10-Q 1 d53628_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission file number 1-13691 Bay State Bancorp, Inc. (Exact name of registrant as specified in its charter) Delaware 04-3398630 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1299 Beacon Street, Brookline, Massachusetts 02446 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (617) 739-9500 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.|X| Yes |_| No Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No The number of shares of common stock, par value $0.01, outstanding as of February 7, 2003 was 4,973,585. BAY STATE BANCORP, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION................................................................................. 1 Item 1 - Condensed Consolidated Financial Statements (unaudited)............................................. 1 Condensed Consolidated Balance Sheets - December 31, 2002 and March 31, 2002............................... 1 Condensed Consolidated Income Statements - For the three and nine months ended December 31, 2002 and 2001 ................................................................................ 2 Condensed Consolidated Statements of Cash Flows - For the nine months ended December 31, 2002 and 2001................................................................................................... 3 Condensed Consolidated Statements of Changes in Stockholders' Equity - For the nine months ended December 31, 2002 and 2001....................................................... 4 Notes to Unaudited Condensed Consolidated Financial Statements for the Period Ended December 31, 2002.......................................................................................... 5 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations............... 7 Item 3 - Quantitative and Qualitative Disclosures about Market Risk.......................................... 19 Item 4 - Controls and Procedures............................................................................. 21 PART II - OTHER INFORMATION.................................................................................... 22 Item 1 - Legal Proceedings................................................................................... 22 Item 2 - Changes in Securities and Use of Proceeds........................................................... 22 Item 3 - Defaults Upon Senior Securities..................................................................... 22 Item 4 - Submission of Matters to a Vote of Security Holders................................................. 22 Item 5 - Other Information................................................................................... 22 Item 6 - Exhibits and Reports on Form 8-K.................................................................... 23 SIGNATURES................................................................................................... 24 CERTIFICATIONS............................................................................................... 25 EXHIBITS..................................................................................................... 27 Computation of per share earnings - Exhibit 11............................................................. 27 Certifications of Chief Executive Officer and Chief Financial Officer - Exhibit 99.1....................... 28

Page 1 PART I - FINANCIAL INFORMATION Item 1 - Condensed Consolidated Financial Statements Bay State Bancorp, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Dollars in thousands, except per share data)

~~September~~December 3031, March 31, 2002 2002 --------- --------- ASSETS (Unaudited) ~~ASSETS~~ Cash, due from banks and interest bearing deposits with other banks $ 10,~~042~~952 $ 10,978 Short-term investments 312,~~169~~481 6,339 --------- --------- Cash and Cash Equivalents 1323,~~211~~433 17,317 ~~Investment~~Investments in available-for-sale securities (at fair value) 3433,~~221~~671 34,804 Investments in held-to-maturity securities (fair values of $~~141~~123 and $177) ~~141~~123 177 Stock in Federal Home Loan Bank of Boston 8,455 8,455 Loans receivable, net ~~484~~505,~~273~~889 445,547 Mortgage loans held for sale 1,~~215~~120 813 Accrued interest receivable 3,~~485~~207 3,256 Premises and equipment, net 3,~~184~~180 3,036 Deferred tax asset, net 2,~~508~~507 2,675 Investment in bank owned life insurance 8,~~852~~947 8,643 Other assets 36,~~933~~336 3,992 --------- --------- Total assets $ ~~563~~596,~~478~~868 $ 528,715 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits $ ~~356~~368,~~288~~209 $ 328,626 Federal Home Loan Bank Advances ~~143~~159,~~456~~803 137,143 Other borrowed funds 2,~~900~~901 2,902 Accrued expenses and other liabilities 57,~~370~~753 5,013 --------- --------- Total liabilities ~~508~~538,~~014~~666 473,684 --------- --------- Stockholders' equity: Common stock, par value $.01 per share, 7,605,696 shares issued (1) 76 76 Additional paid-in capital 4951,~~616~~634 49,606 Retained earnings 3233,~~001~~563 28,896 Accumulated other comprehensive income ~~911~~995 448 Less: Unearned ESOP shares (2,015) (2,015) Unearned 1998 Stock-Based Incentive Plan shares (~~662~~490) (812) Treasury stock, 2,~~837~~702,~~818~~336 and 2,660,073 shares (1) (2425,~~463~~561) (21,168) --------- --------- Total stockholders' equity 5558,~~464~~202 55,031 --------- --------- Total liabilities and stockholders' equity $ ~~563~~596,~~478~~868 $ 528,715 ========= ========= Equity-to-asset ratio 9.8475% 10.41% Book value per share (1) $ 12.4668 $ 11.88

(1) Share amounts have been adjusted to reflect a 3-for-1 stock split on September 3, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 1 Bay State Bancorp, Inc. and Subsidiaries Condensed Consolidated Income Statements (unaudited) (Dollars in thousands, except per share data)

Three months ended ~~Six~~Nine months ended ~~September~~December 3031, ~~September~~December 3031, 2002 2001 2002 2001 -------------------------------------------------------- ~~(Dollars in thousands)~~ Interest income: Loans $9,~~134~~264 $8,~~768~~893 $1827,~~009~~273 $1726,~~581~~474 Investments ~~650~~616 ~~703~~639 1,~~314~~930 12,~~449~~088 -------------------------------------------------------- Total interest income 9,~~784~~880 9,~~471~~532 1929,~~323~~203 1928,~~030~~562 -------------------------------------------------------- Interest expense: Deposits 21,~~109~~967 2,~~813~~360 46,~~150~~117 58,~~650~~010 Borrowed funds 1,~~583~~456 1,~~960~~821 34,~~200~~656 46,~~199~~020 -------------------------------------------------------- Total interest expense 3,~~692~~423 4,~~773~~181 710,~~350~~773 914,~~849~~030 -------------------------------------------------------- Net interest income before provision for loan losses 6,~~092~~457 45,~~698~~351 1118,~~973~~430 914,~~181~~532 Provision for loan losses 75100 75125 ~~150~~250 ~~137~~262 -------------------------------------------------------- Net interest income after provision for loan losses 6,~~017~~357 45,~~623~~226 1118,~~823~~180 914,~~044~~270 -------------------------------------------------------- Non-interest income: Other fees and charges ~~131~~147 ~~118~~143 ~~290~~437 ~~276~~419 Gain on sale of loans, net 45171 2054 79250 2882 Net gain (loss) on trading securities (8525) ~~(132)~~16 (~~101~~126) (6347) Gain on sale of investments 7576 ~~142~~-- 75151 142 Loss on disposal of fixed assets -- -- (30) -- Net increase in cash surrender value of bank owned life insurance ~~105~~95 9294 ~~209~~304 ~~184~~278 Other income 6870 5964 ~~140~~210 ~~114~~178 -------------------------------------------------------- Total non-interest income ~~339~~534 ~~299~~371 ~~662~~1,196 ~~681~~1,052 -------------------------------------------------------- Income before non-interest expense and income taxes 6,~~356~~891 45,~~922~~597 1219,~~485~~376 915,~~725~~322 Non-interest expense: Salaries and employee benefits 2,~~024~~177 12,~~722~~009 46,~~044~~221 35,~~555~~564 Occupancy and equipment expense ~~451~~427 ~~417~~407 ~~867~~1,294 ~~810~~1,217 Advertising ~~118~~120 ~~128~~141 ~~214~~334 ~~281~~422 Data processing ~~120~~121 ~~118~~115 ~~238~~359 ~~226~~341 Professional fees ~~110~~104 99107 ~~210~~314 ~~210~~353 Other expenses ~~321~~375 ~~337~~436 ~~644~~1,019 ~~627~~1,027 -------------------------------------------------------- Total non-interest expense 3,~~144~~324 23,~~821~~215 69,~~217~~541 58,~~709~~924 -------------------------------------------------------- Income before income taxes 3,~~212~~567 2,~~101~~382 69,~~268~~835 46,~~016~~398 Income ~~before income taxes Income~~ tax expense 1,~~269~~535 ~~826~~959 23,~~436~~971 12,~~575~~534 -------------------------------------------------------- Net income $12,~~943~~032 $1,~~275~~423 $35,~~832~~864 $23,~~441~~864 ======================================================== Comprehensive net income $2,~~063~~116 $1,~~532~~441 $46,~~295~~411 $23,~~630~~882 =========== =========== =========== =========== Weighted average basic shares outstanding (1) 4,~~555~~411,~~020~~221 4,~~834~~597,~~344~~512 4,~~591~~530,~~043~~884 4,~~867~~777,~~587~~230 =========== =========== =========== =========== Weighted average fully diluted shares outstanding (1) 4,~~969~~808,~~831~~641 54,~~117~~886,~~394~~640 4,~~996~~933,~~788~~854 5,~~140~~055,~~365~~459 =========== =========== =========== =========== Basic earnings per share (1) $0.4346 $0.2631 $01.8329 $0.5081 =========== =========== =========== =========== Diluted earnings per share (1) $0.3942 $0.2529 $01.7719 $0.4776 =========== =========== =========== =========== Dividends per share (1) $0.~~073~~10 $0.0506 $0.~~1467~~247 $0.1016 =========== =========== =========== ===========

(1) Share amounts have been adjusted to reflect a 3-for-1 stock split on September 3, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 2 Bay State Bancorp, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows (In thousands) The accompanying notes are an integral part of these condensed consolidated financial statements.

~~Six~~Nine months ended ~~September~~December 3031, 2002 2001 --------- ---------~~------------~~ ~~2002 2001 ---- ----~~ Net cash flows from operating activities: Net income $35,~~832~~864 $23,~~441~~864 Adjustments to reconcile net income to net cash provided by operating activities: Earned stock based incentive plan ~~132~~284 ~~132~~284 Provision for loan losses ~~150~~250 ~~137~~262 Net increase in mortgage loans held-for-sale (~~402~~307) (~~682~~377) Depreciation and amortization ~~209~~312 ~~231~~347 Gain on sales of available-for-sale securities, net (75151) (70) Accretion of securities, net of amortization (1420) (2533) Gain on sale of other assets -- (72) Increase ~~(decrease)~~ in unearned income, net (~~201~~432) 59(29) Gain on sale of other real estate owned (2) -- Net change in trading securities -- 363 Increase in cash surrender value B.O.L.I (~~209~~304) (~~183~~277) ~~Increase~~Decrease in accrued interest receivable ~~(229)~~49 ~~(156)~~134 Deferred tax expense (benefit) (7489) 3250 Decrease (increase) in prepaid expense and other assets ~~177~~331 (78589) Increase in accrued expenses and other liabilities ~~421~~2,740 ~~521~~617 --------- --------- Net cash provided by operating activities 38,~~715~~525 24,~~323~~114 --------- --------- Net cash flows from investing activities: Maturities and principal repayments on investments held to maturity 3654 ~~114~~144 Maturities and principal repayments on investments available for sale 12,~~423~~136 57,~~355~~391 Purchases of investments available for sale (~~123~~181) (27,~~248~~329) Proceeds from sale of available-for-sale securities 76152 72 Loan origination and principal collections, net ~~561~~12,799 ~~613~~6,495 Proceeds from sale of other assets -- 92 ~~Loan~~Purchases ~~purchases~~of loans (3973,~~349~~072) (1835,~~853~~217) Proceeds from sales of other real estate owned 115 -- Capital expenditures (~~357~~456) (98149) Distribution to Rabbi Trust (118) -- --------- --------- Net cash used in investing activities (3758,~~736~~571) (1428,~~953~~501) --------- --------- Net cash flows from financing activities: Net increase in demand deposits, NOW and savings accounts 2646,~~994~~930 38,~~055~~302 Net decrease (increase) in certificate accounts ~~668~~(7,347) ~~892~~5,439 ~~Proceeds~~Advances offrom ~~borrowings~~Federal ~~395,~~Home Loan Bank 530,159 46155,~~393~~390 Repayment of ~~borrowings~~advances from Federal Home Loan Bank (~~389~~507,~~217~~499) (71163,~~563~~186) Net decrease in other borrowed funds (21) -- Proceeds from issuance of common stock ~~108~~1,993 ~~161~~481 Dividends paid on common stock (~~727~~1,197) (~~530~~826) Purchases of treasury stock (36,~~439~~876) (34,~~092~~878) --------- --------- Net cash provided by financing activities 2956,~~915~~162 1030,~~316~~722 --------- --------- Net increase in cash and cash equivalents (46,~~106)~~116 (26,~~314)~~335 Cash and cash equivalents at beginning of period 17,317 10,099 --------- --------- Cash and cash equivalents at end of period $1323,~~211~~433 $716,~~785~~434 ========= ========= Supplemental disclosure of cash flow information: Cash paid during period for: Interest $710,~~401~~833 $1014,~~051~~240 Income taxes $26,~~232~~154 $12,~~697~~698 Loans transferred to Other Real Estate Owned $113 -- Life insurance policies transferred to Rabbi Trust $434 --

Page 3 Bay State Bancorp, Inc. and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity (Dollars in thousands, except per share data) (Unaudited)

Accumulated ~~Additional~~Unearned Other Stock-based Additional Comprehensive Unearned Incentive Total Common Paid-in Retained ~~Comprehensive~~Income ~~Unearned~~ESOP Plan Treasury Stockholders' Stock Capital Earnings ~~Income~~ (Loss) ~~ESOP~~Shares Shares Stock Equity --------------------------------------------------------------------------------------------- Balance at March 31, 2002 $25 $ 49,657 $ 28,896 $448 $(2,015) 3$(812) ~~for~~$(21,168) $55,031 3-for-1 stock split, additional shares outstanding (1) 51 (51) -- -- -- -- -- -- Net Income -- -- 35,~~832~~864 -- -- -- -- -- Net change in unrealized gain on available for sale securities, net of tax effect -- -- -- ~~463~~547 -- -- -- -- Comprehensive income -- -- -- -- -- -- -- 6,411 Purchase of treasury stock, ~~195~~256,~~745~~245 shares (1) -- -- -- -- -- -- (4,488) (4,488) Exercise of stock options issued from treasury stock, 18305,~~000~~008 (1) -- (36490) -- -- -- -- 2,483 1,993 91,026 shares withheld for taxes on options exercises -- -- -- -- -- -- (2,388) (2,388) Dividends paid, $0.~~1467~~2467 per share (1) -- -- (~~727~~1,197) -- -- -- -- (1,197) Issuance of stock incentive plan shares -- (1838) -- -- -- 322 -- 284 Tax benefit on expense of stock-based incentive plan -- 642,556 -- -- -- -- -- 2,556 -------- -------- -------- -------- -------- -------- -------- --------~~----------------------------------------------------------------~~ Balance at ~~September~~December 3031, 2002 (Unaudited) $76 $ 4951,~~616~~634 $ 3233,~~001~~563 $~~911~~995 $(2,015) $(490) $(25,561) $58,202 ======== ======== ======== ======== ======== ======== ======== ========~~====================================================================~~ Balance at March 31, 2001 $25 $ 49,275 $ 24,382 $617 $(2,420) 3$(1,208) ~~for~~$(16,911) $53,760 3-for-1 stock split, additional shares outstanding (1) 51 (51) -- -- -- -- -- -- Net Income -- -- 23,~~441~~864 -- -- -- -- -- Net change in unrealized gain on available for sale securities, net of tax effect -- -- -- ~~189~~18 -- ~~Comprehensive income~~ -- -- -- --Comprehensive --income ~~Purchase of treasury stock, 251,259 shares (1)~~ -- -- -- -- -- ~~Exercise of stock options issued from treasury stock, 27,072 (1)~~ -- ~~(59)~~ -- ~~-- -- Dividends paid~~3,882 ~~$0.10~~Purchase ~~per share (1) -- -- (530) -- -- Issuance~~ of ~~stock~~treasury ~~incentive plan shares -- (18) -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ Balance at September 30~~stock, ~~2001 (Unaudited) $76 $ 49~~429,~~147~~831 $ 26,293 $806 $(2,420) ==================================================================================================================================== Unearned Stock-based Total Incentive Plan Treasury Stockholders' Shares Stock Equity -------------------------------------------- Balance at March 31, 2002 $ (812) $(21,168) $ 55,031 3 for 1 stock split, additional shares ~~outstanding~~ (1) -- -- -- ~~Net Income~~ -- -- -- ~~Net change in unrealized gain on available for sale securities, net of tax effect -- -- -- Comprehensive income -- --~~ (4,~~295 Purchase of treasury stock, 195,745 shares (1~~878) -- (34,~~439~~878) ~~(3,439)~~ Exercise of stock options issued from treasury stock, 1876,~~000~~125 (1) -- ~~144 108 Dividends paid, $0.1467 per share~~ (1138) -- -- ~~(727) Issuance of stock incentive plan shares 150~~ -- ~~132 Tax benefit on expense of stock~~-~~based incentive plan~~ -- --619 64481 ~~---------------------------------------------------------------------------------------------------------------~~Dividends ~~Balance at September 30~~paid, ~~2002 (Unaudited)~~ $ ~~(662) $(24,463) $ 55,464 =============================================================================================================== Balance at March 31, 2001 $(1,208) $(~~0.16~~,911)~~ $per ~~53,760~~share ~~3 for 1 stock split, additional shares outstanding~~ (1) -- -- --(826) ~~Net Income~~ -- -- -- ~~Net change in unrealized gain on available for sale securities, net of tax effect~~ -- --(826) --Issuance ~~Comprehensive income -- -- 2,630 Purchase~~ of ~~treasury~~ stock, ~~251,259~~incentive plan shares ~~(1)~~ -- (~~3,092~~38) ~~(3,092) Exercise of stock options issued from treasury stock, 27,072 (1)~~ -- ~~220 161 Dividends paid, $0.10 per share (1)~~ -- -- ~~(530)~~322 ~~Issuance of stock incentive plan shares 150~~ -- ~~132~~284 -------- -------- -------- -------- -------- -------- -------- --------~~-----------------------------------------------~~ Balance at ~~September~~December 3031, 2001 (Unaudited) $76 $49,048 $27,420 $635 $(12,~~058~~420) $(~~19,783~~886) $(21,170) 53$52,~~061~~703 ======== ======== ======== ======== ======== ======== ======== ========~~===============================================~~

(1) Share amounts have been adjusted to reflect a 3-for-1 stock split on September 3, 2002. The accompanying notes are an integral part of these condensed consolidated financial statements. Page 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31, 2002 (Unaudited) (1) Organization Bay State Bancorp, Inc. (the "Company" or "Bay State") was incorporated under the laws of Delaware in 1997 for the purpose of serving as the holding company of Bay State Federal Savings Bank (the "Bank") as part of the Bank's conversion from a mutual to a stock form of organization (the "Conversion"). The Company is a savings and loan holding company and is subject to regulation by the Office of Thrift Supervision (the "OTS") and the Securities and Exchange Commission (the "SEC"). Prior to the Conversion, Bay State had not engaged in any material operations. (2) Accounting Principles The accompanying unaudited condensed consolidated financial statements of Bay State have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the nine months ended December 31, 2002 are not necessarily indicative of the results that may be expected for the current fiscal year. For further information, refer to the consolidated financial statements included in the Company's annual report and Form 10-K for the period ended March 31, 2002 and Form 10-Q for the periods ending June 30 and September 30, 2002, filed with the SEC. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. (3) Stock Split On July 25, 2002, the Board of Directors declared a 3-for-1 split of the shares of the Company's common stock in the form of a 200% stock dividend. The additional shares to stockholders of record as of August 19, 2002 were distributed on or about September 3, 2002. In the accompanying financial statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operation, the computation of basic and fully diluted earnings per share have been adjusted retroactively for all periods presented to reflect the stock split. In addition, other per share data in the financial statements and in the Management's Discussion and Analysis of Financial Condition and Results of Operation have been adjusted to reflect the stock split. Page 5 (4) Stock Repurchase Program The Company also announced on July 31, 2002 that its Board of Directors approved an additional repurchase of 5%, or 243,633 shares of its outstanding common stock. As of February 7, 2003, approximately 172,800 shares have been repurchased under this program, at an average price of $17.49. (5) Other Events On December 19, 2002, Seacoast Financial Services Corporation, a Massachusetts corporation ("Seacoast"), and Bay State announced that they entered into an Agreement and Plan of Merger pursuant to which Seacoast will acquire Bay State (the "Agreement"). The Agreement provides for the merger of Bay State with and into a wholly owned subsidiary of Seacoast and the subsequent merger of the Bank with and into CompassBank for Savings, Seacoast's main banking subsidiary. Pursuant to the Agreement, each share of Bay State common stock, par value $0.01 per share, issued and outstanding immediately prior to the effective time of the merger will be converted into the right to receive at the election of the holder either $27.00 in cash, without interest or 1.257 shares of Seacoast common stock subject to the requirement that 55% of the Bay State shares be exchanged for Seacoast stock. The proposed transaction is subject to all required regulatory approvals, the approvals by shareholders of the Company and other customary conditions. (6) Impact of New Accounting Standards FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This Statement replaced SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," and rescinded SFAS Statement No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 140 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. This Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. This Statement is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001; however, the disclosure provisions are effective for fiscal years ending after September 15, 2000. The effect of this Statement did not have a material impact on the Company's financial position or result of operations. SFAS No. 141 improves the consistency of the accounting and reporting for business combinations by requiring that all business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting. Use of the pooling-of-interests method is no longer permitted. Adoption of this Statement had no impact on the consolidated financial statements. SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be reviewed at least annually for impairment. The amortization of goodwill ceases upon adoption of the Statement, which for most companies was January 1, 2002. Adoption of this Statement had no impact on the consolidated financial statements. In October 2002, the FASB issued SFAS No. 147 "Acquisitions of Certain Financial Institutions", an amendment of SFAS Nos. 72 and 144 and FASB Interpretation No. 9. SFAS No. 72 "Accounting for Certain Acquisitions of Banking or Thrift Institutions" and FASB Interpretation No. 9 "Applying APB Opinions No. 16 and 17 When a Savings and Loan Association or a Similar Institution Is Acquired in a Business Combination Accounted for by the Purchase Method" provided interpretive guidance on the application of the purchase method to acquisitions of financial institutions. Page 6 Except for transactions between two or more mutual enterprises, FASB Statement No. 147 removes acquisitions of financial institutions from the scope of both Statement 72 and Interpretation 9 and requires that those transactions be accounted for in accordance with FASB Statements No. 141 "Business Combinations" and No. 142 "Goodwill and Other Intangible Assets." Thus, the requirement in paragraph 5 of Statement 72 to recognize (and subsequently amortize) any excess of the fair value of liabilities assumed over the fair value of tangible and identifiable intangible assets acquired as an unidentifiable intangible asset no longer applies to acquisitions within the scope of FASB Statement No. 147. In addition, FASB Statement No. 147 amends FASB Statement No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" to include in its scope long-term customer-relationship intangible assets of financial institutions such as depositor- and borrower-relationship intangible assets and credit cardholder intangible assets. Consequently, those intangible assets are subject to the same undiscounted cash flow recoverability test and impairment loss recognition and measurement provisions that FASB Statement No. 144 requires for other long-lived assets that are held and used. Paragraph 5 of FASB Statement No. 147, which relates to the application of the purchase method of accounting, is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions in paragraph 6 related to accounting for the impairment or disposal of certain long-term customer -relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets in paragraphs 8-14 are effective on October 1, 2002, with earlier application permitted. The Company does not expect that there will be any substantial impact on the Company's consolidated financial statements on adoption of this Statement. Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, changes in: interest rates, general economic conditions, legislation or regulation, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in the Company's market area and accounting principles and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included in the Company's Form 10-K filing with the SEC for the fiscal year ended March 31, 2002. Except as required by applicable law and regulations, the Company does not undertake, and specifically disclaims any obligation, to publicly release the result of any revisions which may be made to any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events. Page 7 Acquisition of Bay State Bancorp, Inc. by Seacoast Financial Services Corporation On December 19, 2002, the Company announced it had signed a definitive agreement with Seacoast under which Seacoast will acquire the Company for approximately $140 million in cash and stock. Under the terms of the agreement, Bay State stockholders can elect to receive either $27.00, without interest or 1.257 shares of Seacoast common stock for each share of Bay State stock they own, plus cash in lieu of any fractional share interest. Elections will be subject to allocation procedures, that are intended to ensure that 55% of the Company common stock outstanding immediately prior to the completion of the transaction will be converted into shares of Seacoast common stock. The proposed transaction is subject to all required regulatory approvals, the approval by shareholders of the Company and other customary conditions. The proposed transaction is expected to close in the second quarter of 2003. Certain merger costs will be incurred by the Company prior to the expected closing date. General The Company has no significant assets, other than all of the outstanding shares of the Bank and some investment securities. The Company has no significant liabilities. Management of the Company and the Bank are substantially similar and the Company neither owns nor leases any property, but instead uses the premises, equipment and furniture of the Bank. Accordingly, the information set forth in this report, including the condensed consolidated financial statements and notes thereto, relates primarily to the Bank. The Bank is a federally chartered savings bank and is subject to regulation and examination by the OTS. The Bank's business activities are concentrated in Eastern Massachusetts through six full service retail banking offices located in Norfolk and Suffolk Counties, Massachusetts. Through these offices, the Bank offers a full range of retail and commercial banking products and services and conducts other business as allowable for federally chartered banks. The Bank invests primarily in residential first mortgages, commercial and multi-family real estate loans, and to a lesser extent, home equity lines of credit, other consumer loans, residential construction loans, development and land loans and commercial loans. Lending operations, particularly loan originations, are conducted from the retail offices and at the point of sale. Neither the Company nor the Bank nor any of their subsidiaries conduct business on a national or international basis. The operating results of the Company depend primarily on its net interest and dividend income, which is the difference between (i) interest and dividend income on interest earning assets, primarily loans and investment securities and (ii) interest expense on interest bearing liabilities, which consist of deposits and borrowings. Results of operations are also affected by the provision for loan losses, the level of non-interest income, including deposit and loan fees, gains on sales of assets, operating expenses and income taxes. Comparison of Financial Condition at December 31, 2002 and March 31, 2002 (Unaudited) Total assets at December 31, 2002 were $596.9 million, compared to $528.7 million at March 31, 2002, an increase of $68.2 million, or 12.9%. Net loans receivable, including mortgage loans held for sale, increased $60.6 million, or 13.6%, primarily in residential one-to four-family loans, commercial real estate and multi-family loans as a result of the increased level of loan originations and purchases during the period. Short-term investments, which consist of overnight investments at the Federal Home Loan Bank of Boston ("FHLB"), and to a lesser extent, the Bank Investment Fund, increased $6.1 million. The increase in assets was funded primarily from a $39.6 million, or 12.0%, increase in deposits, and a $22.7 million, or 16.5%, increase in FHLB advances. Total stockholders' equity was $58.2 million, or 9.75% of total assets, at December 31, 2002, an increase of $3.2 million, or 5.8%, from $55.0 million, or 10.41% of total assets, at March 31, 2002. The increase in equity was the result of net income of $5.9 million for the period and an increase in additional paid in capital as a result of stock option exercises, offset by the repurchase of 256,245 shares at a cost of $4.5 million during the nine months ended December 31, 2002 and the payment of dividends at a cost of $1.2 million. Page 8 On September 3, 2002, the Company effected a three-for-one stock split of its common stock in the form of a 200% stock dividend. The Company's book value per share at December 31, 2002 was $12.68, compared to $11.88 at March 31, 2002, an increase of 6.7%. Investments Short-term investments were $12.5 million at December 31, 2002 consisting primarily of overnight investments at the FHLB, and to a lesser extent monies invested in the Bank Investment Fund. This represents an increase of $6.1 million from the $6.4 million at March 31, 2002. Investment securities available-for-sale decreased $1.1 million, or 3.3%, due to a decrease in mortgage-backed securities from principal pay-downs. The Company's investment portfolio at December 31, 2002 reflects a pre-tax unrealized gain on available-for-sale securities of $2.0 million, compared to $1.2 million at March 31, 2002. The table below shows the investment securities portfolio at the dates presented. The amortized cost and estimated fair value of investments available-for-sale were: December 31, 2002 March 31, 2002 ----------------- -------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (Dollars in thousands) Marketable equity securities $ 8,223 $ 9,348 $ 8,045 $ 9,316 Mortgage-backed securities 4,859 4,945 6,977 7,087 Trust preferred equity securities 10,600 11,366 10,599 10,754 Corporate bonds and notes 6,457 6,542 6,454 6,240 Preferred stocks 1,500 1,470 1,500 1,407 ------- ------- ------- ------- Total $31,639 $33,671 $33,575 $34,804 ======= ======= ======= ======= The amortized cost and estimated market values of investments held-to-maturity were: December 31, 2002 March 31, 2002 ----------------- -------------- Amortized Fair Amortized Fair Cost Value Cost Value ---- ----- ---- ----- (Dollars in thousands) Mortgage-backed and mortgage-related securities $123 $123 $177 $177 ---- ---- ---- ---- Total Mortgage-backed and mortgage related Securities $123 $123 $177 $177 ==== ==== ==== ==== Page 9 Loans During the nine-month period ended December 31, 2002, net loans receivable, including mortgage loans held for sale, increased by $60.6 million, or 13.6%, as detailed below:

~~September~~% 30of % of December 31, ~~2002~~total March 31, total 2002 Loans 2002 Loans ------- ------ ------- ------ (Dollars in thousands) Mortgage loans: Residential 1-4 family $219,453 42.43% $187,801 40.89% Multi-family 102,678 19.86 102,440 22.30 Commercial real estate 133,830 25.88 117,341 25.55 Construction and development/land 28,350 5.48 24,361 5.31 ------- ------ ~~Amortized~~------- ~~Fair~~------ ~~Amortized~~Total ~~Fair~~mortgage ~~Cost~~loans ~~Value~~484,311 ~~Cost~~93.65 ~~Value~~431,943 94.05 Commercial loans 14,557 2.81 11,564 2.52 Consumer loans: Equity lines 12,165 2.35 11,939 2.60 Other consumer loans 6,148 1.19 3,830 0.83 -------- -------- -------- -------- ~~(Dollars~~Total inloans ~~thousands)~~517,181 ~~Mortgage-backed~~100.00% 459,276 100.00% ====== ====== Deduct: Allowance for loan losses 4,848 4,535 Undisbursed proceeds of construction and ~~mortgage-related~~development ~~securities~~loans $in ~~141~~process $6,615 ~~141~~8,933 $Unearned ~~177~~income, $net ~~177~~and loan acquisition premiums (171) 261 -------- -------- Loans, net 505,889 445,547 -------- -------- ~~Total~~ Mortgage loans held-~~backed~~for-sale ~~and~~1,120 ~~mortgage~~813 ~~related~~------- ~~Securities~~------- $Loans, ~~141~~net $and ~~141~~mortgage $loans ~~177~~held-for-sale $507,009 ~~177~~$446,360 ======== ======== ~~======== ========~~

At December 31, 2002 loans serviced for others was $47.1 million, compared to $33.0 million at March 31, 2002. Page 10 Asset Quality At December 31, 2002, non-performing loans totaled $361,000, an increase of $252,000, or 231.2%, from $109,000 at March 31, 2002. Non-performing loans consist of all loans that are delinquent 90 days or more. The Bank had no other real estate owned at December 31, 2002 and March 31, 2002. At December 31, 2002 and March 31, 2002, non-performing assets represented 0.07% and 0.02% of total loans and loans receivable, net, respectively. The composition of non-performing assets for the dates presented was: December 31, March 31, 2002 2001 2002 ---- ---- ---- (Dollars in thousands) Non-accrual loans: Mortgage Loans: One-to-four-family $361 $233 $109 Multi-family -- -- -- Commercial real estate -- -- -- Construction and development -- -- -- ---- ---- ---- Total mortgage loans 361 233 109 ---- ---- ---- Consumer Loans: Equity lines -- -- -- Other consumer loans -- -- -- ---- ---- ---- Total consumer loans -- -- -- ---- ---- ---- Total non-accrual loans 361 233 109 Real estate owned, net -- -- -- ---- ---- ---- Total non-performing assets $361 $233 $109 ==== ==== ==== Non-performing assets as a percentage of: Loans receivable, net 0.07% 0.05% 0.02% Total assets 0.06 0.04 0.02 The following represents the activity in the allowance for loan losses for the nine months ended December 31, 2002: (Dollars in thousands) Balance at March 31, 2002 $4,535 Provision for loan losses 250 Losses charged to allowance (2) Recoveries 65 ------ Balance at December 31, 2002 $4,848 ====== Page 11 The allowance for loan losses is based on management's estimate of the credit losses inherent in the loan portfolio and management's ongoing review of the existing loan portfolio, current market conditions and the volume and mix of the Bank's existing loan origination pipeline. To assess reasonable and probable loss exposure in the Bank's loan portfolio, management establishes an allocated allowance based upon its review of internal loan classification reports, which identify any loans classified as special mention, substandard, doubtful or loss and applies an allocation factor based upon its estimated exposure on these specific loans. An unallocated allowance is maintained based on the remaining portfolio, which is classified into various groups based upon loan type, underlying collateral, and delinquency status and payment performance history. The loss factor applied to these loans is based upon management's review of historical loss experience, current local and national economic conditions and industry experience and standards. In addition, as part of the regulatory examination process, the OTS periodically reviews the Company's allowance for loan losses and may require additional provisions for estimated losses based upon judgments different from those of management. The Company will continue to monitor and modify its allowance for loan losses as conditions dictate. While management believes the Company's allowance for loan losses was sufficient to absorb any losses inherent in its loan portfolio at December 31, 2002, no assurances can be given that the Company's level of allowance for loan losses will be sufficient to cover potential loan losses incurred by the Company or that any adjustments to the allowance for loan losses will not be necessary if economic conditions and actual loss experience differs from those assumed by management in determining the current level of the allowance for loan losses. Deposits and Borrowed Funds Deposits increased during the nine-month period ending December 31, 2002, as detailed below: December 31, % of total March 31, % of total 2002 deposits 2002 deposits -------- -------- ------- -------- (Dollars in thousands) Regular savings accounts $ 39,375 10.69% $ 29,810 9.07% NOW accounts 44,146 11.99 34,570 10.52 Money market accounts 148,175 40.24 128,932 39.24 Non-interest bearing deposits 26,497 7.20 17,951 5.46 -------- ------ -------- ------ 258,193 70.12 211,263 64.29 Term deposits 110,016 29.88 117,363 35.71 -------- ------ -------- ------ Total deposits $368,209 100.00% $328,626 100.00% ======== ====== ======== ====== The increase in deposits, particularly in core deposit products, was a result of increased sales efforts and continued customer migration to bank deposits from the financial markets. During the nine months ended December 31, 2002, FHLB advances increased $22.7 million, or 16.5%, to $159.8 million compared to $137.1 million at March 31, 2002. Page 12 Comparison of Operating Results for the Three Months Ended December 31, 2002 and 2001. General Consolidated net income for the three months ended December 31, 2002 totaled $2.0 million, or $0.46 basic earnings per share and $0.42 fully diluted earnings per share, compared to $1.4 million, or $0.31 per basic earnings per share and $0.29 fully diluted per share, for the same period last year. This represents an increase of $609,000, or 42.8%, in net income, a $0.15, or 48.8%, increase in basic earnings per share and a $0.13, or 45.1%, increase in fully diluted earnings per share. The increase was primarily a result of higher net interest income, due to an increase in the average balance of interest earning assets, a decrease in deposit interest expense due to a deposit mix consisting of more lower-costing core deposits and a lower interest rate environment, a reduction in interest on borrowed funds due to the lower cost of borrowings, offset in part by an increase in operating expenses and higher income taxes. Interest Income Interest income for the three months ended December 31, 2002 increased $348,000, or 3.7%, to $9.9 million, compared to $9.5 million for the same period last year. The increase in interest income was primarily due to an increase in loans receivable, offset in part, by a reduction in the yield on the portfolio and a decline in the yields on the investment portfolio. The average balance of interest-earning assets increased from $483.6 million for the quarter ended December 31, 2001 to $539.0 million for the quarter ended December 31, 2002, an increase of $55.4 million, or 11.5%. The increase in the average balance of interest-earning assets was primarily a result of an increase in the average balance of loans, net, of $50.9 million, or 11.6%. The yield on interest-earning assets decreased 55 basis points to 7.33%, due to the lower market interest rate environment. Interest Expense Interest expense for the three months ended December 31, 2002 decreased $758,000, or 18.1%, to $3.4 million compared to $4.2 million for the same period last year. The decrease in interest expense was the net result of a $49.5 million, or 11.3%, increase in the average balance of interest-bearing liabilities which increased from $437.1 million for the three months ended December 31, 2001 to $486.6 million for the three months ended December 31, 2002 and a decrease of 102 basis points in the cost of interest-bearing liabilities to 2.81%, from 3.83%. The increase in the average balance of interest-bearing liabilities was primarily the net result of an increase in the average balance of lower costing core deposits of $53.4 million, or 31.8%, a decrease in the average balance of higher costing certificates of deposits of $11.9 million, or 9.5%, and an increase in the average balance of FHLB advances and other borrowings of $8.0 million, or 5.6%. Although the average balance of interest bearing liabilities increased, interest expense decreased due to the lower market interest rate environment, deposit growth being in lower costing core deposits, the reduction and repricing of maturing certificates of deposit at current lower interest rate levels, along with the repricing of FHLB advances to lower interest rate levels. Page 13 Net interest income The table below shows average balances and the interest earned and paid on interest-earning assets and interest-bearing liabilities and the resulting net interest spread and margin for the periods presented. The average balances are derived from daily averages and the average yields and costs are annualized:

%For ofthe ~~September~~three 30months ended December 31, %2002 of2001 ~~total~~---- ~~March~~---- ~~31,~~Interest ~~total~~Interest ~~2002~~Average ~~Loans~~Income/ ~~2002~~Yield/ ~~Loans~~Average Income/ Yield/ balance expense rate balance expense rate ------- ------- ---- ------- ------- ---- (Dollars in thousands) ~~Mortgage~~Assets ~~loans~~Interest-earning assets: ~~Residential 1~~ Short-term 4investments ~~family~~ $~~204~~ 3,~~145~~522 40$ 10 1.9514% $~~187~~ 2,~~801~~605 40$ 15 2.8930% ~~Multi~~Interest-~~family~~earning ~~103~~deposits 769 4 2.08 769 6 3.12 Taxable investment securities 32,~~346~~097 20490 6.7311 ~~102~~25,~~440~~911 22445 6.3087 ~~Commercial~~Mortgage ~~real~~backed ~~estate~~& ~~132~~related securities 11,~~590~~467 26112 3.5991 ~~117~~13,~~341~~951 25173 4.5596 ~~Construction~~Loans ~~and~~(net ~~development/land~~of 29unearned income) 491,~~868~~185 59,264 7.9954 24440,~~361~~331 58,893 8.3108 -------- -------- -------- -------- Total ~~mortgage~~interest-earning ~~loans~~assets ~~469~~539,~~949~~040 949,880 7.2633 ~~431~~483,~~943~~567 949,532 7.0588 ~~Commercial~~Non ~~loans~~interest-earning 12assets 40,~~807~~436 2-------- 32,145 -------- -------- -------- Total $579,476 $515,712 ======== ======== Liabilities and Equity Interest-bearing liabilities: Now accounts $ 42,860 $ 127 1.5719% 11$ 30,~~564~~285 2$ 43 0.5257% ~~Consumer~~Regular ~~loans:~~savings ~~Equity~~accounts ~~lines~~38,214 111 1.16 28,380 79 1.11 Money market accounts 140,~~318~~300 757 2.2716 11109,~~939~~267 759 2.6078 ~~Other~~Certificate ~~consumer~~accounts ~~loans 4~~113,~~500~~895 ~~0.90~~972 3.41 125,~~830~~800 01,479 4.8370 -------- -------- -------- -------- Total ~~loans~~interest-bearing ~~498~~deposits 335,~~574~~269 ~~100.00% 459~~1,~~276~~967 ~~100~~2.~~00%~~35 ~~======~~293,732 ~~======~~2,360 ~~Deduct:~~3.21 ~~Allowance~~FHLB ~~for~~advances ~~loan losses 4~~148,~~748~~836 41,~~535~~446 ~~Undisbursed~~3.89 ~~proceeds~~141,378 of1,806 ~~construction~~5.00 ~~and~~Other ~~development~~borrowings ~~loans in process 9~~2,~~493~~508 ~~8,933~~10 ~~Unearned~~1.59 ~~income~~2,000 ~~net~~15 602.93 ~~261~~-------- -------- -------- ~~Loans~~-------- Total interest-bearing liabilities 486,613 ~~net~~3,423 ~~484~~2.81 437,~~273~~110 ~~445~~4,~~547~~181 3.83 -------- -------- ~~Mortgage~~Demand ~~loans~~deposits ~~held-for-sale~~22,124 115,~~215~~775 ~~813~~Other liabilities 14,619 9,857 Equity 56,120 52,970 -------- -------- ~~Loans~~Total $579,476 ~~net~~$515,712 ~~and~~======== ~~mortgage~~======== ~~loans~~Net ~~held-for-sale~~interest income $~~485~~ 6,~~488~~457 $~~446~~ 5,~~360~~351 ======== ======== Interest rate spread 4.52% 4.06% ===== ===== Net interest margin 4.79% 4.43% ===== =====

Provision for Loan Losses Provisions for loan losses are charged to operations to bring the allowance for loan losses to a level considered by management to be adequate to cover estimated losses on loans receivable which are deemed probable and estimable based on information currently known to management. The provision for loan losses totaled $100,000 for the quarter ended December 31, 2002, compared to $125,000 for the same period last year. Page 14 The provision reflects management's analysis of the overall portfolio mix and the current level of non-performing loans and delinquency trends, which continued to remain at relatively low levels during the period. The Company may add to the provision for loan losses to support any loan portfolio expansion and change in non-performing loan levels, as considered necessary by management. Non-interest income Total non-interest income, net of gains and losses on investments and trading securities, was $483,000 for the quarter ended December 31, 2002, compared to $355,000 for the same period last year, an increase of $128,000, or 36.1%. These increases were primarily a result of an increase in the gain on sale of loans due to a higher level of loan sales. The increased level of loan sales was a result of the increased level of fixed rate residential loan originations due to the current interest rate levels. The Bank sells all fixed rate residential loans greater than fifteen years, to reduce its exposure to interest rate risk. In addition, the Company recognized a net gain of $51,000 for the three-month period ended December 31, 2002, in gains and losses on trading and investment securities, compared to a gain of $16,000 for the three month period ended December 31, 2001. These gains and losses represent the changes in the market value of the assets supporting certain employee benefit plans and the sale of available-for-sale equity securities. Non-interest expense Total non-interest expense was $3.3 million for the quarter ended December 31, 2002, compared to $3.2 million for the same period last year, an increase of $109,000, or 3.4%. Total salaries and benefits increased $168,000, or 8.4%, primarily the result of the increased number of employees and an increase in the costs associated with the Bank's ESOP due to the increased stock price. Occupancy and equipment expense totaled $427,000, compared to $407,000 for the same period last year, an increase of $20,000, or 4.9%. This increase was the result of the increased level of depreciation on building and leasehold improvements and an increase in utility and maintenance costs of the Bank's various locations. Advertising expense totaled $120,000, compared to $141,000 for the same period last year, a decrease of $21,000, or 14.9%, primarily a result of decreased spending in media advertising and special product promotions offered during the same period last year. Data processing expense increased $6,000, or 5.2%, as a result of the increased level of deposit and loan accounts. Other expenses including professional fees decreased $64,000, or 11.8%. Income Taxes For the quarter ended December 31, 2002, income taxes of $1.5 million were provided on income before tax of $3.6 million for an effective rate of 43.0%, compared to income taxes of $959,000 on income before taxes of $2.4 million for an effective rate of 40.3%, for the same period last year. The increase in the effective tax rate was a result of the increase in non-deductible compensation expense associated with the Bank's ESOP, which is driven by the increased stock price of the Company. Comparison of Operating Results for the Nine Months Ended December 31, 2002 and 2001 General Consolidated net income for the nine months ended December 31, 2002 totaled $5.9 million, or $1.29 basic and $1.19 fully diluted earnings per share, compared to $3.9 million, or $0.81 basic and $0.76 fully diluted earnings per share, for the same period last year. This represents an increase of $2.0 million, or 51.8% in net income, a $0.49, or 60.0%, increase in basic earnings per share, and $0.42, or 55.5%, increase in fully diluted earnings per share. The increase was primarily a result of higher net interest income due to an increase in the average balance of interest earning assets, a decrease in deposit interest expense due to the growth in lower-costing core deposits and a lower interest rate environment, a reduction in interest on borrowed funds due to the lower cost of borrowings, offset in part by higher operating expenses and income taxes. Page 15 Interest Income Interest income for the nine months ended December 31, 2002 increased $641,000, or 2.2%, to $29.2 million, compared to $28.6 million for the same period last year. The increase in interest income was primarily due to an increase in the average balance of interest-earning assets, specifically loans receivable. The average balance of interest-earning assets increased from $470.2 million for the nine months ended December 31, 2001 to $518.5 million for the nine months ended December 31, 2002, an increase of $48.3 million, or 10.3%. The increase in the average balance of interest-earning assets was the result of increases in the average balance of loans receivable, net, of $44.7 million, or 10.5%, and of taxable investment securities of $7.3 million, or 29.0%, offset by a decrease in the average balance of mortgage-backed securities of $3.9 million, or 24.6%. The yield on interest-earning assets decreased 59 basis points, to 7.51%, primarily due to the lower interest rate environment. Interest Expense Interest expense for the nine months ended December 31, 2002 decreased $3.3 million, or 23.2%, to $10.8 million, compared to $14.0 million for the same period last year. The average balance of interest-bearing liabilities increased $42.3 million, or 10.0%, from $424.3 million for the nine months ended December 31, 2001 to $466.6 million for the nine months ended December 31, 2002. The increase in the average balance of interest-bearing liabilities was primarily the result of an increase in the average balance of deposits totaling $41.2 million, or 14.8%, coupled by a slight increase in the average balance of FHLB advances and other borrowings of $1.1 million, or 0.74%. Although the average balance of interest bearing liabilities increased, due to the lower market interest rate levels and the ability to replace the FHLB advances with lower costing core deposit accounts, the cost of liabilities decreased 133 basis points to 3.08%. Page 16 Net interest income The table below shows average balances and the interest earned and paid on interest-earning assets and interest-bearing liabilities and the resulting net interest spread and margin for the periods presented. The average balances are derived from daily averages and the average yields and costs are annualized:

For the ~~three~~nine months ended ~~September~~December 3031, 2002 2001 ----~~---~~ ----~~---~~ Interest Interest Average ~~Income~~income/ Yield/ Average Income/ Yield/ balance expense rate balance expense rate ------- ------- ------ ------- ------- ----- (Dollars in thousands) Assets Interest-earning assets: Short-term investments $ 2,~~223~~503 $ 926 1.6238% $ 12,~~639~~187 $ 1550 3.6605% Taxable investment securities 32,297 1,518 6.27 25,044 1,351 7.19 Interest-earning deposits 769 412 2.08 769 824 4.16 ~~Taxable investment securities 32,292 509 6.30 24,925 459 7.37~~ Mortgage -backed & related securities 11,~~877~~882 ~~128~~374 4.3120 15,~~687~~758 ~~221~~663 5.6461 Loans, (net of unearned income) ~~470~~471,~~996~~080 927,~~134~~273 7.7672 ~~424~~426,~~761~~427 826,~~768~~474 8.2628 -------- -------- -------- -------- Total interest-earning assets 518,~~157~~531 929,~~784~~203 7.5551 ~~467~~470,~~781~~185 928,~~471~~562 8.10 -------- -------- Non interest-earning assets 3537,~~253~~730 3332,~~480~~711 -------- -------- Total $~~553~~556,~~410~~261 $~~501~~502,~~261~~896 ======== ======== Liabilities and Equity Interest-bearing liabilities: ~~Now~~NOW accounts $ 4339,~~624~~711 $376 ~~173~~ 1.5926% $ 28,~~115~~531 $168 62 0.8879% Regular savings accounts 3433,~~008~~994 90283 1.0611 27,~~523~~719 ~~105~~318 1.53 Money market accounts ~~121~~128,~~314~~124 ~~743~~2,257 2.4535 ~~100~~97,~~904~~432 ~~938~~2,599 3.7256 Certificate accounts ~~121~~118,~~325~~768 13,~~103~~201 3.6459 ~~127~~125,~~322~~693 14,~~708~~925 5.3722 -------- -------- -------- -------- Total interest-bearing deposits 320,~~271~~597 26,~~109~~117 2.6354 ~~283~~279,~~864~~375 28,~~813~~010 3.9682 FHLB advances ~~142~~143,~~746~~645 14,~~574~~627 4.4129 ~~134~~142,~~292~~896 15,~~940~~960 5.6546 Other ~~borrowings~~Borrowings 2,~~176~~318 929 1.6567 2,000 2060 3.9193 -------- -------- -------- -------- Total interest-bearing liabilities ~~465~~466,~~193~~560 310,~~692~~773 3.1708 ~~420~~424,~~156~~271 414,~~773~~030 4.5441 -------- -------- ---- Demand deposits 2120,~~126~~765 14,~~755~~068 Other liabilities 1112,~~017~~870 1210,~~280~~886 Equity 56,~~074~~066 5453,~~070~~671 -------- -------- Total $~~553~~556,~~410~~261 $~~501~~502,~~261~~896 ======== ======== Net interest income $ 618,~~092~~430 $ 414,~~698~~532 ======== ======== Interest rate spread 4.3843% 3.5669% ====~~====~~ ====~~====~~ Net interest margin 4.7074% 4.0212% ====~~====~~ ====~~====~~

Page 17 Provision for Loan Losses The provision for loan losses totaled $250,000 for the nine months ended December 31, 2002, compared to $262,000 for the same period last year. The provision for the nine months ended December 31, 2002 was made based upon loan portfolio trends, specifically continued loan growth in loan types and concentrations without a higher risk of default, and the steady rate of loan portfolio growth from period to period. The provision also reflects management's consideration of the current level of non-performing loans during the period, which was 0.07% of total loans at December 31, 2002, compared to 0.05% at December 31, 2001. Non-interest income Total non-interest income, net of gains and losses on investment activities and trading securities, was $1.2 million for the nine months ended December 31, 2002, compared to $957,000 for the same period last year, an increase of $214,000, or 22.4%. The increase was primarily from the gains on sales of loans as mentioned in the quarterly results. In addition, the Company recognized a net gain of $25,000 for the nine-month period in gains and losses on trading and investment securities compared to a net gain of $95,000 for the same period last year. These gains represent the changes in the market value of the assets supporting certain employee benefit plans and the sale of certain equity securities available-for-sale. During the December 31, 2002 period, the Company also recognized a $30,000 loss on the disposal of fixed assets associated with the write-off of leasehold improvements in a branch office that was relocated. Non-interest expense Total non-interest expense was $9.5 million for the nine months ended December 31, 2002, compared to $8.9 million for the same period last year, an increase of $617,000, or 6.9%. Total salaries and benefits increased $657,000, or 11.8%, primarily the result of the increased number of employees, a general increase in salaries and benefits and the greater expense associated with the Bank's ESOP, due the Company's increased stock price. Occupancy and equipment expense increased $77,000, or 6.3%, due to the increased level of depreciation on improvements and utility costs associated with the retail and administrative areas of the Bank. Advertising expense totaled $334,000 compared to $422,000 for the same period last year, a decrease of $88,000, or 20.9%, primarily as a result of a reduction in special promotions and the introduction of new deposit products and retail services last fiscal year. Data processing costs increased $18,000, or 5.3%, due to the higher level of deposits and loans serviced by the Bank. Other expenses, including professional fees, decreased $47,000, or 3.4%. Income Taxes For the nine months ended December 31, 2002 income taxes of $4.0 million were provided on net income before tax of $9.8 million for an effective rate of 40.4%, compared to $2.5 million on income before taxes of $6.4 million for an effective rate of 39.6%, for the same period last year. Page 18 Item 3 - Quantitative and Qualitative Disclosures about Market Risk Management is responsible for monitoring and limiting the Bank's exposure to interest rate risk within established guidelines while maximizing net interest income. The Bank will continue to monitor its interest rate risk sensitivity with the primary objective to prudently structure the balance sheet so that movements of interest rates on assets and liabilities are highly correlated and produce a reasonable net interest margin even in periods of volatile interest rates changes. Further discussion on market risk is in the Company's Form 10-K for the year ended March 31, 2002. Asset/Liability Management The principal objective of the Bank's interest rate risk management function is to evaluate the interest rate risk included in certain balance sheet accounts, determine the appropriate level of risk given the Bank's business strategy, operating environment, capital and liquidity requirements and performance objectives and manage the risk consistent with the Board of Directors' approved guidelines. Through such management, the Bank seeks to reduce the vulnerability of its operations to changes in interest rates. The Bank's Board of Directors has established an Asset/Liability Committee, responsible for reviewing its asset/liability policies and interest rate risk position, which meets on a monthly basis and reports trends and interest rate risk position to the Board of Directors on a quarterly basis. The extent of the movement of interest rates is an uncertainty that could have a negative impact on the earnings of the Bank. In recent years, the Bank has primarily utilized the following strategies to manage interest rate risk: (i) emphasizing the origination and purchase of adjustable-rate loans; (ii) investing in corporate bonds and notes, equity securities or mortgage-backed and mortgage-related securities with shorter estimated maturities; (iii) utilizing FHLB advances to better structure the maturities of its interest rate sensitive liabilities; and (iv) selling in the secondary market longer-term fixed-rate mortgage loans originated, while generally retaining the servicing rights on such loans. Gap Analysis The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are "interest rate sensitive" and by monitoring a bank's interest rate sensitivity "gap." Assets and liabilities are said to be interest rate sensitive within a specific time period if they will mature or reprice within that time period. The interest rate sensitivity gap is defined as the difference between the amount of interest-earning assets maturing or repricing within a specific time period and the amount of interest-bearing liabilities maturing or repricing within that same time period. At December 31, 2002, the Company's cumulative one-year interest rate gap (which is the difference between the amount of interest-earning assets and interest-bearing liabilities maturing or repricing within one year) as a percentage of total assets was a negative 15.8%, compared to a negative 18.3% at March 31, 2002. A gap is considered negative when the amount of interest rate sensitive liabilities exceeds the amount of interest rate sensitive assets. Accordingly, during a period of rising interest rates, an institution with a negative gap position would be in a worse position to invest in higher yielding assets which, consequently, may result in the cost of its interest-bearing liabilities increasing at a rate faster than its yield on interest-earning assets than if it had a positive gap. Conversely, during a period of falling interest rates, an institution with a negative gap would tend to have its interest-bearing liabilities repricing downward at a faster rate than its interest earning assets as compared to an institution with a positive gap which, consequently, may tend to positively affect the growth of its net interest income. Page 19 The following table sets forth the amounts of interest-earning assets and interest-bearing liabilities outstanding at December 31, 2002, which are anticipated by the Bank, based upon certain assumptions, to reprice or mature in each of the future time periods shown (the "Gap Table"). Except as stated below, the amount of assets and liabilities shown which reprice or mature during a particular period were determined in accordance with the earlier of term to repricing or the contractual maturity of the asset or liability. The table sets forth an approximation of the projected repricing of assets and liabilities on the basis of contractual maturities, and scheduled rate adjustments within a one-year period and subsequent selected time intervals. The loan amounts in the table reflect principal balances expected to be redeployed and/or repriced as a result of contractual amortization of adjustable-rate loans and fixed-rate loans, and as a result of contractual rate adjustments on adjustable-rate loans. Money Market accounts, regular savings accounts and NOW accounts are assumed to have annual decay rates of 80%, 15% and 5%, respectively. Deposit decay rates can have a significant impact on the Bank's estimated gap. While the Bank believes such assumptions to be reasonable, there can be no assurance that assumed decay rates will approximate future withdrawal activity. The decrease in liability sensitivity from March 31, 2002, was a result of the decline in interest-bearing liabilities, primarily certificate accounts and FHLB advances, repricing within one year. Page 20

~~For~~More ~~the~~More ~~six~~More ~~months~~than ~~ended~~than ~~September~~than ~~30,~~1 ~~2002~~Year ~~2001~~3 ~~-------~~Years ~~-------~~5 ~~Interest~~Years ~~Interest~~Greater ~~Average~~1 ~~Income/~~Year ~~Yield/~~to ~~Average~~to ~~Income/~~to ~~Yield/~~than ~~balance~~Total ~~expense~~or ~~rate~~Less ~~balance~~3 ~~expense~~Years ~~rate~~5 Years 15 Years 15 Years Amount ------- ------- ------ ------- ------- --------------------------------------------- (Dollars in thousands) ~~Assets~~ Interest-earning assets: Short-term investments .................... $ 112,~~994~~481 $ 16-- ~~1.60%~~ $ ~~1,831~~-- $ 32-- ~~3.50%~~$ ~~Taxable~~-- ~~investment~~$ ~~securities 32~~12,~~397~~481 ~~1,028~~Investment 6in B.35O.L.I 24..................... 8,~~758~~947 ~~909~~-- ~~7.34~~-- ~~Interest~~-~~earning~~- ~~deposits~~-- ~~769~~ 8,947 ~~2.08~~Taxable ~~769~~investment 18Securities 4.68............ 11,989 497 959 13,335 -- 26,780 Mortgage-backed &securities ~~related~~................ ~~securities~~-- 12-- -- 1,~~090~~477 ~~262~~3,505 4~~.33 16~~,~~662~~982 ~~490~~Stock 5in FHLB-Boston .88..................... ~~Loans~~8,455 ~~net~~-- of-- ~~unearned~~-- ~~income~~-- ~~461~~8,~~028~~455 ~~18,009~~Loans 7(1) .81................................ ~~419~~100,~~476~~116 1761,~~581~~781 ~~8.38~~232,266 106,305 9,908 510,376 --------- --------- --------- -------- ~~Total interest~~-~~earning~~ ~~assets 508,278 19,323 7.60 463,496 19,030 8.21~~ --------- --------- ~~Non~~Total interest-earning assets 36.......... $ 141,~~377~~988 32$ 62,~~994~~278 ~~--------~~$ ~~--------~~233,225 ~~Total~~$ 121,117 $~~544~~ 13,~~655~~413 $~~496~~ 572,~~490~~021 ========= ========= ~~Liabilities~~========= ~~and~~========= ~~Equity~~========= ========= Interest-bearing liabilities: ~~NOW~~Money market accounts ..................... $ 38118,~~137~~540 ~~249~~$ ~~1.31%~~22,226 $ 277,~~655~~409 ~~125~~$ ~~0.90%~~-- $ -- $ 148,175 Regular savings accounts 31.................. 5,~~884~~906 ~~172~~11,812 ~~1.08~~11,812 279,~~389~~845 ~~239~~-- ~~1.75~~39,375 ~~Money~~NOW ~~market~~ accounts ~~122~~.............................. 2,~~036~~207 14,~~500~~415 ~~2.46~~4,415 9111,~~514~~036 122,~~840~~073 ~~4.02~~44,146 Certificate accounts ~~121~~...................... 72,~~204~~708 227,~~229~~084 ~~3.68 125~~10,~~640~~160 364 -- 110,~~446~~016 5Other borrowed funds .49..................... 2,901 --~~------~~ --~~------~~ --~~------~~ --~~------~~ ~~Total interest-bearing deposits 313,261 4,150~~ 2~~.65 272~~,~~198~~901 ~~5,650 4.15~~ FHLB advances ~~141,050 3,181 4~~.51............................ ~~143~~34,~~655~~139 435,~~154~~664 ~~5.72 Other Borrowings 2~~35,~~224~~000 ~~19 1.71 2~~55,000 45-- ~~4.45~~159,803 --------- --------- --------- -------- ~~Total interest~~-~~bearing~~ ~~liabilities 456,535 7,350 3.22 417,853 9,849 4.66~~ --------- --------- ~~Demand~~Total ~~deposits~~interest-bearing ~~20,086 13,215 Other~~ liabilities........ ~~11,995~~$ 11236,~~400~~401 ~~Equity~~$ 56101,~~039~~201 54$ 68,~~022~~796 ~~--------~~$ ~~--------~~75,945 ~~Total~~ $~~544~~ 22,~~655~~073 $~~496~~ 504,~~490~~416 ========= ========= ~~Net~~========= ========= ========= ========= Interest-earning assets less interest-bearing ~~income~~liabilities .............. $ 11(94,~~973~~413) $ 9(38,~~181~~923) $ 164,429 $ 45,172 $ (8,660) $ 67,605 ========= ========= ~~Interest~~========= ~~rate~~========= ~~spread 4.38% 3.55%~~ ========= ========= ~~Net~~Cumulative interest-rate ~~margin~~sensitivity ~~4.71%~~gap 3.~~96%~~.......................... $ (94,413) $(133,336) $ 31,093 $ 76,265 $ 67,605 ========= ========= ========= ========= ========= Cumulative interest-rate gap as a percentage of total assets .............. (15.82)% (22.34)% 5.21% 12.78% 11.33% Cumulative interest-rate gap as a percentage of total interest- earning assets ............................ (16.51)% (23.31)% 5.44% 13.33% 11.82% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities ............................... 60.06% 60.50% 107.65% 115.81% 113.40%

---------- (1) Excludes nonaccrual loans. Item 4 - Controls and Procedures Evaluation of Disclosure Controls and Procedures The Company maintains controls and procedures designed to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures performed within ninety days of the filing date of this report, the chief executive officer and the chief financial officer of the Company concluded that the Company's disclosure controls and procedures were adequate. Changes in Internal Controls The Company made no significant changes in its internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation of those controls by the chief executive officer and chief financial officer. Page 21 PART II - OTHER INFORMATION Item 1 - Legal Proceedings Neither the Company nor any of its subsidiaries is party to any pending legal proceedings which are material other than routine litigation incidental to their business activities. Item 2 - Changes in Securities and Use of Proceeds Not applicable. Item 3 - Defaults Upon Senior Securities Not applicable. Item 4 - Submission of Matters to a Vote of Security Holders Not applicable. Item 5 - Other Information Not applicable. Page 22 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibits 2.1 Agreement and Plan of Merger, dated as of December 19, 2002 by and between Seacoast Financial Services Corporation, Seacoast Merger Sub, Inc. and Bay State Bancorp, Inc.* 3.1 Certificate of Incorporation of Bay State Bancorp, Inc. ** 3.2 Amended and Restated Bylaws of Bay State Bancorp, Inc. *** 4.0 Stock Certificate of Bay State Bancorp, Inc. ** 10.1 Form of Voting Agreement (attached as Annex A to Exhibit 2.1) 10.2 Payments and Waiver Agreement by and among Seacoast Financial Services Corporation, Bay State Bancorp, Inc., Bay State Federal Savings Bank and John F. Murphy* 10.3 Payments and Waiver Agreement by and among Seacoast Financial Services Corporation, Bay State Bancorp, Inc., Bay State Federal Savings Bank and Denise M. Renaghan* 10.4 Payments and Waiver Agreement by and among Seacoast Financial Services Corporation, Bay State Bancorp, Inc., Bay State Federal Savings Bank and Michael O. Gilles* 10.5 Consulting and Non-Competition Agreement between Seacoast Financial Services Corporation and John F. Murphy* 10.6 Non-Competition Agreement between Seacoast Financial Services Corporation and Denise M. Renaghan* 11.0 Computation of per share earnings (filed herewith) 99.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith) * Incorporated herein by reference from the Registrant's Form 8-K, as filed with the Securities and Exchange Commission on December 23, 2002. ** Incorporated herein by reference from the exhibits to Form SB-2 registration statement as amended, Registration No. 333-40115 *** Incorporated herein by reference from the registrant's Form 10-KSB, as filed with the Securities and Exchange Commission on June 14, 1999. (b) Reports on Form 8-K A current report on Form 8-K was filed by the Company on December 23, 2002 in which it disclosed under Item 5 the terms of its agreement to be acquired by Seacoast Financial Services Corporation. A copy of the Agreement and Plan of Merger, the form of voting agreement, various arrangements entered into by the Company's executive officers and the press release announcing the merger were filed by exhibit. Page 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bay State Bancorp, Inc. Date: February 12, 2003 \s\ John F. Murphy ---------------------------------------- John F. Murphy Chairman, President, and Chief Executive Officer (Principal Executive Officer) Date: February 12, 2003 \s\ Michael O. Gilles ---------------------------------------- Michael O. Gilles Senior Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) Page 24 CERTIFICATION I, John F. Murphy, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bay State Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant's ability to record process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 12, 2003 \s\John F. Murphy -------------------------- Chairman, President and Chief Executive Officer Page 25 CERTIFICATION I, Michael O. Gilles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bay State Bancorp, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a. designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c. presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a. all significant deficiencies in the design or operation of the internal controls which could adversely affect the registrant's ability to record process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect the internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 12, 2003 \s\Michael O. Gilles ------------------------------- Senior Vice President and Chief Financial Officer Page 26

More More More than than than 1 Year 3 Years 5 Years Greater 1 Year to to to than Total or Less 3 Years 5 Years 15 Years 15 Years Amount ----------------------------------------------------------------------------- (Dollars in thousands) Interest-earning assets: Short-term investments ............................ $ 3,169 $ -- $ -- $ -- $ -- $ 3,169 Investment in B.O.L.I ............................. 8,852 -- -- -- -- 8,852 Taxable investment Securities ..................... 11,933 497 959 13,332 -- 26,721 Mortgage-backed securities ........................ -- -- -- 1,825 3,883 5,708 Stock in FHLB-Boston .............................. 8,455 -- -- -- -- 8,455 Loans (1) ......................................... 100,559 61,156 200,993 112,380 13,787 488,875 --------- --------- --------- --------- --------- --------- Total interest-earning assets .................. $ 132,968 $ 61,653 $ 201,952 $ 127,537 $ 17,670 $ 541,780 ========= ========= ========= ========= ========= ========= Interest-bearing liabilities: Money market accounts ............................. $ 106,152 $ 19,904 $ 6,634 $ -- $-- $ 132,690 Regular savings accounts .......................... 5,669 11,348 11,348 9,455 -- 37,820 NOW accounts ...................................... 2,206 4,413 4,413 11,032 22,064 44,128 Certificate accounts .............................. 81,209 25,847 10,974 -- -- 118,030 Other borrowed funds .............................. 2,900 -- -- -- -- 2,900 FHLB advances ..................................... 30,035 38,421 20,000 55,000 -- 143,456 --------- --------- --------- --------- --------- --------- Total interest-bearing ......................... $ 228,171 $ 99,933 $ 53,369 $ 75,487 $ 22,064 $ 479,024 ========= ========= ========= ========= ========= ========= Interest-earning assets less interest-bearing liabilities ...................... $ (95,203) $ (38,280) $ 148,583 $ 52,050 $ (4,394) $ 62,756 ========= ========= ========= ========= ========= ========= Cumulative interest-rate sensitivity gap ........... $ (95,203) $(133,483) $ 15,100 $ 67,150 $ 62,756 ========= ========= ========= ========= ========= Cumulative interest-rate gap as a percentage of total assets ...................... (16.90)% (23.69)% 2.68% 11.92% 11.14% Cumulative interest-rate gap as a percentage of total interest- earning assets .................................... (17.57)% (24.64)% 2.79% 12.39% 11.58% Cumulative interest-earning assets as a percentage of cumulative interest-bearing liabilities ....................................... 58.28% 59.32% 103.96% 114.69% 113.10%

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