General

        Seacoast Financial Services Corporation (the Company or Seacoast) is a bank holding company, registered with the Board of Governors under the Bank Holding Company Act of 1956, as amended (the BHCA). The Company has two wholly owned bank subsidiaries: Compass Bank for Savings (Compass) and Nantucket Bank, both of which are Massachusetts-chartered stock savings banks. Compass and Nantucket Bank are collectively referred to herein as the Banks.

        Until the completion of a mutual to stock conversion and initial public offering of stock on November 20, 1998, the Company was a mutual holding company, created in connection with the reorganization of Compass into the mutual holding company form of organization in 1994.

        From its organization in 1855 until its reorganization into the mutual holding company form of organization in 1994, Compass was a Massachusetts-chartered mutual savings bank. Upon the reorganization, Compass became a stock savings bank and wholly owned subsidiary of the Company.

        Nantucket Bank was organized in 1834 as a Massachusetts-chartered mutual savings bank and reorganized as a stock savings bank in 1988. The Company acquired Nantucket Bank in 2000 in connection with its acquisition of Home Port Bancorp, Inc., the parent company of Nantucket Bank.

        The Banks' principal business has been, and continues to be, gathering deposits from customers within its market areas and investing those funds in residential and commercial real estate loans, indirect automobile loans (Compass only), commercial loans, construction loans, home equity loans and other consumer loans and investment securities. The Banks' investment portfolios consist primarily of U.S. Government and agency securities, corporate bonds, and mortgage-backed securities, collateralized mortgage obligations and, to a lesser extent, marketable equity securities. Individual and business customers have a variety of deposit accounts with the Banks, including NOW (checking) and other demand deposit accounts, passbook savings accounts, money market deposit accounts, Individual Retirement Accounts (IRA's) and various certificates of deposits. Compass has been providing private banking services to both individuals and businesses since 2001.

        The Banks' deposits are insured by the Bank Insurance Fund (BIF), as administered by the Federal Deposit Insurance Corporation (FDIC), up to the maximum amount permitted by law. Deposit amounts in excess of FDIC insurance limits are insured by the Depositors Insurance Fund (DIF), a

deposit insuring entity for Massachusetts's savings banks. The Banks are voluntary members of the Federal Home Loan Bank of Boston (FHLB), which serves principally as a credit source in providing funds for residential mortgage lending.

Pending Acquisition of the Company by Sovereign Bancorp, Inc.

        On January 26, 2004, the Company announced that it had entered into a definitive agreement with Sovereign Bancorp, Inc. (Sovereign) pursuant to which it would be acquired by Sovereign. Under the Sovereign/Seacoast merger agreement, stockholders of Seacoast (which will include former stockholders of Abington who receive shares of Seacoast common stock in the Seacoast/Abington merger if the Seacoast/Abington merger is completed) will receive 1.461 shares of Sovereign common stock for each share of Seacoast that they own subject to potential adjustment based on the average of Sovereign's closing share prices as reported on the New York Stock Exchange for 15 consecutive trading days prior to the later to occur of (1) Seacoast's stockholder meeting to consider the Sovereign/Seacoast merger, or (2) the date of the receipt of the last governmental approval required to complete the Sovereign/Seacoast merger (the Sovereign determination date) as follows:
    • if,between the date of announcement of the Sovereign/Seacoast merger and the Sovereign determination date, Sovereign's common stock price (measured as set forth above) increases, the exchange ratio will remain fixed at 1.461 for each share of Seacoast common stock outstanding;

    • if, between the date of announcement and the Sovereign determination date, Sovereign's common stock price drops (measured as set forth above) by up to 10% to $21.57 per share, the exchange ratio will be adjusted to a ratio which will yield $35.00 for each share of Seacoast common stock outstanding; or

    • if, between the date of announcement and the Sovereign determination date, Sovereign's common stock price drops (measured as set forth above) by more than 10% to $21.56 or below, the exchange ratio will be fixed at 1.623 shares of Sovereign common stock for each share of Seacoast common stock outstanding.


        Seacoast has a right to terminate the transaction at any time prior to the Sovereign/Seacoast merger if (1) Sovereign's stock price (measured as set forth above) is less than $20.37 (equivalent to a decrease of at least 15%) and (2) Sovereign underperforms an index of ten per financial institutions by more than 15%, subject to a right on Sovereign's part to void the termination by increasing the exchange ratio to an exchange ratio which would yield $33.06 for each share of Seacoast common stock outstanding. In all cases, cash will be paid in lieu of any fractional shares. The Sovereign/Seacoast merger is intended to constitute a tax-free "reorganization" for federal income tax purposes. The Sovereign/Seacoast merger agreement was filed on January 28, 2004 with the Securities and Exchange Commission as an exhibit to Sovereign's Current Report on Form 8-K. Completion of the Sovereign/Seacoast merger, which is currently anticipated to occur in the third quarter of 2004, is subject to a number of conditions, including receipt of all requisite governmental approvals and certain other customary conditions, as well as the right of each party to terminate the Sovereign/Seacoast merger under certain circumstances. In addition, the Sovereign/Seacoast merger is subject to approval by the affirmative vote of at least 75% of the total number of votes eligible to be cast by Seacoast's stockholders. In addition, the Sovereign/Seacoast merger agreement contemplates that the Seacoast/Abington merger will be completed prior to the Sovereign/Seacoast merger, unless the Seacoast/Abington merger agreement has been terminated pursuant to its terms. As a result, if both mergers are consummated, Abington stockholders who receive Seacoast common stock in the Seacoast/Abington merger and who do not sell those shares prior to the close of the Sovereign/Seacoast merger will ultimately end up with shares of Sovereign common stock. Sovereign has stated that it anticipates the transaction will close in the third quarter of 2004.

Acquisitions

        On October 20, 2003, the Company and Coast Merger Sub Corporation, a wholly owned subsidiary of Seacoast (Merger Sub), entered into an Agreement and Plan of Merger with Abington Bancorp, Inc. (Abington), whereby Merger Sub will merge with and into Abington. The Seacoast/Abington merger agreement provides, among other things, that as a result of the Seacoast/Abington merger each outstanding share of common stock of Abington (subject to certain exceptions) will be converted into the right to receive 1.4468 shares of Seacoast common stock, plus cash in lieu of any fractional interest, or $34.00 in cash, subject to election and allocation procedures set forth in the Agreement which are intended to ensure that 75% of the outstanding shares of Abington common stock will be converted into the right to receive Seacoast common stock and 25% of the outstanding shares of Abington common stock will be converted into the right to receive cash. Abington will have the ability to terminate the Seacoast/Abington merger agreement if the price of Seacoast common stock declines by more than 20% and underperforms a peer group of companies by more than 10% over a designated measurement period unless Seacoast increases the exchange ratio for converting shares of Abington common stock to Seacoast common stock in accordance with a formula specified in the Agreement.

        Consummation of the Seacoast/Abington merger is subject to a number of customary conditions, including, but not limited to, (1) the approval of the Seacoast/Abington merger agreement by the stockholders of Abington and (2) the receipt of requisite regulatory approvals of the Seacoast/Abington merger and the proposed merger of Abington's banking subsidiary, Abington Savings Bank, with and into Compass, as soon as practicable following consummation of the Seacoast/Abington merger. A special meeting of the stockholders of Abington, at which the Seacoast/Abington merger is expected to be voted upon, is scheduled to be held on March 25, 2004. In accordance with Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), this transaction will be accounted for as a purchase and goodwill of approximately $94 million is expected to be recognized. As of December 31, 2003, Abington had total assets of approximately $815 million, primarily in investments available for sale and residential loans, and total deposits of approximately $650 million. It is anticipated that the transaction will be completed in the second quarter of 2004. The addition of Abington's 17 branches located throughout the southeastern metropolitan Boston area is expected to complement the Company's existing branch network.

        On May 31, 2003, the Company completed the acquisition of Bay State Bancorp, Inc. and its wholly owned banking subsidiary, Bay State Federal Savings Bank (Bay State), a federally-chartered stock savings bank with six banking offices in the greater Boston area. As required by SFAS No. 142, the acquisition was accounted under the purchase method of accounting and, as such, is included in the Company's results of operations from the date of acquisition. Goodwill resulting from this acquisition totaled $79.2 million. At the date of acquisition, total assets amounted to $579.2 million and deposits totaled $387.7 million.

        On December 31, 2000, the Company completed its acquisition of Home Port Bancorp, Inc., the holding company for Nantucket Bank, a three-branch Massachusetts-chartered savings bank located on Nantucket Island, Massachusetts. This transaction was accounted for under the purchase method of accounting and goodwill resulting from this acquisition totaled $36.3 million. At the date of acquisition, total assets amounted to $341 million and deposits totaled $289 million.

Market Area and Competition

        At December 31, 2003, the Company conducted business from its corporate headquarters in New Bedford, Massachusetts. The Banks conducted business from 50 full-service branches, seven of which are located in New Bedford and the remaining 43 of which are located in the Massachusetts communities of Fall River (two branches), Plymouth (five branches), Assonet, Boston, Brookline, Carver, Dedham, Fairhaven, Mattapoisett, North Dartmouth, Norwood, Seekonk, Somerset, Swansea,

Walpole, Westport, Westwood and Cape Cod (thirteen branches), and the islands of Martha's Vineyard (five branches) and Nantucket (three branches). The Banks also have two limited service high school branches and 56 branch and remote ATMs. Compass opened a branch in January 2004 in Marshfield and another branch in Harwich in March 2004. In addition, Compass's indirect auto lending business extends from the entire state of Massachusetts into Rhode Island and New Hampshire.

        The Banks face significant competition both in generating loans and in attracting deposits. The Banks' primary market area is highly competitive and they face direct competition from a significant number of financial institutions, many with either a statewide, a regional or, in some cases, a national presence. Several of these financial institutions are significantly larger and have greater financial resources than either Compass or Nantucket Bank.

        The Banks' competition for loans comes principally from commercial banks, savings banks, credit unions, mortgage brokers, mortgage banking companies and insurance companies. Their most direct competition for deposits has historically come from savings, cooperative and commercial banks and credit unions. In addition, the Banks face competition for depositors' funds from non-bank institutions, such as brokerage firms, mutual fund families and insurance companies, which offer financial alternatives such as short-term money-market funds, corporate and government securities funds, mutual funds and annuities. Nantucket Bank is the only bank exclusively serving the island of Nantucket. Nantucket Bank's competitive advantage is derived from the fact that all of its products and services are designed to meet the needs and requirements of its local customers.

        The Banks compete for deposits principally by offering depositors convenient branch hours and locations, personalized customer service, telephone and computer access to accounts, a wide variety of deposit programs, automated teller machines and competitive interest rates. The competition for loans varies depending on the general availability of lendable funds and credit, general and local economic conditions, current interest rate levels, conditions in the mortgage market and other factors which are not readily predictable.

Lending Activities

        General.     The loan portfolio, excluding loans held-for-sale, totaled $3.6 billion as of December 31, 2003, representing 82% of total assets on that date. The Banks primarily make residential real estate loans secured by one- to four-family residences, indirect auto loans (Compass only) and commercial real estate loans. The Banks also make home equity line of credit loans, residential and commercial construction loans, commercial loans, fixed rate home equity loans, personal installment loans and passbook loans. The majority of loans, including some loans classified as commercial loans, are collateralized by real estate.

        Interest rates charged on loans are affected primarily by the demand for such loans, the supply of money available for lending purposes, secondary market mortgage 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.

        The following table summarizes the composition of the loan portfolio as of the dates indicated:
 
  At December 31,
    
  2003
   2002   2001   2000   1999    
  Amount
   Percent
Of total   Amount   Percent
Of total   Amount   Percent
Of total   Amount   Percent
Of total   Amount   Percent
Of total    
  (Dollars in thousands)

  Real estate loans:                                                       Residential   $ 1,698,693   47.3 % $ 1,513,388   50.6 % $ 1,311,606   50.9 % $ 1,212,595   51.3 % $ 896,479   51.3 %   Commercial     625,670   17.4     356,610   11.9     337,277   13.1     322,724   13.7     223,500   12.8     Construction, net     146,762   4.1     110,166   3.7     108,556   4.2     109,360   4.6     71,735   4.1     Home equity     96,281   2.7     67,794   2.2     45,709   1.8     39,932   1.7     26,076   1.5                               Total real estate loans     2,567,406   71.5     2,047,958   68.4     1,803,148   70.0     1,684,611   71.3     1,217,790   69.7                           Commercial loans     155,573   4.3     127,822   4.3     115,562   4.5     100,789   4.3     66,360   3.8                           Consumer loans:                                                       Indirect auto loans     831,702         770,574         601,236         528,653         439,753         Less: unearned discount(1)     7         210         1,651         6,781         17,370                                             Indirect auto loans, net     831,695   23.2     770,364   25.8     599,585   23.3     521,872   22.1     422,383   24.2     Other     36,731   1.0     45,027   1.5     56,039   2.2     56,060   2.3     40,673   2.3                               Total consumer loans, net     868,426   24.2     815,391   27.3     655,624   25.5     577,932   24.4     463,056   26.5                               Total loans   $ 3,591,405   100.0 % $ 2,991,171   100.0 % $ 2,574,334   100.0 % $ 2,363,332   100.0 % $ 1,747,206   100.0 %                         (1) Since January 1999, all indirect auto loans have been originated on a simple interest basis. Accordingly, the balance of unearned discount will continue to decline as pre-1999 indirect auto loans are repaid.

        Loan Origination and Underwriting—Compass.     Loan officers based in each of Compass's six regions—Boston, Plymouth, Fall River, New Bedford, Cape Cod and Martha's Vineyard—originate and underwrite mortgage and commercial loans. Compass also employs external loan originators, based in each of the regions, who originate residential mortgage loans. Compass underwrites consumer loans at its main office, although it originates such loans at its branches and call center. In originating indirect auto loans, the Company utilizes a network of automobile dealers located throughout its current market area, which encompasses the entire state of Massachusetts into Rhode Island and New Hampshire.

        Compass's loan underwriting 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, car dealers originate the loans and transmit loan applications to Compass for underwriting. Additional information concerning the underwriting of specific types of loans is set forth in sections that discuss those loans.

        Senior loan officers oversee the loan origination and underwriting functions for commercial and commercial real estate loans. Individual loan officers may originate loans within certain approved lending limits. A credit committee, consisting of senior loan and credit officers, and Compass's Board of Directors, or the executive committee thereof, must approve all unsecured commercial loans over $2.5 million and all secured commercial loans, including commercial real estate loans, over $5.0 million. Pursuant to its loan policy, Compass generally will not make loans aggregating more than $20.0 million to any one borrower. Exceptions to this "house" lending limit must be pre-approved by the Board. At December 31, 2003, one customer exceeded this $20.0 million house-lending limit by $5.0 million. Compass's legal lending limit, which is set at 20% of its capital, was approximately $54 million at December 31, 2003.

        Loan Origination and Underwriting—Nantucket Bank.     Loan originations for Nantucket Bank come from a number of sources. Most real estate loan originations are attributable to referrals from existing customers, real estate brokers, attorneys and builders as well as walk-in customers and officer calls. Officer calls and referrals are important sources of commercial and commercial mortgage loan originations. Consumer loans generally are written with existing depositors.

        Loans originated by Nantucket Bank are underwritten by its personnel, with individual lending officers having the authority to approve loans up to specified limits. A credit committee, consisting of senior loan and other officers, must approve all loans that exceed $700,000 and Nantucket Bank's Board of Directors, or the executive committee thereof, must approve all loans over $1.2 million. Nantucket Bank will generally not make loans to any one borrower with an aggregate balance in excess of its house lending limit of $2.5 million. At December 31, 2003, three customers exceeded the house lending limit by $250,000, $110,000 and $10,000, respectively. Nantucket Bank's legal lending limit was approximately $8 million at December 31, 2003.

        Independent licensed appraisers are used to appraise the property intended to secure real estate loans. Nantucket Bank's underwriting criteria are designed to minimize the risks of each loan. Nantucket Bank has detailed guidelines concerning the types of loans that may be made, the nature of the collateral required, the information that must be obtained concerning the loan applicant and follow-up inspections of collateral after the loan is made.

        Loan Origination and Underwriting—Consolidated.     The following table sets forth activity within the loan portfolio for the periods indicated:
 
   Years ended December 31,
 
   2003
   2002
   2001
 
   (In thousands)
Loans outstanding at beginning of year   $ 2,991,171   $ 2,574,334   $ 2,363,332
Loans originated:                  
  Real estate loans:                  
  Residential     839,466     653,518     479,061
  Commercial     82,844     78,821     78,042
  Construction     171,032     151,845     146,949
  Home equity     75,367     61,870     31,905
   
 
 
    Total real estate loans     1,168,709     946,054     735,957
   
 
 
  Commercial loans     123,333     84,828     82,072
  Indirect auto loans     474,744     513,620     364,684
  Other consumer loans     18,564     25,832     36,604
   
 
 
    Total loans originated     1,785,350     1,570,334     1,219,317
   
 
 
Purchases of real estate loans     17,290     29,351     —
Acquisition of Bay State Bancorp, Inc.     517,794     —     —
Less:                  
  Principal repayments     1,602,350     1,151,609     936,748
  Loans sold     109,021     28,197     68,472
  Transfers to other real estate owned     2,636     82     832
  Principal charged-off     6,297     2,960     2,263
   
 
 
Loans outstanding at end of year   $ 3,591,405   $ 2,991,171   $ 2,574,334
   
 
 


        The Banks charge origination fees, or points, and collect fees to cover the costs of appraisals and credit reports on most new residential mortgage loans and on many commercial real estate loans. The

Banks also collect late charges on real estate and consumer loans. For information regarding the recognition of loan fees and costs, see Note 1 to the Consolidated Financial Statements.

        Loan Maturity and Repricing.     The following table presents the contractual maturity and repricing dates of the Banks' loan portfolio at December 31, 2003.
 
   Real estate loans
   Other
 
   Residential
   Commercial
   Construction
   Home
Equity
   Commercial
   Indirect
   Consumer
Loans
   Total
Loans
 
   (In thousands)
Within one year   $ 144,121   $ 161,687   $ 67,863   $ 95,295   $ 119,438   $ 225,613   $ 13,404   $ 827,421
After one year:                                                
  More than one year to three years     228,615     208,881     21,408     115     18,185     403,298     9,315     889,817
  More than three years to five years     245,245     177,149     14,859     103     15,530     194,685     4,431     652,002
  More than five years to fifteen years     501,736     71,352     14,316     515     2,420     8,099     9,523     607,961
  More than fifteen years     578,976     6,601     28,316     253     —     —     58     614,204
   
 
 
 
 
 
 
 
    Total due after                                                
    December 31, 2004     1,554,572     463,983     78,899     986     36,135     606,082     23,327     2,763,984
   
 
 
 
 
 
 
 
    Total amount due   $ 1,698,639   $ 625,670   $ 146,762   $ 96,281   $ 155,573   $ 831,695   $ 36,731     3,591,405
   
 
 
 
 
 
 
 
Less: allowance for loan losses                                               43,321
                                             
Net loans                                             $ 3,548,084
                                             


        The following table sets forth the balances of loans at December 31, 2003, which are contractually due or scheduled to reprice after December 31, 2004, segregated between fixed and adjustable interest rates:

 
   Fixed
   Adjustable
   Total
 
   (In thousands)
Real estate loans:                  
  Residential   $ 1,217,896   $ 336,676   $ 1,554,572
  Commercial     106,729     357,254     463,983
  Construction     50,494     28,405     78,899
  Home equity     —     986     986
   
 
 
    Total real estate loans     1,375,119     723,321     2,098,440
  Commercial loans     18,359     17,776     36,135
  Indirect auto loans     606,082     —     606,082
  Other consumer loans     23,230     97     23,327
   
 
 
    Total loans   $ 2,022,790   $ 741,194   $ 2,763,984
   
 
 


        Residential Real Estate Loans.     As of December 31, 2003, adjustable rate loans represented approximately 30% and fixed rate loans represented approximately 70% of the Banks' portfolio of residential real estate loans secured by one-to four-family residences. Residential loans totaled $1.7 billion as of December 31, 2003, for an increase of $185.3 million, or 12.4%, over the balance at December 31, 2002. An additional $2.6 million in residential mortgage loans held for sale were outstanding at December 31, 2003. During 2003, the Banks purchased $17.3 million in residential real estate loans and acquired $186.3 million in residential balances from the acquisition of Bay State.

        The Banks regularly assess the desirability of holding long-term, fixed-rate residential loans in their portfolio. A number of factors are evaluated to determine whether or not to hold newly originated

fixed-rate loans in the portfolio. Some of these factors include: current and projected liquidity, current and projected interest rate risk profile, projected growth in other loans and investments, and projected interest rates. Generally, the Banks retain the right and obligation to service all loans that they sell. The Banks receive a fee for servicing loans equal to approximately 0.25% per annum on the outstanding balance. Loans serviced for others on a non-recourse basis amounted to $237.0 million and $249.0 million, respectively, at December 31, 2003 and 2002. The Banks sold $109.0 million in residential real estate loans during 2003. Servicing fee income, net of amortization and impairment, amounted to $558,000 and $409,000 for the years ended December 31, 2003 and 2002, respectively.

        Adjustable rate mortgage loans generally reprice either annually, or are fixed for an initial three, five or seven years and adjust 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 generally ranging from 2.75% to 3.25%. Rates adjust by no more than one or two percentage points in each adjustment period and by no more than five or six percentage points over the life of a loan.

        The Banks each maintain programs to originate residential mortgage loans to low-to-moderate income borrowers. At Compass, these 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 other residential loans and have terms of up to 35 years. The loans may have up to a 97% loan-to-value ratio, although borrowers must obtain private mortgage insurance if the loan-to-value ratio exceeds 80%. At Nantucket Bank, such loans are closed with no points and may have loan-to-value ratios up to 90% without private mortgage insurance. The Banks partially fund the loans with borrowings under either the Community Investment Program (CIP) or the New England Fund (NEF) housing programs of the FHLB. These programs permit borrowings from the FHLB at below market rates to finance the loans. The Banks had $13.0 million of CIP-funded loans and $9.9 million of NEF-funded loans in their residential loan portfolios as of December 31, 2003.

        Commercial Real Estate Loans.     The Banks make commercial real estate loans throughout their market area. The portfolio totaled $625.7 million, or 17.4% of total loans, at December 31, 2003, which represents an increase of $269.1 million over the balance of $356.6 million at December 31, 2002. The increase in 2003 was due to the acquisition of Bay State, which added $275.3 million in commercial real estate balances at the date of its acquisition.

        Properties that are used for borrowers' businesses, such as small office buildings, golf courses, restaurants, inns, retail facilities or multi-family income properties, generally collateralize commercial real estate loans. The loans typically have maturities of 10 years, with amortization periods of up to 20 years, and interest rates that adjust over periods of one to five years based on one of various rate indices. Commercial real estate loans with fixed interest rates are written with maturities not to exceed 15 years. The Banks consider the experience of management, cash flows and collateral values when underwriting commercial real estate loans. The Banks generally make commercial real estate loans in an amount equal to no more than 80% of the appraised value of the property securing the loan and typically require the owners of businesses seeking commercial real estate loans to personally guarantee those loans.

        Commercial real estate lending entails greater credit risk than residential mortgage lending to owner-occupants. The repayment of commercial real estate loans depends on the business and financial condition of the borrower. Changes in economic conditions or government regulations, which neither the Banks nor their borrowers control, could have an adverse impact on the cash flows generated by properties securing commercial real estate loans and on the value of such properties.

        Construction Loans.     The Banks make both residential and commercial construction loans throughout their market area. 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 generally 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 permanent financing already committed.

        The Banks generally increase 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 80% 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. Nantucket Bank generally makes construction loans on owner-occupied primary or secondary residences up to 80% of appraised value but will finance only up to 70% of the value of that land. The Banks generally make commercial construction loans in amounts up to 80% of the lesser of the property's appraised value, as completed, or construction costs of the improvements, and generally require developers seeking commercial construction loans to personally guarantee them. The proceeds of construction loans are disbursed in stages and require either loan officers or appointed professionals to inspect each project's progress before the Banks disburse additional funds and 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. The Banks had $146.8 million in construction loans in their loan portfolios, representing 4.1% of total loans, as of December 31, 2003. Another $83.1 million in funds were available but remain unadvanced as of December 31, 2003. The acquisition of Bay State added $11.1 million in construction loan balances at the date of its acquisition.

        Construction lending, particularly commercial construction lending entails greater credit risk than residential mortgage lending to owner-occupants. Economic events and changes in government regulations, which neither the Banks nor their borrowers 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.     The Banks originate fixed-rate loans and revolving lines of credit which are typically secured by second mortgages on one- to four-family owner-occupied properties. Interest rates on home equity lines of credit normally adjust based on the prime rate of interest. The lines of credit are available for up to 10 years at the end of which they become term loans which are amortized for periods up to 10 years. The Banks generally do not originate home equity line of credit loans with loan- to-value ratios in excess of 80%, including the first mortgage. The Banks had $96.3 million in home equity loans outstanding, representing 2.7% of the loan portfolio, as of December 31, 2003. The undrawn portion of home equity lines of credit totaled $95.3 million as of December 31, 2003. The acquisition of Bay State added $11.4 million in home equity loans at the date of its acquisition.

        Commercial Loans.     The Banks primarily make commercial loans to businesses that operate in and around their primary market area. Commercial borrowers are not concentrated in any one particular industry. As of December 31, 2003, the commercial loan portfolio included, among others, floor plan loans to auto dealerships, loans to hotels, inns and other tourism-related businesses, loans to golf courses, loans to building trade companies and loans to retailers. As of December 31, 2003, the Banks had $155.6 million in commercial loans, representing 4.3% of the loan portfolio. Another $73.5 million in funds were available to be advanced on these commercial loans. The acquisition of Bay State added $15.8 million in commercial loan balances at the date of its acquisition

        The Banks review the financial resources, debt-to-equity ratios, cash flows and their own experience with businesses when underwriting commercial loans and generally require business owners to personally guarantee commercial loans. Commercial loans are generally collateralized by equipment,

leases, inventory and/or accounts receivable. Many 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 partially securing the loan. Commercial loans provide, among other things, working capital, equipment financing, financing for leasehold improvements and financing for acquisitions. The Banks offer both term and revolving commercial loans. The former have either fixed or adjustable rates of interest and terms of up to 10 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 the prime rate of interest.

        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.

        Indirect Auto and Other Consumer Loans.     Compass emphasizes indirect auto lending through a network of over 200 automobile dealers. Compass has been in the indirect auto lending business since 1985 and has increased its portfolio of indirect auto loans to $831.7 million at December 31, 2003, or 23.2% (net of unearned discount) of the loan portfolio. Its network of car dealers extends to communities throughout Massachusetts, Rhode Island and New Hampshire. Although employees of the dealer take applications for such loans, the indirect auto loans are made pursuant to Compass' underwriting standards using Compass' documentation and a Compass loan officer must approve all indirect auto loans.

        Compass makes indirect auto loans collateralized by 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, 2003, new cars secured approximately half of Compass's indirect auto loans. Compass does not engage in auto lease financing. In connection with the origination of indirect auto loans, the interest rate charged to the borrower by the dealer cannot exceed three percentage points over the "buy rate" or the rate earned by Compass. The difference between the two rates is referred to as the "spread." At loan inception, the computed dollar value of the spread is prepaid by Compass to the car dealer. Such prepaid amounts are generally subject to rebate in the event the underlying loan is prepaid or defaults. In recent years, more dealers have opted to receive either a reduced spread or a flat fee in exchange for elimination of their rebate obligation.

        The dealer's ability to refund any portion of the unearned prepaid interest, which amounted to $19.9 million at December 31, 2003, 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, 2003, the balance of the dealer reserve was $7.3 million, or 0.9% of the balance of indirect auto loans.

        Indirect auto lending entails greater risks than residential mortgage lending to owner-occupants as borrowers may be more likely to become delinquent on a car loan than on a residential mortgage loan secured by their primary residence. Moreover, car values 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, factors over which Compass has no control. The Company experienced significant charge-offs during 2003 on the indirect auto loans, as an increasing number of loans were delinquent, which necessitated repossession of the collateral underlying the loans by Compass. Upon repossession, the loan is written down to 75% of the National Automobile Dealers Association (NADA) wholesale value and transferred out of the loan category and into other real

estate owned and repossessed automobiles category. The write down to 75% of the National Automobile Dealers Association (NADA) wholesale value represents the value realized by the Company on its repossessed automobiles since the resale value for used vehicles continues to deteriorate after repossession occurs.

        The Banks make a variety of other consumer loans, including personal installment loans, education loans, and passbook loans. The Banks do not offer credit card loans. Other consumer loans totaled $36.7 million, or 1.0% of the loan portfolio, as of December 31, 2003.

Risk Elements

        General.     For further information concerning the composition of the loan portfolio, nonaccrual loans, impaired loans and the allowance for loan losses, see Notes 4 and 5 to the Consolidated Financial Statements and Item 7, "Management's Discussion and Analysis—Results of Operations—Financial Condition—Asset Quality—Allowance for Loan Losses".

        Non-performing Assets.     Non-performing assets consist of nonaccruing loans, other real estate owned and repossessed automobiles. During 2003, non-performing assets decreased $477,000 from 2002 levels, to $14.9 million, and amounted to 0.34% of total assets at year-end. The Company places all loans, regardless of collateral values, on nonaccrual status when principal or interest is past due 90 days or more. Loans for which payments are less than 90 days past due are placed on non-accrual status where there exists serious doubt as to collectibility. At December 31, 2003, the Company had $14.7 million in nonaccruing loans and $266,000 in other real estate owned and repossessed automobiles.

        Provision for Loan Losses.     The allowance for loan losses is established through a provision for loan losses charged to the statement of operations. The allowance is reduced by loan charge-offs and increased by loan recoveries. In 2003, the allowance increased by $6.1 million as a result of the addition of the acquired allowance from Bay State. The Company recorded a provision for loan losses of $7.9 million in 2003 as compared to $7.2 million in 2002. The Company increased the provision for loan losses in 2003 as a result of the increase in total loan balances, increased loan charge-offs and the level of nonaccruing loans.

Investment Activities

        The investment portfolio, an important component of Seacoast's asset structure, is a source of earnings in the form of interest and dividends, provides for asset diversification and is a source of liquidity. Overall, the portfolio, comprised of mortgage-backed securities, corporate bonds, U.S. Treasury and federal agency securities, short-term investments and equity securities, represented 9.9% of total assets, or $432.3 million as of December 31, 2003.

        In 2003, the total investment portfolio produced interest and dividend income of $18.8 million, or 8.3% of the total interest and dividend income earned by the Company. The investment portfolio generated net gains of $2.2 million in 2003, as compared to net losses of $277,000 in 2002 on the sales, redemption and the marking to market of certain securities. For additional information on investments, see Notes 1 and 3 to the Consolidated Financial Statements and Item 7, "Management's Discussion and Analysis—Results of Operations—Financial Condition—Investments."

Deposits and Borrowed Funds

        The Banks' major sources of funds are deposits, borrowings, principal payments or payoffs on loans and mortgage-backed securities and maturities of investments. Borrowings are generally used to fund long-term assets and short-term liquidity requirements or to manage interest rate risk. Total deposits amounted to $2,917.4 million at December 31, 2003, for an increase of $513.5 million, or 21.4%, over 2002's balance. The acquisition of Bay State added approximately $387.7 million in total deposits during 2003. The Banks do not engage in gathering brokered deposits but acquired a nominal amount of these deposits due to the acquisition of Bay State.

        The Banks are members of the FHLB and are authorized to borrow funds to meet withdrawals of savings deposits or to expand the loan or investment portfolios. These borrowings are subject to collateral requirements and borrowing limitations established by the FHLB. The Banks also have available various other sources of funds, including secured borrowings, federal funds purchased, securities sold under agreements to repurchase and junior subordinated debentures. The Banks may also obtain funds at the discount window of the Federal Reserve Bank of Boston. At December 31, 2003, total borrowings outstanding from all of the Company's various sources amounted to $1,049.3 million. At December 31, 2003, the Banks had the ability to borrow an additional $452.0 million from the FHLB, subject to various restrictions.

        For additional information concerning the composition and maturity of deposits and borrowings, as well as a discussion of the changes in accounting for the junior subordinated debentures, see Notes 9, 10, 11 and 12 to the Consolidated Financial Statements and Item 7, "Management's Discussion and Analysis—Results of Operations—Financial Condition—Sources of Funds—Liquidity and Capital Resources".

Subsidiaries

        In addition to its 100% ownership of the common stock of Compass and Nantucket Bank, Seacoast directly owns 100% of Lighthouse Securities Corporation, Seacoast Capital Trust I, Seacoast Capital Trust II, Bay State Funding Corporation, Coast Merger Sub Corporation and, through its bank subsidiaries, nine other corporations. At December 31, 2003, a summary of the Company's and the Banks' subsidiaries were as follows:

Company Subsidiaries

        Seacoast Capital Trust I and Seacoast Capital Trust II.     Seacoast Capital Trust I (SCTI) was established in 2002 and Seacoast Capital Trust II (SCTII) in 2003, both of which were established as Delaware business trusts. The trusts have no independent assets or operations and exist solely for the purpose of issuing mandatorily redeemable trust preferred securities and are not consolidated in the accompanying consolidated financial statements. During 2003, the Company changed its method of accounting for these subsidiaries and now carry the assets under the title "junior subordinated debentures". As of December 31, 2003, the trusts had total assets of $74.7 million. For further information on the junior subordinated debentures, see Note 12 to the Consolidated Financial Statements.

        Lighthouse Securities Corporation.     Lighthouse Securities Corporation (Lighthouse), a wholly owned subsidiary of Seacoast was incorporated in 1998 as a Massachusetts securities corporation and, as such, engages exclusively in buying, selling and holding investment securities on its own behalf and not as a broker. The income earned on Lighthouse's investment securities is subject to a significantly lower rate of state tax than is assessed on pretax income earned by the Banks. At December 31, 2003, Lighthouse had total assets of $1.2 million, consisting of cash maintained at Compass.

        Coast Merger Sub Corporation.     Coast Merger Sub Corporation was formed on October 17, 2003 as a Massachusetts corporation and a wholly owned subsidiary of Seacoast. Coast Merger Sub Corporation was formed solely to effect the merger of the Company and Abington and has not conducted any business during the period of its existence.

        Bay State Funding Corporation.     Bay State Funding Corporation was incorporated in 1997 as a Massachusetts corporation and is currently inactive.

Banks' Subsidiaries

        Securities Corporations.     Compass Bank has four wholly owned subsidiaries that are Massachusetts securities corporations. These securities corporations engage exclusively in buying, selling and holding investment securities on their own behalf and not as a broker. The income earned by the securities corporations is subject to a significantly lower rate of state tax than is assessed on pretax income earned by the Banks. The subsidiaries are as follows: Sandwich Securities Corporation, incorporated in 1993; Sextant Securities Corporation, incorporated in 1995; Bay Leaf Security Corporation, incorporated in 1998, and Bay State Federal Savings Securities Corporation, incorporated in 1973. At December 31, 2003, the combined assets held by the securities corporations totaled $259.6 million, consisting primarily of investment securities of $184.5 million and $74.4 million in cash maintained at Compass.

        Compass Preferred Capital Corporation.     Compass Preferred Capital Corporation (Compass Preferred) is a subsidiary of Compass. It was incorporated in 1998 as a Massachusetts corporation to engage in real estate business activities (including the acquisition and holding of securities and real estate loans) that enabled it to be taxed as a real estate investment trust (REIT) under Massachusetts tax laws. In 2003, a retroactive change to Massachusetts tax law was implemented which specifically denies the deduction for dividends received from a REIT in determining Massachusetts taxable income. Compass Preferred had total assets of $673.5 million at December 31, 2003, of which $400.0 million was mortgage loans originated by Compass and another $273.5 million was cash maintained at Compass. For further information on the retroactive tax law change, see Note 13 to the Consolidated Financial Statements.

        The Sextant Corporation.     The Sextant Corporation (Sextant) is a wholly owned subsidiary of Compass originally formed as a Massachusetts corporation to purchase equipment on behalf of Compass for tax-favored purposes. Sextant has also engaged in limited real estate development activities. At December 31, 2003, Sextant had total assets of $2.0 million, primarily in cash maintained at Compass.

        The 1855 Corporation.     The 1855 Corporation (1855 Corporation) is a wholly owned subsidiary of Compass incorporated 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, 2003, 1855 Corporation had total assets of $1.7 million, of which $1.3 million consisted of real estate used for banking purposes.

        BSF Service Corporation.     BSF Service Corporation was incorporated in 1973 as a Massachusetts corporation and is currently inactive.

        N. Realty Corp.     N. Realty Corp. (NRC) is a subsidiary of Nantucket Bank incorporated in 1998 as a Massachusetts corporation to engage in real estate business activities (including the acquisition and holding of securities and real estate loans) that enabled it to be taxed as a REIT under Massachusetts tax laws. In 2003, a retroactive change to Massachusetts tax law was implemented which specifically denies the deduction for dividends received from a REIT in determining Massachusetts taxable income. NRC had total assets of $170.0 million at December 31, 2003, of which $108.0 million was mortgage

loans originated by Nantucket Bank and another $61.7 million was cash maintained at Nantucket Bank. For further information on the retroactive tax law change, see Note 13 to the Consolidated Financial Statements.

Supervision and Regulation

        As Massachusetts-chartered stock savings banks, Compass and Nantucket Bank are subject to regulation by the Massachusetts Division of Banks (the Division or the Commissioner) and the FDIC. The Banks are required to file reports with, and are periodically examined by, the FDIC and the Division concerning their 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. The Banks are members of the FHLB and are 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.

Bank Regulation

        General.     Compass and Nantucket Bank are subject to supervision, regulation and examination by the Division and are subject to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of capital and reserve accounts, distribution of earnings and payment of dividends. In addition, the Banks are 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.

        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 banks, after giving the Commissioner an opportunity to take such action.

Regulatory Capital Requirements

        The Banks are 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 the "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 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 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, at least half of which must be Tier 1 capital.

        In addition, the FDIC has established regulations prescribing a minimum Tier 1 "leverage ratio" (Tier 1 capital to adjusted average 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 for individual institutions when particular circumstances warrant.

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 would result in the bank failing to meet its applicable capital requirements on a pro forma basis. Massachusetts law also restricts a bank 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 its liquidation account established in connection with the conversion from mutual to stock form. In addition, Massachusetts law requires the Commissioner's approval if the total of dividends declared by a bank in any calendar year exceeds net income for that year combined with the retained net income of the preceding two years.

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% or more, has a Tier 1 risk-based capital ratio of 6% or more, has a Tier 1 leverage ratio of 5% 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% or more, a Tier 1 risk-based capital ratio of 4% or more and Tier 1 leverage ratio of 4% or more (3% 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%, a Tier 1 risk-based capital ratio that is less than 4% or a Tier 1 leverage ratio that is less than 4% (3% under certain circumstances); (iv) "significantly undercapitalized" if it has a total risk-based capital ratio that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or a Tier 1 leverage ratio that is less than 3%; and (v) "critically undercapitalized" if it has a ratio of tangible equity to total assets that is equal to or less than 2%.

        Based on the foregoing, Compass and Nantucket Bank are currently classified as "well capitalized" banks.

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 the Banks.

        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.

        Dividends.     FRB policy specifies 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. Under the prompt corrective action regulations adopted by the FRB, the FRB may prohibit a bank holding company from paying any dividends if any of the holding company's bank subsidiaries 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 bank holding 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.

General

        USA PATRIOT Act.     The USA PATRIOT Act of 2001 is intended to strengthen U.S. law enforcement's and the intelligent communities' abilities to work cohesively to combat terrorism on a variety of fronts. The potential impact of the Patriot Act on financial institutions of all kinds is significant and wide ranging. The Patriot Act contains sweeping anti-money laundering and financial transparency laws and imposes various regulations including standards for verifying client identification at account opening and rules to promote cooperation among financial institutions, regulators and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

        Customer Information Security.     The FDIC and other bank regulatory agencies have adopted final guidelines for establishing standards for safeguarding nonpublic personal information about customers that implement provisions of the Gramm-Leach-Bliley Act of 1999 (Gramm-Leach), which established a comprehensive framework to permit affiliations among commercial banks, securities firms, insurance companies and other financial service providers by revising and expanding the BHCA framework. Specifically, the information security guidelines established by Gramm-Leach require each financial institution, under the supervision and ongoing oversight of its Board of Directors, to develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, to protect against anticipated threats or hazards to

the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer.

        Privacy.     Gramm-Leach requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, Gramm-Leach requires financial institutions to explain to consumers their policies and procedures regarding the disclosure of such nonpublic personal information, and, unless otherwise required or permitted by law, financial institutions are prohibited from disclosing such information except as provided in their policies and procedures.

Federal Reserve System

        The FRB requires all depository institutions to maintain noninterest-bearing reserves at specified levels against their transaction accounts (primarily depositor checking and NOW accounts). Banks are authorized to borrow from the FRB's "discount window," but FRB regulations require banks to exhaust other reasonable alternative sources of funds, including FHLB borrowings, before borrowing from the FRB.

Personnel

        As of December 31, 2003, the Company had 852 full-time equivalent employees. None of the Company's employees are represented by a labor union and management considers relations with its employees to be good.

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