------------------------
Kevin G. Champagne
President and Chief Executive
Officer
By: /s/ FRANCIS S. MASCIANICA, Jr.
--------------------------------------
Treasurer, as Principal Financial
and Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ KEVIN G. CHAMPAGNE
- -----------------------------------
Kevin G. Champagne President, Chief Executive March 23, 2000
Officer and Director
/s/ MANUEL G. CAMACHO
- -----------------------------------
Manuel G. Camacho, D.D.S. Director March 23, 2000
- -----------------------------------
David P. Cameron Director
/s/ HOWARD C. DYER, Jr.
- -----------------------------------
Howard C. Dyer, Jr. Director March 23, 2000
/s/ MARY F. HEBDITCH
- -----------------------------------
Mary F. Hebditch Director March 23, 2000
/s/ GLEN F. JOHNSON
- -----------------------------------
Glen F. Johnson Director March 23, 2000
/s/ THORNTON P. KLAREN, Jr.
- -----------------------------------
Thornton P. Klaren, Jr. Director March 23, 2000
/s/ J. LOUIS LEBLANC
- -----------------------------------
J. Louis LeBlanc Director March 23, 2000
/s/ FREDERIC D. LEGATE
- -----------------------------------
Frederic D. Legate Director March 23, 2000
/s/ REALE J. LEMIEUX
- -----------------------------------
Reale J. Lemieux Director March 23, 2000
/s/ A. WILLIAM MUNRO
- -----------------------------------
A. William Munro Director March 23, 2000
/s/ CARL RIBEIRO
- -----------------------------------
Carl Ribeiro Director March 23, 2000
/s/ JOSEPH H. SILVERSTEIN
- -----------------------------------
Joseph H. Silverstein Director March 23, 2000
/s/ GERALD H. SILVIA
- -----------------------------------
Gerald H. Silvia Director March 23, 2000